Warner Bros. Discovery, Inc. (WBD) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Discovery Year-End and Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Andrew Slabin, Executive Vice President of Global Investor Strategy. Please go ahead.

Good morning, everyone. Thank you for joining us for Discovery's fourth quarter 2018 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; Gunnar Wiedenfels, our Chief Financial Officer; and JB Perrette, our President and CEO of International. You should have received our earnings release, but if not, feel free to access it on our website at www.corporate.Discovery.com. On today's call, we will begin with some opening comments from David and Gunnar and then we will open up the call for your questions. Please try to 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 may 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. And with that, I will turn the call over to David.

Good morning everyone and thank you all for joining us on today's call. Before we begin, I'd like to extend a warm welcome to JB Perrette, our President and CEO of International. JB and I have been working together for almost 20 years and I'm pleased that he'll be joining us on this morning's earnings call. With so much exciting activity taking place across our diversified international portfolio, JB can help provide some color and perspective on what's taking place in the many international markets in which we operate. I'm pleased to report that we delivered a strong set of operating results this morning capping off a transformative year for Discovery. Coming up on a year since our merger with Scripps, I'm proud of the achievements and progress we've made in a short amount of time and even more excited about the opportunities ahead. Over the last year, we've reengineered our company, creating a leaner, more efficient, and more focused global operating structure, represented impressively in our expanding operating margins which increased by 600 basis points this quarter and we expect to expand our margins further in 2019 as Gunnar will discuss. Our better than expected free cash flow generation and our significantly reduced net leverage reduced by roughly a turn in just 10 months. We are a free cash flow machine and we intend to drive it hard. We've also taken meaningful steps to strengthen and solidify our core businesses by adding exclusive new content and capitalizing on the uniqueness of our global loved brand and treasure trove of IP. We are powering people's passions with Immersive 360 degree media ecosystems in popular and valuable content categories uniquely combining linear and direct-to-consumer experiences. And we continue to enhance our global suite of brands and IP that have real utility and function, helping to further differentiate us from our peers. We have a growing opportunity to more effectively attract and engage viewers around the world and across all platforms, against the backdrop of our position as the number two TV Company in America including broadcast and cable. Our leadership position in 200 countries and territories around the globe with multiple channels in every market making us the number one pay-TV company in the world. We cast a uniquely wide global net essentially unparalleled. Our existing reach allows us to drive awareness to our emerging set of consumer services. I've referred to this in the past as having a brick and mobile presence or the ability to drive awareness on the ground to our mobile and direct-to-consumer presence. Our ubiquitous global brands and pay and free to air channels such as the Discovery Channel, Animal Planet, Food, HDTV MotorTrend, Science, TLC, ID, Oprah, and Eurosport and valuable strategic long-term partnerships like those with the Olympic Games and the PGA Tour, the European Tour, and Tiger Woods, helped to differentiate us on this front. Our Global IP which we own above the globe is also distinguished by the fact that it married entertainment with function and utility. And in an environment where 5G and bigger broader pipes create wider lanes into the home and directly to consumers wherever they are, the nature of what nourishes people can and will change, we're extraordinarily well suited to capitalize on that. We view our passion verticals like Food, Home, Natural History, Science, Auto, and Oprah, as representing great examples of where our functional content can extend into new ecosystems with a conversation with viewers, fans, and participants has elevated into an experience that brings watching and doing together. When it comes to traditional scripted content and movies, people watch that content. We have an opportunity to create content and experiences where people watch and do. Additionally, our strategy has been to own and control virtually all of our content rights in every window, in every market around the world. We have purposely left meaningful revenue dollars on the table by playing the long game as compared to many of our peers that have for example hived off digital distribution to any number of streaming services or sold-off international rights. As a result, we will not have to buy back content and give up revenue to drive our strategy forward. It allows us to have great speed to market and accelerate our ability to scale as services gain consumer appeal. For example, let's look at the Food and Cooking category, a broad genre that represents a multiple $100 billion addressable marketplace in which we have excelled as a perennial top cable network for decades. We enjoy rich engagement with a strong and trusted brand that is loved by fans. The Food Network reaches over 150 million global fans per month on its digital properties alone and they consume over 450 million monthly video views, enjoy a leading social footprint, has 10 million monthly readers of our Food newsletter, and over 80,000 recipes that are regularly assessed. When fans think of Food, our brands are well represented and our relationships run deep and wide and serve as a great backbone from which we can continue to pursue entirely new business models. In our drive to build and own the global cycling ecosystem, we acquired the Global Cycling