Ladies and gentlemen, thank you for standing by and welcome to the Discovery Inc. Second Quarter 2020 Earnings Conference Call. At this time all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Good morning, everyone. Thank you for joining us for Discovery's Q2 earnings call. Joining me today are 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 www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we will open the call to take questions. Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2019, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I would like to turn the call over to David.

Good morning, everyone, and welcome to our Q2 earnings conference call. Last quarter we noted that these uncertain times highlight unique competitive advantages that distinguish us from many of our peers, strategically, creatively, operationally, and financially. We benefit from content leadership in core genres that are relevant, popular, and durable, an efficient, low cost content production model with a long tail and global appeal, short production cycles that allow for quick content development, the most international and diverse mix of assets, platforms and brands, and among the most trusted family-friendly brand portfolio that offers safe environments for advertisers. And while our relentless focus on content that nourishes and delights our fans has always been our North Star, its impact couldn't be more significant than it is right now. In a world that offers viewers greater choice than ever before across an increasing array of delivery platforms, an added competition per viewers, time more and more viewers are choosing to spend time with us everywhere around the globe. It's emblematic of our differentiated model. At a time when most broadcasters and networks have been relying on tide repeats and reruns of scripted shows, we brought over 1,000 hours of fresh, original content to our networks since the world's shut down due to COVID. It's been cost effective, creatively shot and produced and well received. In fact, Amy Schumer Learns to Cook, which was shot from home for food network, was nominated for a Primetime Emmy. Of most importantly, our ability to continuously refresh and update our IP further adds to the strategic value of our global IP library. Particularly as we drive our content increasingly direct-to-consumer and its attraction increases to others during a time when nearly all platforms require more and more depth of content to attract, delight and maintain…

Thank you, David. Good morning, everyone. As David noted, we continue to operate under less than optimal conditions around the globe. However, I remain very pleased with how our organization has adapted and evolved in the face of current uncertainty and limited visibility. The benefits of a dual revenue stream model are apparent, particularly long-term contractual subscriber-based distribution revenues, which I'm pleased to report. We continue to renew with solid pricing and mutually beneficial terms with our partners. This highlights not only the tremendous value of our content on the linear platform, but also supports the evolving nature of how we may reach audiences on a B2C basis. I'm looking forward to discussing our plants with you in greater detail in the near future. And even as we continue to invest to support these initiatives, the efficiency of our operating model has never been more critical or more apparent, while there were some timing related benefits, most importantly from a decreased content spend, particularly on delayed sports events. We achieved our highest free cash flow in the first half here in the company's history. Consequently, over the trailing 12 months period, we have again generated $3.1 billion in free cash flow in an environment when global ad sales were down 11% ex-FX in the first half and down 20% ex-FX in the second quarter. I'll provide some modeling help on the cadence of our free cash flow drivers and content spend specifically shortly. In the U.S. advertising decreased 14% year-over-year in an environment characterized by overall weaker demand stemming from COVID related issues. Though, while demand was weaker, we were able to hold firm on pricing and our overall CPMs for the quarter were up mid-single digits year-over-year. Scatter pricing was solid, up 25% above last year's broadcast upfront. Interestingly,…

Thank you. [Operator Instructions] And our first question comes from Steven Cahall from Wells Fargo. Your line is open.

Thanks. So I'd love to talk about the medium term outlook for U.S. affiliate revenue growth in light of some of the accelerating sub-declines. You've had a pretty good kind of industry leading affiliate growth rate. So I was wondering if you could just give sort of the longer term outlook about how you're thinking about your ability to keep getting price on linear deals versus those sub-declines. And then relatedly, a big part of the country now is not subscribing to the linear bundle, so how are you thinking about taking that content kind of more direct to consumer? Thanks.

