Good day, ladies and gentlemen, and welcome to the Q2 2014 Discovery Communications, Inc.’s Earnings Conference Call. My name is Mark, and I will be your operator for today. At this time all participant are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Craig Felenstein, Executive Vice President, Investor Relations. Please proceed, Sir.

Good morning, everyone. Thank you for joining us for Discovery Communications’ 2014 Second Quarter Earnings Call. Joining me today is David Zaslav, our President and Chief Executive Officer; and Andy Warren, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at www.discoverycommunications.com. On today’s call, we will begin with some opening comments from David and Andy, after which, we will open the call up for your questions. (Operator Instructions) Before we start, I would like to remind you that comments today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management’s current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our annual report for the year ended December 31, 2013, 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. Before Andy provides some context around our second quarter results and the momentum we continue to generate across our global portfolio. I know industry consolidation is on everyone’s mind. So, I want to talk about Discovery’s market position, our overall operating performance and while I am so excited about our growth profile in both the short and long-term. It’s a great time to be in the content business. There are more consumers assessing more content on more platforms in more countries than ever before. The consumer experience is evolving and the key to exploiting this dynamic marketplace is to capitalize on the brand and distribution strength of the company by following the same strategic formula we have employed since I came to Discovery seven years ago. That strategy is based around four operating principals. First, invest in more content and ensure spending is focused on the screen, all screens, not just the TV screen. Second, leverage our unparalleled Beachfront real estate to build stronger, more valuable brands. Third, accelerate our strategic advantage and brand position across the global pay-TV marketplace. And lastly, build additional scale and market share in key growth markets. Let me speak to each briefly. Increasing our content investment to build stronger brands and solidify category leadership in our programming genres is core to our gross strategy. We continue to prioritize developing must-have programming with compelling characters and storytelling while owning all the global and digital rights. Over the past seven years, we more than tripled our overall content investment and by nurturing our audiences and super fans, we expanded our viewership across our U.S. networks by 53% now reaching between 11% and 12% of the cable audience. The growth is even more dramatic internationally where…

Thanks, David, and thank you, everyone, for joining us today. In the second quarter we continue to execute very well on our primary financial goals of achieving solid global revenue growth, expanding base business or OIBDA margins, delivering strong adjusted earnings per share growth and returning over $500 million of capital to shareholders through our share repurchase program. On a reported basis, total company revenue in the second quarter increased 10% led by 23% international growth which is partially offset by 2% decline at the U.S. networks through the inclusion last year of licensing revenue related to a Netflix agreement. Excluding the impact of licensing revenue and foreign currency as well as the contribution from Eurosport following its consolidation as of the end of May. Total company revenue growth was 9%, double-digit advertising growth and high single-digit distribution growth. Total operating expenses on a reported basis increased 12% in the second quarter primarily due to the inclusion of the Eurosport business. Excluding this acquisition, the content cost associated with the year ago licensing agreement, as well as the impact from foreign currency movements, total company expenses increased 7% versus 2Q ‘13 primarily due to increased content costs as we continue to invest in strengthening our global network portfolio. On a reported basis, adjusted OIBDA in the second quarter increased 6%. Excluding the impact of Eurosport, foreign currency and licensing revenue, adjusted OIBDA grew 11% which resulted in margin expansion of nearly 100 basis points versus the second quarter a year ago. Net income available to Discovery Communications increased 26% to $379 million driven by the strong operating performance as well as by a $29 million gain associated with the step up value from raising an ownership interest in Eurosport to 51% and a $31 million pretax gain from the sale…

(Operator Instructions) Your first question comes from the line of Todd Juenger from Sanford C. Bernstein. Please proceed.

