Good day, ladies and gentlemen, and welcome to the Quarter 2 2012 Discovery Communications Incorporated Earnings Conference Call. My name is Ben, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Craig Felenstein, Vice President of Investor Relations. Please proceed, sir.

Thank you, operator, and good morning, everyone. Welcome to Discovery Communications Second Quarter 2012 Earnings Call. Joining me today is David Zaslav, our President and Chief Executive Officer; and Andy Warren, our Chief Financial Officer. Hopefully, you have all received the earnings release, but if not, feel free to access it on our website at www.discoverycommunications.com. On today's call, we will begin with some opening comments from David and Andy, after which, we will open the call up to your questions. We urge you to please keep to 1 or 2 questions, so we can accommodate as many folks as possible. Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2011, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'll turn the call over to David.

Thanks, Craig. Good morning, everyone, and thank you for joining us. Discovery delivered another strong quarter during Q2 as the strategic initiatives we have been driving across the company, over the last several years, are generating significant financial growth. At the same time, we are continuing to capitalize on the growth of Pay TV globally and a macro ad environment that remains healthy throughout the vast majority of the 200-plus countries we operate in. Discovery's consistent focus on investing in our global platform, building new brands and leveraging additional growth opportunities resulted in another quarter of double-digit OIBDA growth, excluding the impact of foreign currency. The steps we have taken to broaden our global content offerings are helping to drive international expansion, while domestically, we are generating significant returns from sustained programming initiatives and audience growth, especially across our developing networks. Andy will discuss the specifics behind our financial performance in a moment, but before he does, let me take a few moments to highlight some of the initiatives contributing to our sustained operational and financial success. You've heard us talk in the past about Discovery's long-term strategy of investing in bigger, stronger brands and the highest quality nonfiction content. We've increased our success base content costs by about 7% or 8% annually over the last 4 or 5 years. This sustained investment in programming is delivering market share growth worldwide, and given the continued strength in the advertising market across the globe, we have been able to generate 13% total company organic growth in the second quarter. The biggest contributor to this growth in percentage terms is our International business, which generated local ad growth of 22% this quarter. This business is a true differentiator for Discovery, and the significant advertising growth highlights the opportunity we have to exploit…

Thanks, David, and good morning, everyone. Discovery continued to deliver solid operating results during the second quarter, this further execution of strategic initiatives and a favorable operating environment enabled the company to deliver double-digit advertising and affiliate revenue growth, excluding the impact of foreign currency. Total company revenue in the second quarter increased 7% on a reported basis, while organic revenue growth was up over 10%, excluding the negative impact of currency movements, led by 19% international growth and complemented by 6% domestic growth. Total operating expenses in the quarter were up 6% compared to the prior year, primarily due to increased programming costs from higher content amortization and $6 million of impairment charges related to the ID rebrand in Latin America, as well as some increased personnel costs primarily at our International sales operations. Excluding the impairment charge and the impact of foreign exchange, the increase in operating expenses for the company was still 6% versus the second quarter a year ago. Discovery's continued ability to generate revenue growth in excess of expenses translated into a 6% increase in adjusted OIBDA during the second quarter. Excluding the unfavorable currency impact, adjusted OIBDA was 11% versus 2Q '11. Net income increased 15%, to $293 million, reflecting the strong operating performance in the current year, as well as lower taxes, driven primarily from the benefit associated from reorganizing certain tax entities. Free cash flow decreased to $138 million in the second quarter, as the increased operating performance was more than offset by higher content investment due to the timing of production spending and increased tax payments. For the last 12 months, however, free cash flow increased 5%, reflecting the improved operating performance and lower stock compensation payments, partially offset by higher tax payments and working capital. Our full year expectation for…

[Operator Instructions] Your first question comes from the line of Mr. Doug Mitchelson from Deutsche Bank.

David, I've got a question on International ad growth and a question on domestic ad growth. 22% international local currency ad growth is really something, with incremental growth coming now from TLC and free-to-air. When does that growth start to tail off? And will the newer growth initiatives, like international ID launches, be enough to sustain mid or high teens ad growth? That's international.