Thanks, Steve. Well, we just did, as we said four big deals, three of them here in the U.S. The good news for us is our content is hugely over-performing. The not so good news for us is that our content is cheap, and so we've been able to get increases. I believe that we should be getting significantly more for our channels. We have the Number 1 channel in America and TLC where we're Number 2 or 3 in America for women. Aside from the news networks, you look at Food, HG, OWN, TLC, ID, our portfolio is extraordinarily strong and growing with characters and brands that people love, and they watch these channels like they watch Fox News all day. And so we're taking that into the upfront, but as we sat down with distributors, they recognize that we're providing huge value. They make a lot of money by selling them. So I expect we'll continue to do quite well in renewals that come in the future, but right now we're very stable and we're very happy about that. So we can get on with getting on. To your second point, which I think is an important one is that there are 30 million subscribers or more, maybe 33 million, that are broadband only. There are a lot of people that want to watch content with no commercials. And there are some strong players out there that have built a great road to this direct-to-consumer business. And we think we can get on that road, Netflix and Amazon and Disney Plus, it was hard work building behaviorally that road of getting people to pay for content and gestationally we're now like in the third or fourth inning, and people are comfortable with that. But those services are all…

Sorry. Sounds good. Can't wait to take the SUV offer.

Yes. Let me just add one thing, Gunnar here on the affiliate question. Steve, so, a couple of points I want to make. Number one, as you know, we have a very clean affiliate number, and this is why we point out when there is a sort of special effects like in this quarter. The underlying number is 2%, if you combine that with the 5% sub-decline sort of across the industry, essentially in our main part of the portfolio, then you get to sort of, the implied pricing number, as David said, we're pretty happy about how those deals have gone. No visible trend change here when it comes to pricing. The big factor that we don't control of course is sub-declines. So we'll see how that – how that turns out over time. And then there is going to be an increasing contribution, both in international and the U.S. from D2C subscription revenues, and again, that's a little more difficult to plan out, but you should start assuming some positive contributions over time.

One more point, Steven, because the focus generally here in the U.S. tends to be the U.S. but we are the Number 1 global media company outside the U.S., leader in sports, leader in our – the aggregate local content that we have in every language. And I just laid out what our strategy is here in the U.S. and we'll be talking to you exactly about when we're coming to market? How we're doing it? Exactly what it looks like, which is very exciting. But outside the U.S. we have a very compelling differentiated strategy as well. Local content, local sports, so Netflix and Disney fantastic services, they're coming over the top, primarily U.S. eventually Netflix has a little bit of local, Disney will have some local, others will do a little bit of local, but we're local content, local sports. So we think that differentiated above the globe attack. Outside the U.S. local language, local sport, very strong, very differentiated. In the U.S. very differentiated, a great companion, great content, great brands, great characters, great original. So we like our hand.

Great. Thank you.

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

Hi, good morning. This is Meghan Durkin standing in for Doug. I want to see, if you could talk a little bit about the progress with the Food Network Kitchen? Any update on subs post the Amazon promotion. How much is it contributing to advertising? Is there any e-commerce revenue coming in and any learning’s there? And I have a follow-up for Gunnar.

Great. Great. Thanks. Well, look everything that we've done, we've been in the direct-to-consumer business for the last couple of years with the Eurosport player with deep play, with Food Network Kitchen and each one of them we've learned, we fallen down, we picked ourselves up? What do people like? What do they want more of? How do we create a product that people love month to reduce churn? How do we get partners to help us? Partners to help us is hugely important. Being – having Amazon together with us, built into echo. There's a huge number of people that are on Fire TV, that Amazon is pointing to and driving. How do we get those people to convert to be Food Network Kitchen subs? What does Amazon do? What do we do? How effective can Amazon be as a partner in driving free funnel subs and pay subs, all of that is stuff that we're learning? It's very; it's going to be very helpful to us. Same is true across Europe, as we're getting distributors to align with us and have gotten distributors to align with us in driving our – driving deeply in our direct-to-consumer product. So it's going well, we're learning a ton from it. We get to talk directly to customers. And as we – as we lay, as we roll out our big aggregate attack, it will take you through in the near-term. We’ll at that point, we'll figure out what other details on some of our vertical products will give you.