Thank you very much. David thanks for your comments in the opening remarks around Eurosport and lot of the stuff that you guys have been doing over in Europe I wonder if you could expand on that a little and just think a bit longer term, when you put all of that together Eurosport, SBS, All3Media, other things you may be contemplating on there, what ultimately are you trying to build in Europe for Discovery, what sort of presence do you hope to have their overtime and any sort of indications of what sort of growth that implies if you’re successful? Thanks

Thanks Todd. Well first our international business has never been stronger, last year we became the number one pay-TV media company in the world but more importantly we have more channels in more countries than any other media company and we started to populate those channels with better content, stronger brands and we’re growing market share over the last few years, 20% so a lot of the growth we are seeing in Western Europe is that the cost of getting local internationally most of that cost has been born already over the last 7 or 8 years, we have local teams throughout all of Eastern and Western Europe, Latin America and Asia and our content is getting stronger. So even in a flat market, which is what the advertising market is like or even down in some of Eastern and Western Europe, particularly Western Europe, we’re able to grow mid-teens, high-teens early 20s and that really is about the fact that our content is resonating. What Eurosport does is it just adds more must-have content, to pick up between 1 and 4 channels in 70 countries that we’re already in and to have all that IP and to be able to bring that to the advertising market and bring it to the distribution market with almost no additional cost, we think it’s really valuable. As important is the fact that we own all of that IP and it allows us to talk to partners about sharing content, about joint bidding for content and many of those partners will be distributors that we already have 8, 10, 12 channels with. So, we have found a lot of players in Eastern and Western Europe that are looking for to align around sports which is very attractive for us when we can package…

Thanks a lot. A very quick follow-up if you don’t mind Andy on the international revenue line, there was a nice growth in the other component which looks it was attributed to production studios, maybe that was Raw or was that something else anything you can tell us what that is and whether it will recur would be great? Thanks.

Sure a big driver Todd the Eurosport licensing some of the content they have rights, they sell off some of the rights that they can’t utilize fully. So you will see that kind of be a sustained level of growth as we annualize the Eurosport acquisition.

Got it thanks.

Next question operator please.

Your next question comes from the line of David Bank from RBC Capital Markets. Please proceed.

Thank you very much. So a question about the domestic side and particularly on advertising I guess, I think Andy gave us some pretty healthy pricing and you know in some sense of the domestic ad market but your slight guidance range narrowing also kind of sighted softer advertising. So, I guess how do you reconcile the strong pricing with kind of tepid tone of ad markets and what do you think is impacting that market, I know there has been press that it was sum of weak upfront for the cable networks generally can we get your take on the upfront environment, the upfront process as well. Thank you very much.

Sure, thanks David. Well first let me hit the upfront, for us the upfront looks like mid-single-digit we decided to sell less into the upfront market, the volume is not as strong as it was last year, having said that, the pricing in scatter for the past two, three years has been strong and the pricing in scatter is strong today. So, our view was given that the pricing was mid-single and that the volume was a little lighter that we didn’t want to sell into it. So we’ve held more inventory back if the scatter market performs similar to what it’s done in the last few years will have some significant upside for having that extra inventory. The advertising market in general has been good on pricing and a little bit year-over-year down on volume and for us at least we’ve decided to hold our CPMs and not go for that volume, you see some of that in the performance. The other thing is that we’ve had some tough comps with the Olympics, the cancellation of Everest and we sold How Stuff Works which had some impact. So when you at the last few quarters for us we see and we think some deceleration of volume, some unusuals that maybe held us back a few points but we also think we’ve left some money on the table. And so Joe Abruzzese and I and the leadership team have been focusing on how do we really maximize our rating points to get more value, so I think it’s those three together.

Okay. Thank you very much.

Your next question comes from the line of [Kennan] from Barclays. Please proceed.

Thank you. Just a couple of questions. The first is when you look at your tax rate I mean are there strategic options for you now that your revenues are more than 50% coming from international market that you could look at specially in terms of inversions and so on. And secondly in terms of Eurosport I mean what’s the kind of cost cadence that we should expect in terms of soccer is that a big priority going forward in terms of acquiring the rights.