Okay. Doug, we're seeing some real strength across the board, and it really has to do with the fact that we've been investing long-term. We now have Discovery, Animal Planet, Science, TLC, and we're getting ID built around the world. And our market share is growing, which is very helpful. At the same time, the Pay TV universe is growing. It grew 15% in the quarter. So part of it is that we're very well-positioned in -- around the world, with an average of 6 channels in 210 countries. But when you look at some of the real growth markets, Brazil, Mexico, Russia, India, Turkey, in a lot of those markets, we have 10 or 11 channels with a number of successful networks. And so part of it is a market share story, Doug, part of it is that Pay TV itself is growing. And finally, we're getting a little bit better at selling advertising. Some of these channels are new. So ID is just getting in there, TLC, so we're becoming more known in the marketplace. But also, when you see that our costs and some of the -- and International has grown a little bit, it's because early on, we went to a number of agencies in markets to sell advertising. And now that we're getting bigger, we're going into a number of those countries with our own boots on the ground. And so we've saved some money, and we think we can get some upside and we'll continue to get upside. A market like that is Russia, Brazil, those are markets where we're selling our own advertising now. So overall, we feel very strongly about our growth trajectory around the world. ID is another example of a channel that works well around the world that we feel good about. So internationally, we feel like we're very well-positioned.

You occasionally give sort of a market share number. Is there still plenty of headroom as your market shares are moving higher? Do you start to worry about running into a wall at some point?

Yes, I think we're reeling in the third or fourth inning here. We've just got TLC distributed. It's now the #1 most distributed women's brand in the world. And we're starting to see the benefit of having a strong female brand in almost every market. We saw that here in the U.S. because we get to see every advertiser. And whether it's -- in most cases, TLC right now is continuing to grow, because we're getting to know how to nourish that audience around the world. In some markets, it's really taking off. In Italy, we're very, very strong. In Western Europe, we've been able, with TLC, to take advantage of a very big market share story that has, in a difficult economy, given us substantial growth. We had very small presence in Spain, but we had a ton of content. So we put that content on a free-to-air channel at very low costs, and we're gaining a lot of market share with a very successful channel called Discovery MAX in Spain. So overall, we think there's a lot of opportunity for us to continue to grow market share.

And on domestic, if you produce mid single-digit growth in 3Q, or going to, despite the Olympics and given your upfront commentaries, is it fair to say investors should expect 4Q reaccelerates backup to high single-digit domestic ad growth?

We're not going to predict fourth quarter, but I do think fourth quarter will be very strong. We have the anomaly of the Olympics, as well as we have a lot of strong content on Discovery that's out of cycle. So we had Gold Rush on Friday nights. That was the #1 show on television, including the broadcasters, we have a very good development slate. And a lot of that will be coming up in the fall. So we feel very good about fourth quarter, and I think you can expect to see some strong numbers on the advertising side, assuming that the market stays as is.

Is there any way to figure out what the Olympics impact might have been? Is there any ballpark, 3%, 5%?

It's hard to tell. The Olympics have come out very strong. We stayed a little bit flexible. At this point, we're holding back a number of our premieres because we just feel that the Olympics right now has a significant amount of cultural momentum. If, in fact, the Olympics loses a little bit of steam, then we think we have some upside. In addition, when we come back after Shark Week, if our content is a little bit stronger than you'll also see on the ratings side, you'll see some more upside. But we've tried to be conservative here in our approach.

And, Doug, it's Andy. Just to add, importantly for the fourth quarter, we do expect the resumption to double-digit OIBDA growth in the fourth quarter. So that's a key outlook for us at the back half of the year.

The next question comes from the line of Ben Swinburne from Morgan Stanley.

Just following up on the domestic trends in Q3, David, is any of the deceleration coming from just sort of market trends or any weakness in demand overall in TV in the U.S. or would you really chalk it all up to some ratings office in the Olympic comp?

Yes, we're not seeing any softness in the market. The market remains strong. We had a very good upfront. We can talk a little bit more about it later. But overall, it was more demand than we've seen in the past. We were able to -- it was similar to last year, in terms of the amount of inventory that we moved, about 55%. And the pricing was quite good. And more importantly, we got a very strong receptivity to all of our networks this time. One of the key objectives was to get more advertisers into Destination America, more into ID, more into Science and Military. And so the acceptance of the strength of those brands was an important success metric for us for this upfront.

Great. And if I could just ask one follow-up internationally. You've been in the cable business for a long time. You're looking at the international opportunity as being early days still. I'm just curious, when you think about moving to free-to-air in some markets, it would seem like that's, to some extent, a hedge, if you think about long-term growth in Pay in markets, like Italy, for example. Are you sort of saying you think you can maximize Discovery as sort of profit or revenue pool in those markets by playing sort of both platforms? Do you expect the Pay TV penetration to resume growth as the economies heal over there? Just a little more on your thought processes moving to the free-to-air side of the equation would be good.