Network last month. It is a targeted and highly valuable global audience including a sizable group here in the U.S. and it follows on the heels of our multi-platform global alliance with the PGA Tour in which we are seeking to super serve communities of passionate sports fans. We first invested in the Global Cycling Network two years ago and recently took a large majority ownership position. We're now the leader in serving passionate highly participatory and high income cycling enthusiasts around the globe, $50 billion plus market. The business model has multiple revenue streams including advertising, subscription, commerce, and events among others, and by complementing Eurosport's position as the home of cycling in Europe we believe there is great upside to this combination and offering. And it's a terrific blueprint much like MotorTrend, another strong example of the vertical where we have been able to drive an Immersive 360 degree offering by leveraging our linear presence, in-depth IP, and brand recognition with fans. We've gotten off to a great start with Golf TV, our long-term relationship with the PGA Tour and we're very pleased with early product results. While we're still in beta and really just getting started, we're happy with the quality of the technological capabilities thus far and early engagement numbers are impressive after only a few events. We're super excited about our global relationship with Tiger Woods and the initial Tiger content is proving to be a great driver of interest. Tiger is having a lot of fun with the interface with fans and we've already produced over 30 original pieces that have been consumed by millions of fans over just the first three tournaments. And we are enthused by the positive perception we've seen to both the linear and OTT product within the initial countries where we've come to market and we're hard at work building something truly unique in the years ahead. As we dig deeper and refine our strategy in direct-to-consumer under Peter Faricy and his team, we gain a great perspective on how best to pivot our resources financially, strategically, technologically, and operationally to the consumer first mindset that engages fans across the breadth and depth of our functional content verticals. And building upon the experiences we've gained from our initial forays into this ecosystem such as launching the Eurosport Player and our GO apps which are now a several $100 million a year business and growing. We’ve gained some great insights into what works and what doesn't. You've heard me say repeatedly achieving success in the direct-to-consumer world will require a lot more than a simple shifting of content from one platform to another. We believe the successful offering requires an experience that is immersive, trusted, informative, educational, social, and community driven. And by virtue of our many functional verticals, we're well suited to successfully pivot our businesses forward. Gunnar will take you through the financials in detail in a few moments, but I'd like to highlight just a few key items. Our brands continue to strongly resonate and feel differentiated within a content landscape that is increasingly cluttered and crowded. Whether marked by the continued momentum at TLC, picking up even more momentum from where it finished 2018 as the number one ranked channel in Prime in January for women 25 to 54, or the Impressive resurgence in ratings at both Food and HDTV that began midway through 2018, the continued success at ID which maintained its number one position in total day for women 25 to 54. Thus, even with the noted rating challenges at the Flagship Discovery which are improving and Discovery is still the number one network for men in Prime XSports. Our portfolio still achieved domestic advertising revenue growth of 3% despite not having news or sports which speaks to the power of our broad portfolio balance. We launched additional Legacy Discovery Networks late in the fourth quarter on Hulu and Sling solidifying our long held view that our portfolio brands does indeed resonate in an OTT world and we continue to strive to partner with every and all key OTT players in the marketplace. Turning to International. While our results are somewhat skewed due to the tough comparisons against the China Mobile distribution deal and deconsolidation of our Eurosport Germany ProSieben venture, our underlying International performance remains solid particularly in light of softness in certain international markets such as UK with Brexit, Italy, and Mexico due to economic and political challenges. We remain focused on continuing to integrate and take full advantage of Scripps content and brands internationally. It's still very early and will take time to see these benefits fully materialize but less than a year into it, we're seeing positive signs on our three main objectives and benefits. One, driving meaningful cost savings by replacing acquired content. These content cost synergies are a meaningful contributor to yet another quarter of margin expansion that we have delivered in 4Q and anticipate more in 2019. Two, leveraging the previously unexploited content and formats to strengthen our existing international networks. Scripps content is now making up from single-digit to low 20% of schedules in certain key markets such as Germany, Italy, Brazil, and Mexico and we are seeing continued improvements in performance as well. And finally, three, launching new pay free-to-air and digital branded services focused primarily around Food and HDTV where in markets such as Europe and Latin America, we're securing commitments and getting off to a great start with new network launches. Lastly, we believe that we have the right combination of linear and non-linear platforms. The strongest hand in Global IP and some of the strongest brands in creative curators in the world, all supported by a strong and de-levered balance sheet throwing off a ton of cash which provides us with great runway and optionality. We're confident in our ability to execute during this time of disruption and during this time of great opportunity. With that, I'd like to turn the call over to Gunnar.