And then, I’ve a follow up for Gunnar. So you can just give us a little bit more color on exactly where we're going to see the investments flying through the model. Is it going to be U.S., International or combination of both?

Yes. It's going to continue to be a combination of both. I mean, as David said, we're increasingly looking at the U.S. market. So if you look at last year, the majority was hitting international. You should assume that that's going to be a bit more balanced mix this year. Other than that, we had given guidance initially as we went into the year, on our investment levels. I know we have retracted guidance, but we have continued to invest, and I continue to expect us to keep investing at pretty much a similar level as what we originally got into this, roughly $600 million of losses from those new investment activities for the year.

Okay. Thanks guys.

Thank you. Our next question comes from Jessica Reif Ehrlich from Bank of America Securities. Your line is open.

Thank you. Three, four questions. Can you talk about what you're seeing on pay-TV subs outside the U.S. Disney call that out on their earnings call yesterday? Second, on cost you've had amazing cost control, I know Gunnar you said it's flat on a full year basis, but when you look forward, can you parse out how much of these – of the cost containment or decreases and how much is permanent and how much is just deferred cost that you have to spend like T&E and sports? And then finally, David, you mentioned advertising the upfront. Can you talk about the process now and expectations as well? How are you selling differently? You targeting different metrics? Are you doing more addressable advertising and what's the new timeframe for the upfront? Is it the broadcast year, or are you going to a calendar year? Thanks.

Okay. Why don't I start with the upfront, and then Gunnar, why don't you take the metrics on international and cost control? The upfront would have been over in a normal year, and so it's a bit of a dance, but the market has gotten – has really picked up, it's getting better. I think the, in terms of the upfront, I think we have the best hand. We have original content; we are continuing to produce original content. Most of what you're going to see right now from us is very dependable, a fully engaged audience, and we come with, you know what, on some Sunday nights we get a four – we get over a four or four five on TLCs 90-day alone, with the Number 1 franchise on television. So one is we're way under paid for all of our channels. And we expect that that even at significant increases, we will be a great value because when people look out to the other services, what are they buying? They're buying a lot of reruns. They may be buying sports. They may not be buying sports. We’re the new sports people are coming on every day and watching Food and HG. TLC is the most popular service in women’s 18 to 25, 25 to 54, 18 to 49. So – and the – and HG is the Number 1 channel for women in the aggregate. So if you want to reach women in America, you want to reach them in watching live or close to live. We’re the only place to come. We still have the Number 1 channel for men with real strength with Discovery. And so we got some swagger. We really have some swagger because, we look at the advertising market and we see broadcast charging $65 for CPM and delivering 0.4, we’re delivering 4.5s. And we have historically been relatively cheap. And we think right now, since we're the Number 2 media company in America in what we deliver, and we have the most fresh content and dependable, fresh content going forward that if you want to play, you got to pay. And if you want to reach people, women live, men live and know that you're going to reach them between now and the end of the year at this crazy time, you're going to want to be with us. And that's – that's as we talk to advertisers, they recognize that, and they recognize the strength of our brands. And I think we're going to – we certainly are going to do very, very well, and I hope that we're going to make up a big piece of the differentiation, because it shouldn't have existed. And we're a hell of a buy compared to everyone else even at a big increase.