Yes. Look, free-to-air is pretty limited for us, but when we've use it, we've been able to uniquely be successful. Strategically, when you take a market like Italy or Spain that has -- that's either mature or a small Pay TV universe, and you have one of the strengths that we have is we have a over 25-year library of content that we own all of the rights to, and so for us, free-to-air is a little bit different. We pick up a stick of free-to -- a channel, and we could essentially program that. Like in Spain, our cost is almost -- is very little. And so if you look at other markets, like Turkey, Russia, big growth markets like Brazil or Mexico, those are not markets where we would launch free-to-air because we're riding a very aggressive Pay TV market that feels a lot like the U.S. 10 years ago. And all those wins are in our favor there, where we're seeing sub growth, we're seeing viewership, in general, moving to cable, we're seeing our market share growing. And so in those markets, we will -- we'll be much more traditional. And in some of the more mature markets in Western Europe, this has been a very specific strategy, but a very effective strategy.

The next question comes from the line of Mr. David Bank from RBC Capital.

Two questions, one on the programming expense side and one on the advertising side. I guess, on the expense side, it sounds like you're sort of calling out on the call and in the press release a little bit of a step-up in cash programming expenses for the quarter. Was that -- is that sort of a quarterly lumpiness throughout the year or is it a -- do we expect to see kind of a -- or could you tell us, do we expect to see a step-up on annualized amortization going into next year? If you could give a little bit more color around that. And the second question is, there is clearly a cyclicality of content in any given period, and you have some tough comps. And you have the Olympics, and you have like a lot of moving parts here. But we're kind of swinging from like really down in some of the flagships to expectations are really up. What kind of minimum ratings growth do you think you need on the flagships domestically at TLC and Discovery to kind of get back to that high single-digit growth, given the expected performance in the emerging networks, which seem to be really strong? Can you talk about sort of just, like at a minimum, what do Discovery and TLC on a sustained basis have to do?

Okay. David, it's Andy. I'll answer your first question. There's really no call-out on the cash timing. We knew that to be a little bit of acceleration of cash content expense in the second quarter. We had said for a while now that first half expense to be higher than second half. We still believe that overall from an expense profile. So there's no cash timing call-out. It just was a timing of cash distribution in the second quarter. David?

Yes. On the flagships, there is cyclicality to it. We had a very strong fourth quarter and first quarter on Discovery. We were up high single digits, and we had a lot of our content really working, a lot of new content that was working quite well. In the summer, we were a little bit out of cycle. In the last 2 weeks in July, before the Olympics, we were up 15%, and that was without a lot of our premieres and our good stuff. So I do think it goes up and down. We expect that Discovery and TLC will grow. We have a very specific audience that we're going after, but we're also not just about ratings. One of the keys for us is the ability to take quality content and move it around the world. It's very efficient for us on Discovery, on TLC, on Animal Planet. And so for us, ratings isn't the only metric, but we do expect that we'll -- that those networks should grow and will grow mid single, and if we're more successful than that, double digit. We have very good creative teams in place there. At the same time, we've been one of the only media companies to affect the strategy that's built around the idea that we can still build meaningful audiences on new channels. So ID didn't exist 4 years ago, it's now a top 10 network in America. It's been probably 10 years since a top 10 network has launched, and we did it from scratch. We're seeing a lot of strength at OWN, we're seeing strength on Science, Animal Planet. Destination America is working very well, particularly in the travel category, where there's a lot of good advertisers. And so we're definitely focused on having TLC and Discovery grow, but we're also very excited about the fact that we have a number of other channels that are growing as well.

Okay. Andy, just to clarify, I just want to follow up and make sure I understand. So the -- whatever is going on in terms of the programming investment that you did signal going into the quarter, is there anything we could take away in terms of longer-term amortization changes? Has anything changed from sort of prior assumptions and programming investment trends?

No, David. I mean, no, we continue to see opportunity to invest, especially in our emergency channels that David has talked about. But there's no change here in the views we've given in the past and our kind of content structure for the second half and going into '13.