Thank you, David, and thank you everyone for joining us today. As David stated, 2018 was a momentous transformational year for Discovery, as we completed the acquisition and integration of Scripps and I'm so proud of what we have accomplished operationally, strategically, and financially. We remain well ahead of our original expectations in our synergy realization and overall company transformation and are very optimistic about Discovery's outlook. Let me now walk through our fourth quarter and full-year financial results. My commentary today will again focus on our pro forma results which include the operations of Scripps as well as OWN and MotorTrend as if all had been owned since the beginning of 2017 and will be in constant currency terms for the International and total company commentary unless otherwise stated. Please refer to our earnings release filed earlier this morning for all of the detailed cuts of our fourth quarter and full-year results. For the full-year 2018, Discovery achieved or exceeded all of our total company guidance metrics with 8% full-year adjusted OIBDA growth helped by a decline in SG&A and total costs due primarily to strong synergies from the Scripps transaction. Over $2.4 billion of reported free cash flow as we benefited from strong operating performance and working capital timing and deficiencies partially offset by Scripps related acquisition and integration costs. And as David noted, we ended the year with net leverage of 3.7 times roughly a full turn lower than when we closed the transaction. Looking at the rest of our full-year results, total company revenues were up 3% with 2% domestic growth which was driven by 3% advertising growth and 1% distribution growth and 8% International growth which was driven by 3% ad growth, 5% distribution growth, and almost 90% other revenue growth primarily from sub-licensing a portion of our Olympics rights in the first quarter. This was partially offset by a 66% decline for education and other due to the April sale of our Education division. Pro forma revenue growth excluding the impact of the sale of the Education business was 4%. As I previously noted, adjusted OIBDA grew 8% well above revenue growth as total company costs were down year-over-year despite having the first quarter Winter Olympics in Europe and despite continued investment in digital initiatives as we realized significant synergies from the merger. Full-year net income increased to $594 million versus a net loss in the prior year which was impacted by the non-cash European goodwill write-down. Our full-year tax rate came in at 33% higher than our latest expectation of the high 20% range due to higher than expected taxes in the fourth quarter primarily due to a book tax charge associated with net deferred tax assets as well as additional fourth quarter non-cash impairments and restructuring charges which impacted net income before taxes in our International division. Focusing now on our total company fourth quarter results, total company revenues were down 1% with 2% domestic growth and flat International growth and a large decline in Education and other due to the sale of the Education business. Adjusted OIBDA increased 16% and margins expanded a healthy 600 basis points helped by significant declines in costs both in the U.S. and internationally in large part due to merger synergy which more than offset continued investments in our digital initiatives. Now let's look at our individual operating units, fourth quarter results, starting with our U.S. segment. Total U.S. revenues grew 2%. We had another quarter of solid advertising growth of 3% which was driven by strong pricing and continued modernization of our GO TV Everywhere platform, partially offset by the impact of lower linear rating particularly at the Flagship Discovery Network. Distribution revenues grew 1% driven by increases in affiliate rates and additional contributions due to new carriage on Sling and Hulu towards the end of the year for certain key Legacy Discovery nets, partially offset by a decline in linear subscribers across the full portfolio for the three months. Delving further into the drivers of fourth quarter U.S. affiliate growth, subscriber trends at our top fully distributed nets like Discovery and TLC which are driving the LION's share of our economics were flat at the end of December, a nice improvement versus down 2% in the prior quarter primarily due to the additional carriage on Hulu and Sling. While total portfolio subs declined 4% year-over-year as expected due to continued high-single to low double-digit losses at our smaller nets. Total domestic costs were down 13% due to content synergies and lower personnel costs leading to 17% growth in fourth quarter domestic adjusted OIBDA and very strong 56% domestic margins or 700 basis points of year-over-year margin expansion. Turning now to our International segment. Fourth quarter advertising growth came in flat year-over-year as increases in Europe primarily due to pricing were offset by declines in Asia and in Latin America where double-digit growth in Brazil was more than offset by declines in Mexico and other markets. Fourth quarter affiliate growth of 2% came in ahead of our guidance as increases in Europe due primarily to higher pricing and increases in Latin America due to greater than expected increases in subscribers as well as pricing were partially offset by declines in Asia, our smallest market due to lower pricing as well as a tough comp versus contributions from our mobile licensing deal in China in the fourth quarter of last year and the continued impact from the proceeds in JV. Turning to the cost side, operating costs were down 6% in the fourth quarter with cost of revenue down 9% primarily due to content synergy and flat SG&A with personnel cost reductions from the integration of Scripps offsetting increased personnel hiring primarily related to the digital initiatives. This led to 15% adjusted OIBDA growth and 500 basis point of year-over-year margin expansion. So now that I have reviewed the highlights of our 2018 results, let me share some forward-looking commentary on 2019. From a total company perspective starting with free cash flow, we are very proud to have come in at over $2.4 billion of free cash flow in 2018 versus a target of around $2.3 billion that we said going into the year. I think this is a great result given our priority of de-levering the company as quickly as possible taking net leverage down roughly a full turn in less than 10 months. This represents a free cash flow conversion of over 55% of adjusted OIBDA which underscores the strong potential for cash generation at the new Discovery and nicely offset the significant step-up in operating investments in our direct-to-consumer and overall global digital businesses. Looking ahead in 2019, we expect another year of healthy free cash flow growth based on further adjusted OIBDA growth and continued margin expansion even after further $200 million to $300 million digital P&L investments, lower cash restructuring costs to achieve which we currently expect to be around $150 million versus $400 million in 2018, and further focus on working capital efficiency. There will be some offsetting factors such as higher cash taxes and a roughly $100 million step-up in capital expenditures as part of our further transformation efforts but we will continue to be laser-focused on driving healthy free cash flow growth after also making the investments necessary to build out our direct-to-consumer portfolio. We will continue to update you over the course of the year as we refine the timing and magnitude of our digital investments based on progress, acceptance, and the ultimate success of our initiative. I also wanted to share some commentary around our synergy progress. In 2018, we grew adjusted OIBDA by 8% despite significant investments in digital initiatives primarily due to strong merger benefits across the full global portfolio. While it will become increasingly difficult to identify synergy versus underlying business momentum, we continue to relentlessly drive our ongoing transformation, and as we look ahead to 2019, we will strive towards further cost and revenue upside. And while we expect to increase our investments in our strategic pivot, merger synergies will allow us to more than offset these investments and even after realizing healthy margin expansion in 2018, we expect to see additional margin expansion in 2019. On leverage, we remain well ahead of our schedule to get our net leverage within our target range of 3 to 3.5 times and we expect to be under 3.5 times in the first half of this year. We will discuss our capital allocation plans in more detail once we are within our target range, but for now, our priorities have not changed: first, to reinvest in our businesses; second, to pursue strategic and value accretive M&A investments; and third, to return capital to shareholders through share buybacks. With two-thirds of the first quarter now under our belt, I will also give some color around our four key revenue drivers on the pro forma constant currency basis for the first quarter 2019. First, for U.S. advertising, growth is expected to be up in the low-single-digit range with similar dynamics as in the fourth quarter of last year, continued pricing increases and the continued monetization of our digital and GO products, partially offset by lower linear ratings on a year-over-year basis. Portfolio ratings overall are currently similar quarter-to-date, though key networks like Discovery and TLC are slightly improved versus the fourth quarter supported by additional carriage on Sling and Hulu. Where our ratings end up for the quarter will help determine where we will fall within our guidance range. We would note that we expect a positive impact from having additional nets on Sling and Hulu to continue to slightly pick up throughout the year. Second, U.S. affiliate growth is expected to be up around 3% to 4%, Instagram over the course of the year to be up comfortably in the mid-single-digit-range on a full-year basis again given expected tough growth at virtual MVPD. Note this guidance assumes no significant change in the industry's underlying subscriber trends. Third, International advertising growth is expected to be down high-single-digits due to the tough comp versus the Olympics in Europe in the first quarter of last year as underlying trends remain relatively consistent with what we saw in the fourth quarter across our markets. And finally, International affiliate growth will be around flat where again underlying trends remain relatively consistent with last quarter across our markets. So in the first quarter, we face a much tougher comp versus our China Mobile licensing deal in Asia as we delivered more than double the content in the first quarter of 2018 versus the fourth quarter of 2017 as well as some year-over-year impact from additional digital revenues associated with the Olympics and the Eurosport player in last year's first quarter. Before I close, let me quantify the expected foreign exchange impact on our 2019 results. At current spot rates, FX is now expected to negatively impact revenues by approximately $150 million to $160 million and adjusted OIBDA by $65 million to $75 million versus our 2018 reported results. In closing, we remain extremely optimistic about the outlook for the new Discovery which will allow us to accelerate the transformation of our business, drive free cash flow, and ultimately generate significant long-term value for our shareholders. Thank you again for your time this morning and now, David, JB, and I will be happy to answer any questions that you may have.