Let me do Eurosport and then Andy will talk to the where we’re in terms of tax and what our opportunities are. Eurosport is a profitable business that has significant growth built in as it is today. They have locked in tennis, winter sports, cycling and track and field and those are locked in for the next few years. And just by going into local feeds using the resources of Discovery we think we could build the brand, we could enhance the performance in a meaningful way. So the question then since we have between one and four channels is we have a very stable and growing asset. What our options to build it, we will be disciplined, the idea of joint bidding in many of these markets can be very attractive. Often there are bidders you have two distributors bidding for content or you have a distributor bidding for content against a broadcaster and maybe in either case they don’t have enough platforms to carry all the content. And so we’ve had a lot of conversations where we can align, we can align on a disciplined basis, we could do it where we can get more must-have content which will enhance our brand but we could do it in a way that is either has good economic return in the near-term or has good economic return and allows us to pick-up all of our channels in a particular market and realign our relationship on the distribution side with the distributor. So I think when you see us bidding on assets, you should assume that we’re looking at it and we’re only going to bid if we think that it will at the very least in the medium and long-term provide more shareholder value for us. But I would look carefully at where we joint bid because we have a lot of great distribution partners around the world and many of them are interested in taking advantage of our platforms and our infrastructure and expertise and that could be a real helper to us where we can play in sports in a way that’s effective. There is no reason – we don’t see any reason to make a big bid to try and build the channel, we already have the channels, so it’s really a question of what do we put on it to build the brand and make more value for shareholders and make our overall portfolio stronger.

Your tax question is a very good one, one that we agree is a real opportunity for us, it’s something we’ve been very focused on for last couple of years. And if you look at the benefit that we’ve been driving so far this year, second quarter our effective tax rate was down 250 basis points. And the theory is really this as we continue to grow our content investment more-and-more of that content is being utilized outside the United States, so we’re domiciling all of that contents in places that not only do we have operations but also it is quite frankly more tax effective. So you will continue to see that reduction in effective tax rate throughout 2014 and you will see that accelerating in 2015. So regarding your inversion question. Look for us we’re going to continue to drive our effective tax rate down as I mentioned and given our deferred tax rate stuff structures we should have cash taxes below our effective tax rate. But inversion really it comes to down to really the strategic value whatever that alignment or acquisition could be. Inversion makes a very good deal better it doesn’t make a bad deal good. And so for us it’s really all about the overall structure and leveraging the operations we have internationally.

Thank you.

Your next question comes from the line of Ben Swinburne from Morgan Stanley. Please proceed.

Thank you, good morning. David just picking up a little bit more on your M&A strategy and also some comments that John Malone made in the journal this week about scale and the need or the opportunity for scale. You over the last 18 months or so two years at least to us outside have diversified a bit in terms of genre, you’ve got a little more vertically integrated with TV production obviously sports some serialized drama probably SBS. Why not take the opportunity given the rate environment to continue to build scale, diversify a bit into other parts of the ecosystem and take advantage of the opportunity you have in front of you today, your guy’s one of few global players with the scale today to continue to take advantage of those things. I realize those have implications potentially for margins and growth rates which I think the market is digesting at the moment. But do you see the opportunity and is it exciting for you to think about continuing on this path to build Discovery to be a meaningfully larger company in different kinds of businesses maybe than you were in four or five years ago?