Longer-term, we've been investing about 8% or 9%. And with that, we've been able to launch TLC around the world, to invest in all of these channels we just talked about. And it's all success-based investment. Next year or the year after, if that number goes up, we're going to be very happy. If that number goes up, it means that we're -- that the content is working even better, and therefore, we're investing more and we're gaining more market share. But so far, if you look over the last couple of years, it's been pretty steady into -- in the 8% to 9%. And that's where we expect it to be, unless we can hit a few more strong veins of program content.

Your next question comes from the line of John Janedis from UBS.

David, the shelf life of programming seems to be getting a little bit shorter. When you look at over the next couple of years, do you see your number of new primetime hours increasing somewhat on both the mature and emerging networks?

It's hard to tell. On the one hand, you're right that content seems to be cycling a little bit shorter. On the other hand, we have a new window with Netflix and Amazon, where we're able to take content that's 18 months and older, and in our case, the majority of that is 2 years and older, and create significant economics. On that score, we've been looking at that Netflix, Amazon window, and it's been very successful for us, with no degradation of viewership. So that is all incremental. It's a little too early at this point for us to figure out whether we're going to do more premieres. At this point, we haven't, particularly on our smaller networks. We're able to do much less and still get the benefit of significant repeat and using content on multiple channels on Discovery and TLC that are -- that have audiences that are -- that DVR a little bit more and are much stronger brands and stronger channels. On that, we're able to repeat a little bit less. But in general, we haven't made any decision to make any meaningful change.

All right. Maybe on your related topic, you mentioned Netflix and Amazon. How do you think about future opportunities from them or other players in both the U.S. and abroad?

Well, we did a deal with Netflix that was a 3-year deal -- a 2-year deal with an option to extend for a third year. We have a very good relationship with Netflix. That new window of 18 months and older, which is the deal that we did with Amazon and Netflix domestically, looks to be working very well so far for us. And if it continues, then we're very happy that we have an opportunity to exercise a third year on that. There are a number of other players that are looking for content in that window and in a nearer-term window with TV Everywhere. And I think that's one of the reasons why it's such a good time to be in the content business right now if you own your content. Every one of those windows provides additional consideration for us, and they are potentially more growth. And since we own our content, we get almost all of that. Outside the U.S. is a little bit different. I mean, it really depends on the market. So far, we haven't done any of those deals outside the U.S. In mature markets, like some of the markets in Western Europe, it's very possible that we'll be doing some of those deals because you have a highly penetrated Pay TV market that looks a lot like the U.S., and the Netflix-type deals become incremental, with, at least at this point, no sense of degradation of viewership. That's very different than when you go to Latin America where Brazil is 25% penetrated or Mexico, 42% penetrated. And you're seeing huge growth in Mexico that was almost 1 million subscribers added in the last quarter. And in those populations, there's a C class that's adopting onto Pay TV that hasn't had Pay TV before. And so we're not convinced that doing an 18-month window and presenting content to those viewers is a good idea. It may be, but we're just not convinced. So we're going to -- in the emerging markets, we'll probably stay away for a period of time and ride the Pay TV window alone. But in some of the more mature markets, we'll look at it as being an incremental opportunity.

The next question comes from the line of Todd Juenger from Sanford Bernstein.

One on -- quick one on -- another one on ratings and then one on the JVs. So the choppiness you mentioned at Discovery and TLC in Q2, I just wondered if you have any insight on, for instance, in June when Discovery and TLC had tougher months, where those viewers went, and how many of them landed on your other networks, and how many of them landed on competitive networks, and how you feel about trading those viewers back and forth like that. And then where you expect them to come back from. And then on the JV losses of the minority positions just came in really light on the loss there for the quarter. Just wondering what -- I know ratings are well -- are way up, but that was an extraordinarily much lower loss than we had seen earlier in the year. Just wondering if that's indicative of the future there. I know they're buying less services from you, so that's part of the financial improvement there. But any other color on what's driving that improvement.