Thank you. [Operator Instructions]. Our first question is from the line of Jessica Reif Ehrlich with Bank of America Merrill Lynch. Your line is open.

Thank you. I have a multi-parter, first JB it's great to have you on the call and would love to take advantage of that. When we last met in Warsaw in fall, you gave a compelling view of TVM's growth. Can you give us -- can you talk about the importance -- let me put it this way, given the importance of Poland in the International portfolio, could you give us an update on the strength of that market, kind of the drivers of that market and maybe on a less positive note, can you give us some color on what's going on in Latin America with the ratings. And then for Gunnar or David, just to come back to the free cash flow comment on 2019, can you give us a little clarity on what the building blocks are for free cash flow? You talked -- you said it does seem like a little more to go in synergy both on the cost and the operational side but just a little bit of color on that would be great?

Yes, good morning, Jessica. This is Gunnar. Let me start with some more background on -- my thinking around free cash flow. David and I've been speaking about free cash flow and the ability of this new combined company to generate cash quite a bit. And I'm actually very proud of the tremendous progress that we've made with the $2.4 billion number for 2018 again only 10 months into the combination. And again keep in mind that includes about $400 million of restructuring cash out, and also we have made all the investments in our digital and direct-to-consumer portfolio this year that we -- that we felt necessary. So I think that's a great result and we're still very excited and encouraged by the further potential. And that's why for 2019, as I said earlier, we're guiding to a healthy growth. There's going to be significant improvement in the cash generated by the underlying operation of this business. And as we go through the year, we will make the decisions of how much and at what times we reinvest part of that cash and that's going to determine the reported free cash flow number. In terms of the building blocks that you asked for, clearly we're expecting further underlying AOIBDA growth. And as I said, I'm expecting further margin expansion this year on top of the margin expansion that we saw in 2018. Also again cash restructuring costs of course are going to come down. We're currently expecting about $150 million in cash out in 2019 after $400 million in 2018. We will continue to focus on working capital efficiency. I still see a lot of potential there. And that's going to be a focus area again in 2019 as it has been last year. And then clearly as we de-lever and pay down debt, cash and expenses is going to come down over time. Now on the offsetting side, clearly there will be higher taxes as we grow our net income before tax. We're also planning for a roughly $100 million step-up in CapEx. That's essentially for two parts. Number one is building out our global tech stack. And number two is some transformational investments that we're making related to consolidating our real estate footprint systems integration et cetera. And then of course the main factor this year is going to be the further P&L investments that we're planning to make. We've got a great portfolio, we've made some key decisions but other decisions are yet to come. And we want to maintain the flexibility and the number and the timing of those investments is ultimately going to determine how much we drop to reported free cash flow. That's why I didn't give a specific number but as you can see, we continue to be super excited and confident about the cash generation.

What's critical here is when we closed on Scripps, I have laid out a little less than a year ago that we saw this company as being really unique and that we could generate huge free cash flow which we're doing and we'll continue to do and we see it accelerating. But the most important element here is the uniqueness of this company today. The idea that we can generate this kind of free cash flow, and as I said at the time, we can become a free cash flow machine. And what that really does for us in an environment of where there's challenges in the overall ecosystem, it gives us a moat and that moat is all this free cash flow. And as we look at Golf, Cycling, Natural History, we look at Chip and Joanna Gains and the power of their brands and their ability to reach. We look at those different initiatives and we could say this is really working well. We can deploy more capital here. This isn't accelerating, let's deploy less capital but we have full flexibility. And I think that makes us -- that gives us a really unique advantage. JB?

Yes, hey Jessica. Thanks for the welcome; it's great to have you and so many of our investors over in Warsaw last fall. So on the two questions, first on Poland; we really see the Polish and the TVN asset as a big game changer for us. And really the focus is on three things. Number one; there is strong number one position in TV. We had -- we closed 2018 with record audience share of 27%, our fall season reached an even higher percentage of 29% share with great fall season launches starting in September. And so we couldn't be more excited about the momentum on the TV side. Second, we have the leading local OTT business in with all the content that TVN producers in that market and we continue to see strong double-digit growth across the board in our digital business in Poland. And third, it's given us a major hub to produce both on the backend side of our business as well as on the production side at very low cost great shows. And so we've done some great production so far at 30% to 40% discounts is what we could do either in the U.S. or internationally with things like House Hunters International and some other shows and then we're moving more of our back office activities in some areas to a very low cost and very competitive and high skilled environment. So those three areas have frankly outperformed even what we thought and so we couldn't be more excited about the momentum of the Polish business at the moment. On LATAM, it's frankly a little less; it's not so much a ratings issue. Ratings actually continue to perform well. We're getting as David alluded to in his comments earlier, great commitments from distributors to launch Food and HG, millions of new subs in that region. That's -- the momentum on the operating side both audience and distribution wise remains strong. The challenge really is frankly a lot about Mexico and volume challenges given the political instabilities in that market right now. And Brazil is doing well much better than we did, as David mentioned, we had double-digit growth in the fourth quarter and we continued to see strong improvements in the ad sales market in Brazil. So it seems like it's more of a cyclical issue for us in LATAM and we're hopeful that Mexico will over the course of the year begin to stabilize. And if Brazil continues on the progress it's made in fourth and first then we should have a better story as we get into the back half of the year.