Thanks, Ben. Well first and foremost we have a great organic growth story that’s intact and accelerating outside the U.S and inside the U.S. We see growth and we look at what we’ve done over the last year and we think we can do better. Our brands are still strong, we’re growing market share here in the U.S and we could even lean harder into the ad sales market and do even better. So we think the organic growth story is very compelling for us and there is a lot of kind of easy fruit, in a lot of these markets like India, Brazil, Mexico, Eastern Europe where we have 10, 11, 12 channels and subscribers are growing significantly and more-and-more viewers are moving to cable and advertisers you want to catch those. So there is a significant piece of our organic business that we’re just well positioned on. Having said that because we have infrastructure everywhere in the world. Local teams, selling and programming we are able to very quickly look at what’s out there and yet you are bigger in a way that we can grow faster and pick up IP and have more scale for our negotiations with advertisers and distributors is attractive but it’s all a matter of price. In the last 18 months we’ve done some acquisitions but we’ve done acquisitions that we think are really in line with our business for the SBS it’s 30% sub-fees, a lot of IP got us a lot of scale in the market, we have fair amount of synergy, we continue to take advantage of that. Eurosport which really just comes on top of our infrastructure. So we will look but again when you see – when you take a look at scale one of the most important…

That’s helpful. And does Sky Europe factor into that at all you are sort of starting to see Europe move a bit in the consolidation sort of pact the USA have?

Yeah we had a very good relationship with Sky Jeremy Barrett in most cases we sell our advertising in markets around the world in the UK Sky sales our advertising so they are the biggest distributor and they our advertising, we have 15 channels in the UK we have a very strong relationship with Jeremy, we have been very effective and I think a very symbiotic with Sky Italia, with Sky Deutschland, we also have a good relationship with FoxTel in Australia. So, I think you know part of this is building relationship and those relationships are often built on how long you have been in the market, how important your content is to the viewers and so I think we are in that relationship with Newscorp by having a lot of channels, important content that matters, it allows us to partner up, so I think there is no question consolidation raises issues, the fact that we have significant scale in those markets, I think is very helpful to us.

Thank you.

And Ben from a purely financial operating perspective on your acquisition question, 2Q is an important proof point for us when we annualize SBS, you look at the overall margin profile the company up 100 basis points, international up 50 basis points, it really showed and demonstrated you know the kind of command control that we talked about, that we are going to be grow margins off the new base, when you leverage this dataset, you know our infrastructure our ability to grow both the topline and leverage our cost base.

Thanks Andy.

Your next question comes from the line of Jessica Reif Cohen From Bank of America, Merrill Lynch. Please proceed.

Thank you, you mentioned early in the call that there is a CPM gap on the newer channels, so I am just wondering if you could give us a range of what you think it is, in the U.S. as well as I think you said outside the U.S. as well that you feel like you are not really monetizing to the full potential?

Sure thanks Jessica. It’s in the U.S. it’s quite meaningful it – I think it’s going to take us another 2-3 years to at least on ID and we have been added on ID to get our fair share on CPM, the bad news is that it’s taking a long time, the good news is that we are making significant progress, we have really started on a very low base, I don’t think anybody expected that we would be aggregating these kind of female audiences with the length of view and scale of what ID has become. So, we are now starting to sell it really as a must have product, we are number two in day time, number two in late night. But it’s going to take time, the good news about that, there is some built in growth, same thing with Destination America and as look at some of our growing networks that’s going to provide real growth to us, so if the market – if the markets CPM are lower you should expect to see as those channels grow higher growth from us, outside the U.S. it’s even bigger, because we just rolled out TLC 18 months ago, into almost 190 countries ID we’ve rolled into about 150 countries in the last year and we are going to roll it out to another 50 in the next 12 months and we are getting accelerated viewership on those two channels in a meaningful way, one of the real advantage as we have outside the U.S. is that you go to France and you put on a TV, you are going to Italy and you put the TV on, it’s just the much, much less competitive environment. So as we launch – you launch a channel here in the U.S. you are one of 200 or 220 if you launch a channel in Russia in the Ukraine and Italy you are one of 50, one of 40, one of 60 and also just rationally the pay-TV market is more like it was 7, 8 years ago maybe 10 years ago in the U.S. so younger viewers are watching more of cable advertisers are starting to move over. So, we see a bigger gap. Finally I would say that one – when you look at the U.S. subscribers are flat, viewership is flat. So, it’s a pretty tough market, the one win at our back in cable is that there is still a meaningful CPM differential between broadcast and cable and it’s becoming less and less easy to justify. Primetime is probably the best justification, but when you look at the kind of viewership that we get on for instance ID in late night or ID during the day it’s much more difficult to do that, so I think you’ll continue to see over the next couple of years that gap not just for us but for cable versus broadcast come down.