Okay. And then let me cover the other two questions quickly on the pay-TV subscribers, Jessica, so right now it's mildly up across the board, obviously JB would say looking at international, it's just a collection of very, very many market with very different dynamics going on, but it's up a little bit. I think the one outlier, I guess we should point out is Brazil, which obviously given the current environment was down in subscriber numbers. But other than that, we continue to see growth. On the cost control side, what's permanent, what's deferred, let's just go through a couple of elements. I would start with; let's call them, the windfalls, travel, T&E overall, events, some marketing, real estate, et cetera. A lot of that obviously was a windfall and is going to come back if and when we start opening up again. I think the second, a big savings driver here ironically of course has been the absence of sports events and some other original productions. Again, we have been able to maintain a very, very healthy schedule from the perspective of fresh content and again, financially in a positive way, because we're producing a lot of content and we're producing it at a much more attractive cost per hour. And our audiences loving the authenticity continue to enjoy it. So that has been a positive driver overall, as things go back to normal, you should see some of that content coming back at higher costs. There may be even additional costs from some COVID related additional health protocols, et cetera. Again, I would hope to be able to offset some of that with more efficient overall production approach, but that's sort of the second building block. And then you shouldn't forget that we're still on our transformation journey. What we started two years ago, we went into this with a massive team, hundreds of people working on hundreds of initiatives, we've worked through a lot of that list, but we still have a lot of initiatives more complex, more long-term nature that we're working through and we're committed to continue, adjusting the structure of this company to the best possible setup for the operating environment.

Great, thank you.

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

Hey, David, I have a couple for you. On the newer deals, will those deals accelerate or was that a natural timing? And then can you talk a bit about the alignment you now have given those deals? Does that allow you now to do your bigger SUV build? And then on the SUV build, would you consider adding a non-commercial tier and also non-Discovery content in terms of making the SUV even bigger, and more attractive to people who don't like commercials?

Sure, thanks, Michael. We don't really talk specifically about when our deals come up and what we do. But we had a significant amount of flexibility. We now have more flexibility. So we have the lane, the full lane that we need in order to be effective. What's interesting that we found that we think is going to help us in this drive is a lot of the competitors now are coming out with their scripted series of scripted movies with the same drive. We got more stuff. We've got more shows. Hey, buy us. We have more shows. And those shows that are actually really good and they break companies. More shows, more shows, more shows. You know, what people are saying, I got enough shows. What we have is great brands, great characters. And we think that that's going to make a huge difference in an environment with a lot of blaring lights for shows. And as we build that, and as we have been very quietly aggregating content, creating original content we are looking at the full gamut of what will nourish and create the most compelling product that's the most differentiated. We think we have the right recipe and we'll take you through it very soon. And we think you're going to love it. We hope you like it. And we hope more importantly that when we get out to consumers in the U.S. and around the world, that that they like our hands as much as we do.

Thank you.

Thank you. Our next question comes from Brett Feldman from Goldman Sachs. Your line is open.

Yes, thanks for taking the question and just to stick with the direct-to-consumer theme, I listened to some of the language you used during your prepared remarks. You highlighted the importance of reaching these 30 million plus broadband only households. You talked about the importance of being a companion to any pay TV service. You think about this broadband households are predominantly served by cable companies, which our current distribution partners for you. Is it safe to assume that as you look to sort of accelerate your direct model, you're looking to do it in partnership with your existing partners, not only because of the reach, but also because the importance of just continuing to be respectful and those relationships? And then just as an extension of that with Fixer Upper is coming back on Mangolia, which is awesome, should we assume that Mangolia could potentially be a centerpiece of your accelerated direct-to-consumer model as well? Thanks.

Sure. Thanks. Look, I don't want to get into any more of the details you can expect that we think we have the best content, the greatest brands, and then a world where it's hard to curate, which is why people say up on more shows. We have this ability to curate through brands and through characters that people already know, and they know how to navigate. You should expect that we'll be offering our content in ways that are competitive in terms of whether they have commercials or don't have commercials, or how much commercials they have, we've thought that out carefully and we intend to our product will be very competitive and flexible. And we expect to have multiple partners and that's how we're going to be successful domestically and around the world. And we'll take you through that. But Disney has been very successful by using partners. And where we have been more successful, we've been more successful when not only are we marketing our product, but other distribution platforms are marketing our product. And so whether it’s table, distributors, mobile distributors, or larger players that are pushing other products, like Amazon is doing with us with Fire, every one of those is an added opportunity. And we like everyone else are looking for all of those to get the scale and build scale as quickly and as aggressively as possible.

Great. Thank you.