Thank you. Our next question is from Alexia Quadrani with JPMorgan. Your line is open.

Hi, thank you very much. Just a question really following up on your International commentary bit more generally though in terms of how we should think about International advertising, obviously there is some weakness in Brexit you guys highlighted, does that -- in UK does that get worse before it gets better. And I guess when do you think the Scripps content generally make a difference to the International advertising story? And then just a follow-up for David if I may, I'd love to hear your commentary on how you view Netflix, is it a bigger competitor now in the unscripted content space both in terms of tracking the right content or resources for your networks or viewership just curious to hear your comments?

So on International, look obviously it's one word as you guys know that's very complicated to paint with one brush given the number of markets but I would say it's -- we really see a bit of a mix. We've seen some markets that are particularly strong. Frankly for us, we talked about Poland markets, some of the Nordic markets which have historically been more challenging, we're seeing great actually growth in markets like Sweden. So there are some markets where the volume and the markets continue to be strong and we have seen then in some other markets which are softer that David alluded to. Brexit specifically, frankly I wish I could tell you, I think we're all sort of waiting as to what the outcome will be. I -- it's hard to say whether that will be a, I don't think it's a short-term fix. But ultimately there is an extension granted in some capacity could the market improve in the back half of the year possibly, it’s just very hard to predict at this point. On the Scripps content, look I think again in a market -- in a marketplace where we saw stronger markets in some of the biggest markets we have, the audience performance is actually trending very positively. So the good news is audiences and ratings are strong as the year progresses and if we see some of these bigger markets stabilize, we've talked about the UK, we have talked about Mexico earlier that I think the monetization will come in towards the back half of the year and over time as we go into 2020.

On the Netflix Prime, Amazon Prime, HBO Showtime that let me answer it in two ways. One is Food, Travel, ID with Crime home, all those are growing. People are spending more time with us; they're watching more of our content it's growing. This is difficult stuff. And this is what we do for a living. We have a team that does only Food and we work with production companies that deal almost primarily with us. And we figured out how to create shows and build characters in that genre. In the Home genre the same, in the Crime, there's loads of people doing Crime, but Henry Schleiff and his team know how to do it and work with production companies in a collaborative way that I think give us a really unique advantage. So we're seeing growth in those areas and it's what we do. When people go to HBO and they go to Showtime and they go to Amazon Prime and Netflix they're really going for something else, they're paying $10 to $15 for scripted series and scripted movies. That's what the brand is. And look on a broader basis as we get -- as we get further and further into our mission of powering people's passions, people spend about 50% of their time on scripted series and scripted movies and they spent about 50% of their time on everything else. And we've picked out these passionate brands and categories that we think that have -- that are the most compelling in this everything else area. And the big opportunity here is that the right side this scripted series and scripted movies, people watch that stuff, that's all they do, is they watch it, they watch a great scripted series and they watch movies. On our side, we're focusing on this idea that they watch and they do. And that's a huge opportunity. They watch Golf but they also buy Golf equipment. They also -- they will go to Tiger for instruction. They want to see where to take a vacation with Golf. They watch cycling but they buy equipment with cycling and they want to find out where to go to get to get the best clothing and what's the most -- what's the best coaching. When it comes to Food, people watch our content but they also want recipes. They want to talk to experts about how to make, how to engage in, in that category long form and short form. And so we think between Home, Cycling, PGA, Natural History, Travel, Oprah, we're in these categories where people will watch and do and that's why we bought this cycling business. That's why we got into the PGA and even in categories like Natural History where we're the leader globally. People may watch a particular piece of content but then they can take a deep dive into our science or space categories. So we think we don't have -- we're in an environment where we're a real market leader. We're differentiated and we have this opportunity in this watch and do, that could create a real opportunity build businesses in these funnels.

Thank you. Our next question is from Doug Mitchelson with Credit Suisse. Your line is open.

Hello, thanks so much. I guess two questions, JB curious regarding your sports strategy internationally in Latin America and Asia, with Fox Sports in Brazil and Mexico be a natural fit if Disney has to sell them for deal approval purposes and if not wanting to touch that one just more broadly given the viewing declines mentioned and the pricing declines in Asia, would sports in those markets be something that might make sense to pursue at some point similar to what you've done in Europe. And David on your end, I think a lot of investors look at the stock valuation and while they want you to invest in growth, I think they also think the company should be buying back stock hand over fist and I think what's been outlined on the call so far has been investing in lots of interesting niche opportunities rather than large scale acquisitions suggesting a lot of balance sheet flexibility should be remaining as you go through the year and I was just curious if you had any comment on that and whether I was missing anything there? Thank you.