Okay. On the ratings piece, we really feel like it's cyclical. We didn't have many premieres, and our strongest content was not in play in June. What you'll see coming after Shark Week on Discovery is some of our better content getting even stronger as you go into September and October, so we're quite confident. On TLC, we have a number of our strong shows that are performing well, and you're going to be seeing more of them as the summer goes on. And we just launched a new night of wedding programming. We're the #1 network for women on Friday nights, with wedding programming, we have a whole slate of new wedding programming coming on Thursday. So one, we feel pretty good about where we are creatively. But where it goes, I'm sure that we pick up some of it from our other 12 or 13 networks here in the U.S. But people here -- this is the most competitive viewing market in the world. We have over 200 channels. So it's -- our job is to put on great shows with strong characters and great stories. When we do, we build very big audiences. In the end -- last 2 weeks in July, Discovery was up 15% because we were -- we put on some more good content. So that's how we see it on that. Before I pass it to Andy, on OWN and The Hub in terms of the actual numbers, both are -- both have really accelerated. The Hub has seen not only ratings growth, but Margaret Loesch has started to get a real sense of how to program that network to the kids' audience, 2 to 11. My Little Pony has taken off in a big way culturally, which has been a help, and Transformers. And on OWN, there's a great leadership team that's really stable now in place. Erik Logan and Sheri Salata, very strong, Oprah is engaged. And that network has grown every month from the beginning of this year. It's now performing even better than we thought it would. It was up 14%, then 20%, now 50%. It's more than 25% year-to-date. And more importantly, every advertiser that signed up before we went on the air has re-signed up to be part of OWN. And so we feel very good about it, and we're looking forward to OWN being profitable next year. And we're feeling very good about Hub. So a lot of work went into that, a lot of hard work by the leadership teams there to figure out the audience and how to nourish them. We got a ways to go on both, but they're both doing quite well.

Yes. Todd, the significant improvement in the other income expense line was driven by OWN. That's really twofold. One, in the first quarter, if you remember, we had the closedown costs of Rosie. We accrued all of those expenses in the first quarter. But also, it's driven by this better performance at OWN. I mean, OWN, operationally, expense-wise, advertising-wise, as David said, rating-wise, they had a better quarter. And so that flowed through to us. As we look forward though, the third and fourth quarter, important to highlight that we do expect slightly higher losses in that line, mostly driven by investing into the strength and the momentum at OWN right now, put more marketing, more content expense. So we will have a slightly bigger pickup of losses there. But again, it's investing momentum, and the second quarter was very good.

The next question comes from the line of Jessica Reif Cohen from Bank of America Merrill Lynch.

Just on the buyback, I just -- I know you guys commented on that, but the pace does seem to be picking up Q2 and into Q3. Can you just comment, will Q3 -- it looks like it will be over another quarter over $400 million?

Yes. Jessica, as you've heard me say before, my #1 metric that I look at and I drive is free cash flow per share. And so when we model out and when David and I, when we talk to the board about this, when we model out buying a stock today and free cash flow per share going forward in our forecast and creating that IRR, as long as that IRR is strong and double-digit, we're a buyer of our stock. And actively, enthusiastic about that. You saw that momentum in the second quarter, and we do anticipate continuing that. Ideally, we would continue to put money into growing organically and continue to look at perhaps acquisition opportunities. But in the meantime, we will continue to allocate capital towards rebuying shares, especially given our free cash flow per share growth profile.

And then on that -- kind of the acquisition front, because you mentioned that in the press release earlier in the call, what kinds of acquisitions would be of interest to you, I mean, if you just kind of talk theoretically?

Jessica, theoretically -- clearly, International is our strength. It's almost 40% of our business now. It's grown -- 4 years ago, it was $250 million. Last year, it was $650 million. This year, it will be dramatically more than that, with real meaningful, I think, strategic advantage. Our content works well. We have more channels than anybody else. We have local teams on the ground. And so building on that strength is a key strategic initiative for us. In addition, it's an important hedge. The U.S. has slowed down. We're growing in the U.S. because we're growing market share and because we have a good team monetizing with Joe Abruzzese the sales that we get. And we have a strong leadership team on the distribution side that over the next few years, we think, will do very well when our deals come up. But when you can -- when you have markets that are underpenetrated, like Turkey and Russia and India and all of Latin America, where we've been for so long so strong, to the extent that there are any meaningful opportunities where we can acquire something. But because of our position, we're likely to have more synergy than others. And because we're on the ground, we can make pretty quick assessment. But we're only going to buy something if we think it will help us grow faster. And so we have been looking very hard on a lot of things, but we haven't bought anything yet because we haven't found anything that's going to help us grow faster. We did make a small acquisition of Revision3 this past quarter. That's a video stream business. It's a leader in the video stream business, and that's consistent with us viewing ourselves as a company that satisfies curiosity on all platforms. And they're a very aggressive, entrepreneurial company in Silicon Valley, and we're excited about having them as part of us.

The next question comes from the line of Mr. Michael Nathanson from Nomura.