Thank you. Our next question comes from Ben Swinburne from Morgan Stanley. Your line is open.

Thanks. Good morning. Maybe one for Gunnar just on the near term. Anything you can tell us sooner about affiliate trends as we think about the back half of the year. I don't know if the second quarter is a decent kind of run rate for U.S. and international. And then maybe for David, just going back to your point about, lanes and open lanes, AVOD is an area where we're seeing at least a lot of growth in consumption. And your company, given its scale and advertising it audience seems perfectly situated to exploit that as the ad market comes back. Is that a strategic priority for you, for Discovery in terms of investing in either ad technology, a more targeted ratings approach than just standard Nielsen demos? And there's been some acquisitions in the space, like Tubi and Pluto. I'm just wondering how you think about that opportunity and whether that's an area of focus for the company?

Ben, let me start with trend question. Again, I don't want to give specific guidance and there's not too much to add to what I said a couple of minutes ago. U.S., feeling good about the pricing trends, we don't control the subscribers and we'll see over time as D2C ramps up, how that starts contributing. On the international side, a similar answer, the key factor here is sports and that's two-fold. Number one, as we already pointed out the termination of the Bundesliga contract is going to be a little bit of a drag on affiliate revenues. But again, as I pointed out obviously, very beneficial on the AOIBDA side. And the second factor is some sports have come back, but the majority of the big events is still slated for us a bit later in the third quarter. And partly in the fourth quarter, that's going to be a driver and we'll see how that pans out.

Thanks Gunnar.

I guess, to answer your question on the AVOD, we've been quite successful with our GO products, even though they are just individual channels that are authenticated. But we've been able to get a very young audience and get additional data, which has helped us get – which the advertisers have liked. We do have a team that's driving our data, we're also working innovatively with a number of the cable operators who have set-top-box data. I do think data is a huge piece of our future in order to be able to get higher value for our existing content. And in products where we're going direct-to-consumer, AVOD, or SVOD, that has a commercial light, I think, you'll see that ability to provide data to advertisers that benefit both us and them.

Great thanks.

Thank you. Next question comes from Jason Bazinet from Citi. Your line is open.

In your prepared remarks you talked about increased flexibility on next gen products. Do you mind just elaborating on what flexibility you are seeking? And with those four renewals you talked about, do you have that flexibility globally now, or is it still just in a subset of your global footprint? Thanks.

We have it globally, fully globally. And when we take you through our aggregate global plan, we'll give you more detail.

Thank you.

Thank you. Our next question comes from Alexia Quadrani from JP Morgan. Your line is open.

Thank you. Just sort of a general question on advertising, you guys continue to extract higher pricing. And I'm curious if the ratings continue to go up the way that they have? Can you – are all the old rules sort of thrown out the window in terms of broadcasting, getting premiums versus cable, can you sort of surpass that eventually? And then my second question is really on the rebranding of DYI in terms – in early 2021. Any progress so far in terms of potentially getting more distribution for that channel?

Sure, thanks. We have gotten more distribution per DIY. I mentioned, I think, on the last call that when Chip and Jo were on DIY on a Sunday night, that you could actually see people on Google trying to figure out what channel DIY was, so that they could watch it. And they did watch it. And it was the number two show on Sunday night on television, behind 60 minutes. So we think we're super excited about what they're doing. I spoke to Chip and Joe yesterday for an hour-and-a-half, they're excited not just about Fixer Upper, but about everything that's going on in Waco, with the production, with the brand. So very exciting, and they will come on to DIY with more subs. And as a channel it's been growing significantly because of the environment where people at home and the content works very well. So we feel very good about it. It will be early in early next year. And what was the other question?

Really on pricing in general, can – can the gap really disappear between you and broadcast?