On the sports piece, we look at everything. We are -- we own with Liberty Formula E. We own the League in our partnership with Jay Monahan, the PGA. We have global rights everywhere in the world except for here. I deal with Tiger his rights that include the U.S. everywhere in the world. Cycling we just bought a business that's fully global and so we are opportunistic in terms of looking at sport as a passionate brand where we can super serve people's interest across the board. But we're also -- there's a lot of stuff that we look at that we don't think fits our metric of being able to provide long-term growth. In most of those cases, we bought sports assets that have very long tail with --in the case of the PGA, it's through the end of 2030; in the case of the Olympics, we did it for a decade; in the case of cycling, we own the business. And so most of our rights on Eurosport, we paid low-single-digit increases and we got -- we would try to get six year deals. We don't like doing business with these three-year type Soccer deals which we're getting out of. And so I think we're going to be opportunistic, we're in the sports business; we may even be the leader in sports around the world when you aggregate all of our IP. So we look at everything and we will look at everything but we'll look at it in terms of what kind of a sustainable asset it is and JB.

Yes, I think that's right. And on the Asia piece of it, the reality is the a) the Golf deal has put us in business in Asia in a major way. The two of the biggest markets in Asia for Golf are Japan and Korea. And so that has significantly changed the game. We announced obviously last quarter our expansion of our relationship with J:COM, our distributor there, who is now also our Golf partner, and in Korea we will be coming up next and then China as well. So we are in sports business through Golf which I think is a meaningful step for us. And then the other thing that in terms of more things in Asia and sports, a lot of it becomes much more localized which I think is a bit of a challenge. The rights that are big in terms of Australian Rules Football, Rugby in Australia versus what works in Malaysia versus what works in Japan is oftentimes very different and so it's hard to get the same scalable play. But as David said, we'll look at everything. But I think for now we're going to take the Golf product for a real ride here and we think that has great opportunity.

And look, I think that we're building a platform that's unique. If we're successful with Golf and cycling, we're also doing MotorTrend and in addition to that, we have global rights to Natural History and these other brands. But if we're able to build, we're the only company that's doing business in over 48 languages and as we build this platform for which we've brought Peter over to build and we've brought over one of the most senior technology leaders from Amazon. If we build that and we're in multiple languages like we did the Olympics in 22 languages, we're going to do the PGA in over 40 languages. And so there's very few companies that can promote from the ground and convert into multiple languages and have a platform that's above the globe. And once that's done, we think the opportunity could be significant. There's a lot of sports with federations are going to want to try and reach above the globe but they're not going to have the scale to build the platform. Our platform is built. They're not going to have the scale to market in every country. We have multiple channels in every country and we have an online digital business in every country. And so we think once we build and we can prove out these ecosystems that we could be a platform that people come to where instead of paying for those rights that we can represent those rights and get a split.

Okay. And then, Doug, on your buyback question, look I mean the way I look at this is I'm really proud of how the leverage number has come down. I mean again almost a full turn in only 10 months. The free cash flow number 2018 has been better than what we planned honestly and also what we guided to and this isn't going to stop. As I said, we're planning to get back into our target range of 3 to 3.5 times within the first half of this year. That's great flexibility, as David said, that's very important in this environment and we see a lot of potential of underlying additional growth in our cash generation. And all those investments that we're discussing about again those are investments that we can fund out of our free cash flow growth. I think that's a very unique situation. I don't think we need any sort of major transactions but you've seen some of the partnerships we've been able to strike over the past 12 months. Those are great divestments into our future growth and doesn't change our financial profile. We've got a very strong balance sheet. Regarding buybacks we're going to come back. Our first priority has always been to de-lever down to 3 to 3.5 times, when we get there, we'll come back and update you on what the capital allocation is going to look like. But again priorities are de-lever first, invest in the business, and then return capital through buybacks.

Thank you. Our next question is from Drew Borst with Goldman Sachs. Your line is open.

Hi, thanks for taking the questions. I want to ask about the costs in particular the cost of revenues which in the fourth quarter took a noticeable step down relative to what you had been doing in the prior couple of quarters. So I guess as we look into 2019, should we think about what we saw in the fourth quarter as kind of the run rate for 2019?

Thank you. So well I mean the step down in Q4 actually has two components. Number one, as JB laid out earlier, we've really taken a new strategic look at the programming grid literally across the entire global footprint. And we've made more use of the SNI content replacing acquisition content so that obviously has a pretty significant impact on our cost of revenues. In the fourth quarter, there was another U.S. component that was supported on a year-over-year basis because in the prior year fourth quarter Scripps had taken some significant write-downs on content. So that has been helping us on a year-over-year basis as well. So it's probably a little more pronounced but as we've said before this content synergy is one of the key elements of the merger thesis. We will continue to see improvements over the year. Keep in mind that the full first quarter is essentially excluding any synergy impact in 2018. So we'll see a step up in 2019 and we'll continue to be very, very focused on costs as I said. And as a consequence of that, we will see further margin expansion in 2019.

Okay. Thank you for that. And if I could one more on the digital investments that you mentioned, I just want to make sure I understand it. I think you mentioned $200 million to $300 million for 2019; is that an incremental step-up beyond what you had been doing in 2018 or is that kind of an absolute number. So I think the last time you gave us an update you guys talked about sort of spending about $50 million per quarter, so call $400 million per annum maybe you could just describe that in a little more detail?

Yes. So the $50 million per quarter indeed has been the run rate at which we have been investing since we closed the transaction and so that would add up to $200 million a year, I guided to $200 million to $300 million because again keep in mind there is some -- there will be some flexibility. This is not one fixed number. This is not a business where we put together a plan in the fall for the next year and then this is exactly what we're executing. We're -- we've got a lot of very, very promising initiatives on the table. We've seen some first successes and we need to have the flexibility to double down on anything that's really getting traction. And on the other hand, we will not make certain investments. If we -- if the first feedback from the market doesn't look like we're on to something. That's why it's a bit of a broader range but the way to look at this is as previously that $50 million run rate now is a full-year range of $200 million to $300 million in incremental P&L investments.

Okay, thanks. And just real quickly restructuring charges I assume are we done now like in 2019, we won't see any more restructuring charges related to the deal?