Dave, I have 2 for you. Let me start with the first one. Given what you did in NBC and now Discovery, I wonder if you have any views or strategies of change looking at the DIRECTV-Viacom battle from last month on affiliate fees. Does that make you change your philosophy or strategy through your own deals going forward? So I just want to know what your view of that was.

I don't really have a view on, specifically, what happened with Viacom, but we have a very clear strategy domestically and internationally. We've been saying it now for 6 years, which is, what's most important is that we build strong brands, grow our viewership and try and get affinity groups. It's not just the ratings of your channels, but it's how strongly do the groups of people that watch the channel feel about your channel. So the fact that Discovery is the #1 most valued brand on cable is important to us, the fact that we built a network ID that has women that feel very strongly about it as a channel that they love. So the fact that we've launched 7 channels since -- in the last 5 years, the fact that our market share is up significantly, and candidly, we have a very strong equitable argument. We were investing about $600 million. We're now investing over $1 billion. So our strategy is simple, and that's that we want to bring more value to the viewers. We want to be more important to the viewers. And if we are, we think that when we do our deals, we'll be able to get substantially more value because we're spending more money and we've earned it by having our channels be more important.

And is going dark something that you would -- an option that you'd consider?

I don't want to speak about the negotiations that we're going to have, but we feel very good about where we are in terms of the hand that we have because we think our channels in the aggregate are very strong. All 13 come up at once. We have good relationships with the distributors, but we'll be pushing hard to make sure that we get fair value.

Okay. And let me just ask you just a point of clarity about the upfront. At one point, you said you guys had sold more volume, and then you said a number in the Q&A of 55% sellout. So could you help us square that -- did you sell the same volume on the mature TLC, Discovery networks and add more volume on the other? So how do those 2 comments work together?

It's really -- it's a little less on some channels, but remember, we have more inventory based on some of the new launches we have. So overall, more volume, but again, good mid to high single-digit pricing. And that 55% was right where we wanted to be going into what is still a robust scatter market.

And it's not -- the point is it's not 55% across-the-board. There are a number of our channels that we're catching up on. It's going to take probably 2 to 3 years before we can get full value on ID, although we're making progress. And the same is true, we're working our way up with a lot of these brands, but they're new. And as a result of that, they're not getting the -- we believe they're not getting the CPM that they deserve. And so in some cases, for some channels where we got the right value, we took more. In cases where we think that we could do better by going into scatter, where we can push the CPM up higher and faster, we took less. But overall, we feel very good about how we did.

Your next question comes from the line of Anthony DiClemente from Barclays.

First, for Andy on free cash flow. I know your cash taxes stepped up by about $200 million in 2012. Wondering if we're at a more normalized level there as we try to model out free cash flow into 2013, if there's any anomalies in the calculation that you would point out, whether it's taxes or working capital. And then one for David, just following up on the question about distribution and the negotiations. Wondering if it's possible that any of your existing deals are opened up and extended early because of TV Everywhere authentication. Is that possible? And I'm just sort of wondering, if not, then why not? Is that sort of a commentary on the environment or anything? Wondering if you think we see those deals come -- open up before expiry.

Anthony, on the tax question, if you remember, last year, there was a real anomaly with the Section 181 catch-up. And so this year, we don't have that benefit. It hasn't been extended yet by Congress. If it is, that would be a really good guy. But right now, we're assuming it has not been renewed. So that last year was a real good guy. That's the difference between last year and this year on the tax side. As far as going forward, no real call other than one huge benefit we have at being such a globally diverse company is our ability to kind of maximize tax entity and structures. And so we are taking a look at our global content rights and how we can structure those in a way that's most tax advantaged for long-term. But for today, 35% is roughly the right number to think about. We did have that one discrete item in the second quarter that was helpful, and that will be a good cash guy next year. But broadly speaking, the main answer to your question is Section 181 last year.

Right. So broadly speaking, if I just model out your free cash flow trajectory similar to your cash flow from ops trajectory, then that's reasonable?

Yes.

Anthony, on the distribution side, if you take away TV Everywhere in terms of the terms, the deals start coming up at the end of this year, and it's -- they kind of flow in pretty evenly over the next 4 or 5 years. As I've said earlier, TV Everywhere is something that we think is valuable. Many of the distributors would like it, and they would like authentication. We haven't reached agreements yet with anybody. We are in some tests with Comcast. We like that model. There's 2 ways we could do TV Everywhere. We could get valuable consideration for TV Everywhere alone or we can open up the deals early and do a roll-up renewal that includes TV Everywhere. Both have been discussed. We haven't decided which we're going to do, and we'll do the one that we think creates the most value for shareholders.