I hope it does, because if it does, then you can put a multiple of 2.5 times against our ad revenue. All kidding aside, we're dealing with a legacy issue. And that legacy issue is really doesn't make sense anymore. How much do people watch? How much did they watch live? How engaged are they? And if anything, if you're selling products, being on HG or Food or cooking is probably a lot more important for a lot of advertisers than to be on a regular show, even a sports show. And a lot of advertisers have told us their ability to convert product is stronger on us. So we have this inverse problem that's really based on the fact that cable was at the kids' table. Well, we've aggregated the very strong brands, we’re investing, have invested hugely in building those brands, building the characters, building the relationship with the audience. And we're starting to really breakthrough. And we have to fight to get our fair value. And we have to be – and in the end, I think, the equitable argument that we have has broke – started to break through a little bit? In the last two years, you've seen us outperform quarter-by-quarter. You should see us outperform by a lot more, in my opinion, because in the end, we have great content that people love. And then in this very unusual environment, we also have original content and it dependable ongoing product at a time when some of our competitors can't do it because of sports and scripted is harder. So I hope so. We are fighting for it. We've got a great leader and Jon Steinlauf, we've got a great team. We're very engaged in the upfront. We're engaged in scatter. And we got to keep telling our story. They know it. We have to figure out how we wrestle it.

Thank you.

Thank you. And we'll take our final question from Rich Greenfield from LightShed Partners. Your line is open.

Hi, thanks for taking the question. David, I guess the question is as you and others, I think of NBC, I think what HBO Max just did, as everybody is finally kind of making the pivot to direct-to-consumer, where do you think – I mean, we're probably around high 70s, 80 million subscribers in the multichannel bundle today. Where are you thinking bottoms out? And as you think about Europe, with Disney taking a huge write down and sort of pivoting to D-to-C overseas, how do you think about kind of the state of Europe relative to what you are seeing in the U.S. for the multichannel universe?

Thanks Rich. Well first let me just start with Europe. Europe, I think, is much more stable. And in terms of what we're seeing in terms of viewership on that platform, viewership was way up on traditional television, it was – the whole marketplace performed very differently and much more favorably. The idea that we were significantly up in all of our sports weren't even on. And people were watching so much more of our content, which by the way, I think the fact that people are watching a lot more of our content. In the end, we're an IP company. The fact that people are watching, spending more and more hours with our brands, with our characters in the U.S. and around the world, just means that our overall IP library, we emerged from this behaviourally, that they're spending more time with our brands and our characters, and they love us more. And we love them more and we know them better. And so I think we emerged stronger, but Europe is more stable. Europe is – the decline is much slower. And the difference is there's huge broadband here. And Amazon is a great, great product, but it's not deployed with local content the way it is here in the U.S. U.S. is one market 330 million people. And Netflix has been extraordinarily successful, Amazon is successful, Disney Plus is successful and so – and there’s huge amount of broadband. So you see this and a lot of marketing dollars telling people what are on those platforms. None of that exists in Europe. So our local language, local sports, we think is pretty compelling. And the fact that the ecosystem is more stable also gives us, given how big we are in Europe in both sports, free-to-air and cable, gives us, I think, a much….

Are you surprised by Disney's move to sort of abandon Europe?

I don't really want to comment on Disney. It's a great company. I think Bob has done an extraordinary job in building IP and building that company. For us, I look at what we have. And I really like what we have in Europe. I like the differentiation of what we have. I love the IP that we have. In the U.S. I can't predict where it's going to go, but we're on every skinny bundle. We are – everybody has taken real notice. We have content that people love and with a very core of that bundle. If people have cable TV and they have six channels that they watch in almost every phase for the six are us. So we'll do very well [indiscernible] advertising that we deserve. Our sub-fees, I think, will continue to be good, because we deserve it. And we can't – the reason that we're going so hard direct-to-consumer is because – we want to make sure that our great content is on every platform and has an opportunity for everyone to see it, how they want to see it. And when they do, we think they're going to be very happy and we think we're going to do very well.

Really look forward to trying it.

Thank you. And that does conclude our question-and-answer session for today's conference. Ladies and gentlemen, this now concludes today's call. Thank you for your participation. And you may now disconnect. Everyone, have a wonderful day.