We're mostly done. As you can see, we are expecting to pay out some of the 2018 accruals in 2019. That's why we still have about $150 million cash out in the numbers that I just discussed. And we probably will see round about $50 million of additional P&L charges. But I would expect that that's it though.

Thank you. Our next question is from Todd Juenger with Bernstein. Your line is open.

Hi, thanks. I appreciate it. It's a bit somewhat mundane today, if you don't mind but I hope I can ask. So Gunnar just I was hoping on the -- thank you for the 2019 guidance on the affiliate fees consistent with what we've heard before. Just wondering if you could help us understand, if there's any licensing components in there, as spot licensing sort of what an underlying organic rate for pure affiliate fees versus other stuff. And the other question for either you Gunnar or David, just thinking about the portfolio of networks in the States and your comments about the fully distributed networks and their distribution stability and then some of the digital tier networks losing distribution faster. What are --as you think about -- is that -- what is the right number of networks for you guys at some point does it make some sense to think -- to rethink some of the digital networks and either reexpress them somehow in a different way than a linear full network. What is the trade-off there, what's the incremental margin from those? Any thoughts on that would be great. Thank you.

So indeed the guidance that we're giving for Q4 for affiliate revenues both for Q1 and for the full-year is very clean number if you wanted to call it that. As a matter of fact, Q1 is actually slightly tougher comp versus last year regarding some Ava components that were in there last year. But it's a very clean numbers driven by our pricing step-ups in new and existing deals and the additional carriage on virtual MVPDs and the expected growth on those platforms.

On the channels, we've said before that about 85% of our fees goes against our top six or eight channels. We have focused on the idea that if we grow our core eight that we really have an opportunity. We've been very successful now in getting our channels carried on the smaller bundles which exist everywhere in the world and not here. And we're hoping that this year as those grow, we think we'll benefit more than anybody else from those. We also have Chip and Joanna who we are hard at work and have been down to Waco. We think that is a very unique opportunity to enhance the channel and grow a channel. We --no other media company in the last couple of years has been able to go on offense and grow as many channels in fact most media companies haven't launched any new channels and we have ID that didn't exist. The number one cable channel for women in total day, we have the Oprah Winfrey Network number one for African/American women. We launched Velocity and we now have an opportunity with Chip and Jo to take a network that is doing okay and take it to the next level. But to your point, we also have a real vision for that in terms of going direct-to-consumer. And when you think about this idea of watch and do, there's probably no better example of watch and do than Chip and Jo. They created a great show called Fixer Upper and then they created a whole multibillion dollar business called Magnolia based on the quality of their ability to design and build product. And so there was an example where they built an entire ecosystem and we're reconnecting with them and excited about what we can do together. They're in Magnolia on their own. But we think there's a lot that we could do together to build our channel. So net-net, I think over time you'll see some fewer channels but we think we have at least one or two more that we could build strong here in the U.S. with big characters and big personalities that people love and want to spend time with. And that's what we're about. That's why we did the Tiger deal, that's why we did PGA. That's why we're in cycling, that's why we were with Oprah and Chip and Jo. In the end, we have great brands but we have great characters that people love. And that's what this business is about spending time with people that you love and finding out what their stories are and what their challenges are and the things that they love.

Thank you. Our next question is from Vijay Jayant with Evercore ISI. Your line is open.

Thanks. One for Gunnar, one for David. Gunnar, you talked about the underlying trends in subscribers that are holding to what it was in 2018. Obviously, there's been a lot of movements in the virtual MVPD space. You guys are one of the few companies on AT&T Watch. Can you sort of talk about how you sort of think the virtual MVPD contribution as part of that would broadly be in 2019 given your position. And for you, David, obviously you've talked about the passion of your verticals in Food and Home and new ecosystem and you gave a full bunch of numbers about the TAM, you have also talked about in the past the strategic partnerships possibly with the Samsung and Amazon. Can you just sort of give us some insight on if those do happen, what is the monetization model there?

Great. Let me just start with this whole idea of 5G is a part of the whole narrative of who's going to own the home. And the -- within the home, the place that people spend the most time is the kitchen. And as I've said, the question that everybody -- everybody in the world asks every day is what's for dinner, what's for breakfast? And the challenge of who's going to own the kitchen. I think we have a real opportunity. We have the greatest chefs, we're the leader in recipes, we're the leader in short form, we're the leader in brand and credibility, we're the leader in content. And so we're very active in aggressively pushing that ourselves and having discussions with everybody that's in the kitchen about how do we own the kitchen whether it's distributors with 5G or whether it's players that want to meet with voice activation in the kitchen or with screens in the kitchen. And so we're actively driving that in addition we think that do-it-yourself and home design is another area where we have a lot of experts, a lot of content, and a lot to offer. And so we're pushing that hard and that's not in our current plan but we do think there's a real opportunity there because we have something that is real functional and something that could provide real value to customers aside from just watching entertaining content.

And on your distribution question, I don't want to break out individual contributions of individual deals but as we've said before that mid-single-digit guidance for the U.S. affiliate growth is a combination obviously of the inclusion Hulu and Sling and then price increases on our traditional deals. And I mean in terms of the mix in the market, we've always been a firm believer in the value of our content and I think our ability to hold those deals last year underpin that quality. And we've also been a firm believer in value of smaller bundles in the market. And I think we're seeing some confirmation there as well.

Thank you. Our next question is from Michael Nathanson with Nathanson. Your line is open.

Thanks. I just have one simple one for you guys, on International M&A with David and JB, for a couple of years back, we've seen cable networks start buying broadcast assets abroad. You did at SBS; Viacom did it Telefe Channel 5. I wonder going forward do you think that's still a winning strategy to go into local markets buy broadcast assets and do you see any -- with your financials, any benefit of basically being both a broadcaster and a cable network based on your ability to drive returns higher growth or anything. So I love to hear about that.