The next question comes from the line of Tuna Amobi from S&P Capital IQ.

Just a quick clarification. Andy, your comments on the higher losses for OWN in the back half, I was wondering if that was relative to Q2 or relative to the first half. That would be helpful.

Definitely Q2. I mean, that operating improvement that we saw on the second quarter will continue, but we are going to put a little more money behind it, especially in the marketing side. So it will be slightly more relative to our Q2 performance.

Okay. And still on the OWN steam, David. So I think it's fair to say improvement in OWN has been remarkable so far this year, and maybe you guys aren't telling the story enough. But as I think about your -- the ratings and the breakeven target that you've given, is there something in there that perhaps you think may derail a sustainability of this trend that we're seeing? Can you point to maybe a couple of things that you've done that you think can make these kinds of gains to be sustainable, or not?

Candidly, we're significantly ahead of where we thought we would be last quarter with the ratings, where we had started to really build ratings. We have a good leadership team in place. Most importantly, the viewers are coming back. They like what they see. We're giving -- it's very simple, we're doing less of what's not working, we're doing more of what is working. Oprah's much more engaged. She has a team in there that's in love with the brand, and we've been trying to figure out over the last year how do we nourish the viewers. We get to talk to them through oprah.com, which is a great advantage. It's a very strong online vehicle, one of the top for women. And between the leadership team and the new content that we have and a lot of that the new content that we have coming up, we're quite confident that we've begun to really find the recipe for a strong women's network. And we think that the OWN brand now is starting to be what Oprah and I talked about when we were all excited about this. The Oprah brand is one of the best brands in media. And for women, it's -- it may be the best brand in media.

And separately, with regard to the upfront strategy, so one might have thought that you guys may have played it a little bit more conservative, granted a mid to high single digit is higher than, I guess, what the industry saw. But with all these new channels and rebranding and whatnot and the kind of ratings momentum, can you maybe elaborate a little bit more on why you kind of chose that strategy? I think you said the scatter market is relatively healthy. So a little bit few more data points on that would be helpful.

Yes. We feel quite lucky having Joe Abruzzese, probably the best sales -- we think the best sales leader in the business. We were on the high-end of the market in terms of the upfront, and we were very strategic. Not only we were on the high-end of the market in terms of the pricing and the volume, but we were also able through Joe's team to put the dollars in the places where we thought would be most valuable to us and to give ourselves opportunity to go into scatter with some of our brands when we thought that they would be more valuable there or where we had more ratings momentum to take advantage of it. So overall, we were very happy with the upfront.

The last question comes from the line of Barton Crockett from Lazard Capital Markets.

I wanted to ask about the outlook for the third quarter ad growth internationally. You talked about how you see a bit of a slowdown domestically, partially in Olympics impact. Is there anything like that happening internationally or does the Olympics' impact really not matter over there?

Yes, it really doesn't matter over there, Barton, as much. We still expect double-digit growth there, a less visibility based on the market. But we still expect double-digit growth out of international.

Okay. And then just a follow-up on the FX impact in this quarter, which was quite pronounced. I know you guys talk about 40% of your International segment revenues being dollar-denominated. Could you parse down for us a little bit more about where you actually saw the FX headwinds in the quarter?

Well, look, it's really twofold. The -- relative to a year ago, the euro weakened 13%. And so when you look at our FX impact, not only is it the transactional impact but the translation as well. From an accounting perspective, you take your short-term assets, like receivables, and you actually translate them at the lower currency rate. That also flows through to the income statement. So it's not just a transactional fees but the translation as well. The accumulation of those 2, given a significant move in the euro, translated into this meaningful amount of FX impact in the quarter.

Okay. Do you see -- I mean, as you flatline on the FX going forward, does the impact remain similar in the third and fourth quarter or does it fade?

It fades relative to the year-over-year variance. The guidance we gave assumes really a constant currency from today, so we haven't really assumed any defluctuations in the market today. But it will wane a little bit based on just a year-over-year fluctuation in the currency.

Thanks, everybody, for joining us. We appreciate it. If you have any follow-up questions, please give us a call. Thanks.

Thank you for your participation in today's conference, ladies and gentlemen. That concludes the presentation. You may now disconnect. Good day.