I would say directionally, we're much more focused on owning IP. We have a lot of free-to-air channels, we have cable channels. We're really focused on taking that IP to other platforms and maximizing the efficiency and free cash flow of our existing platforms. We look at everything but it wouldn't be the first place we go. And the overall idea of owning -- of owning broadcast assets really would make more sense in a market like Poland where it's protected because it's a unique language, they have a very strong portfolio and this strong GDP growth. But in general not at the top of the list of what Bruce Campbell, JB, and I are looking at right now.

And ultimately markets that have other ancillary as we talk about in terms of Poland, their market position and strength and ability to pivot to digital and ability to provide us other benefits in terms of lower cost of production and back office services as well. There are other benefits to it than purely the broadcast assets. So that asset actually is fairly unique. And we're seeing even in the Nordics, as you mentioned, as we're finally getting more traction and pushing more aggressively into the OTT space, a stronger growth on the OTT, so pivoting those businesses to be much more OTT and direct-to-consumer driven, leveraging the local content and IP as David said that they have in their portfolio is really the focus for us.

Thank you. Our next question is from Steven Cahall with Royal Bank of Canada. Your line is open.

Yes, thanks. Maybe first, Gunnar, I was hoping I could at least try to pin you down a little bit on adjusted OIBDA growth for 2019. Just some of the trends that we've been seeing is a big pickup in U.S. OIBDA growth driven by I think the cost synergy. And then you've got a pretty easy comp in International in Q1 just because of the Olympics headwind that you had in 2018. So can you just help us maybe put in context should we see an acceleration in adjusted OIBDA growth in 2019 versus 2018 or anything there would be helpful. And then maybe to just pick up a little bit on Vijay's question you basically said your distribution guidance now accounts for not a lot of change in the subscriber trends that we've seen. Q4 was maybe a little bit out of trend in terms of both linear and vMVPD. So if we see a little more of Q4, is that kind of baked into your guidance. Do you have some buffer there? How should we just think about what we're seeing on the sub decline and what's baked into that guidance? Thank you.

All right. Well, so I mean let me start with your OIBDA question. And I'm not going to give a specific guidance but a couple of building blocks, you are 100% right that Q1 is obviously going to be an easy comp because we have that special impact of the Olympics which for the quarter had a negative -- profit impact last year. We also look at the last quarter before closing the transaction, so there's literally zero synergy impact in the Q1 2018 number. So we should be seeing a nice step-up. And for the full-year, let me reiterate what I said before. I do plan for an margin expansion on top of the margin expansion that we have seen in 2018. So that's number one. On an underlying basis clearly there is going to be significant AOIBDA growth but then, as I said before, we will continue to make P&L investments. And let me just clarify that based on what we have in the plan for 2019 that would add up with the investment that we've made last year to about $300 million maybe $400 million negative impact from those direct-to-consumer investments. Again keep in mind we're building out a portfolio for -- to drive our future growth. And as I said before after that -- after that investment I am targeting margin expansion for the full-year and clearly AOIBDA growth to some extent that's going to obviously depend on the timing of the magnitude of the investments we're making. On your sub number question. You're right; Q4 is obviously a very healthy step-up because for the first time we're looking at the additional subscribers from Hulu and Sling. Again, I mean, the -- I don't want to give any specific guidance what we have baked into the financial guidance of mid-single-digits for 2019 is assuming stable underlying trends as we see them today with no acceleration or deceleration.

Thank you. Our last question is from Ben Swinburne with Morgan Stanley. Your line is open.

Thank you. Good morning, David. I think you closed the Scripps deal a few months before last year's upfront. I'm just curious now that you've had the acquisition done for a bit. How are you thinking, if at all about changing how you approach this year's upfront. Obviously a huge audience share particularly with female viewers. Any changes we should expect in terms of how do you go to -- how you go to market and package inventory, how Discovery GO might factor in any details there would be interesting. And then for Gunnar, I apologize, I know you've talked about it a couple of times but maybe I'm the only one who's confused. Could you just go back to the 2018 digital spend and then the 2019 just so we clearly understand what is incremental versus the total, has there's been a bunch of numbers thrown around that are different. Thank you.

Thanks, Ben. We had a good upfront and we had a good calendar. We've said that we think this quarter will look a lot like four. And candidly, I'm on my way down to Florida now. I think that we probably left some points on the table for this quarter and we could do better. I'm not satisfied at all. We spent a lot of the last two weeks looking at our efficiency rate, looking at our sell-out rate how we sell and GO. The reason I say that is TLC was the number one network in America for women in January, number one. And we have ID very strong, we have Food strong, HD strong, and Discovery improved and GO was accelerating. And so I think that our creative team is doing a good job. And I think we have a very strong ad sales team but we've got to get more focused, the way that we drilled down and had real work streams on cost. We now have developed co-work streams on our revenue on sales and I -- I'm not satisfied at all. I think we should have had -- we should have a bigger number this quarter. We're going to continue to drive to it but if we do our job right, I think you're going to see better numbers in the quarters ahead.

Okay. Let me clarify the digital investments commentary. So as we've said previously, we have been investing on a run rate of about $50 million in the quarter since closing the transaction that is against our 2017 baseline. We're going to slightly accelerate that pace and I'm targeting $200 million to $300 million additional investments in 2019 and as obviously some of those investments started to pay off, the total dollar amount in absolute terms in our 2019 profits and cash flow will be between $300 million and $400 million total impact from investments on the digital side.

Thank you. And ladies and gentlemen thank you for your participation in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.