Can I just the similar question on the affiliated deals a lot similar, but internationally how often do these deals come up and how much of your distribution revenue growth is – pure sub growth and how much are we starting to see affiliates for sub increase, I know we are way behind the U.S. but what kind of increase are you seeing.

Well, outside of the U.S. is a shorter cycle so it tends to be about 3 year deals and the deal work differently and we are trying to change that. Most of the growth that you are seeing is actual subscriber growth, not pricing growth and the good news we are not the only one trying to change that now. Now there are some markets that have very high growth, we are just getting on that boat and going along with the sub growth is still hell of a ride, but there are number of markets that have slowed down, we are going to take now our scale and we have whatever our 10 channels or our 14 channels in the markets and really starting to drive through pricing growth. So I think over the next few years if we are successful you will see more of pricing growth where you know historically just been sub growth.

Thank you.

Next question operator.

The next question from the line of Anthony DiClemente from Nomura. Please proceed.

(inaudible) for the trajectory, international ad growth the number that’s apples-to-apples with the 17% growth that you guys put in the release, I was just wondering if you can give us that number in the 2Q excluding the unfavorable impact, the World Cup until showed we expect that 17% to actually re-accelerate given the impact of the World Cup into the second half? I have a follow-up thanks.

The World Cup did have an impact on us having sent in that 17 was also few days of – there was some stuff in and some bad stuff out, if you took all that away, we would have still been well into the teens, even despite World Cup probably better than that if the World Cup wasn’t there, I don’t know Andy.

That’s correct, the – when you take some of those kind of unique items, we were still like a teen ad sales growth company internationally and we certainly expect that to continue in the third and fourth quarter, just really given the whole notion of share of wallet following share of viewership, in many of our key markets we still see our viewership and our share being much greater and our share of ad sales wallet. So, that cycle of catching up will really benefit us I think for many years to come.

Thank you Andy and then David, just Liberty Global has been a partner viewer I wonder if we could get your thoughts on Liberty Global acquisition of 7% of IPV have you consider partnering with John and with Liberty Global on that, I mean it seems to me that you would make sense to part of your free to air acquisition strategy on a fundamental level and then referring to an earlier question tax level, it could have been or could be helpful in terms of potential Inversion strategy. So, just want to get maybe your or Andy thoughts on that particular asset? Thanks

Well, we don’t – we are not going to comment on any specific transactions but Liberty Global John and Mike Fries have built a great company and we like working with them, we like working with Rupert and Jason and James and Jeremy on the Sky platform throughout Europe, we see ourselves as partners with all of our major distributors and we are always looking for opportunities to work with our distributors to create more scale, more distribution revenue, better advertising, CPMs but that’s it.

Okay. Thank you very much.

Your next question comes from the line of Alexia Quadrani of JP Morgan. Please proceed.

Thank you. Is there any more color you can provide on the ongoing affiliate negotiations and do you sort of believe the dynamics may change at all upon the closure of the proposed consolidation on the distribution side? And then just a follow up on the previous comment you made about CPM gap and narrowing that gap domestically, I guess any can you continue to see that now a bit with the volume right here.

On the consolidation here in the U.S. First it looks like those deals are going to take meaningfully longer than expected. So I think in terms of the timing of the close of those deals it’s looking like it will be mid to at least mid-next year maybe later than that with the number of transactions that need to go through the system. And the implications of those very large consolidations. For us our focus is we’re now almost a 12% viewership on cable we were at 4 how do we drive that to ‘13, ‘14, ‘15 how do we make own stronger Discovery TLC. So certainly consolidation raises meaningfully as used where is to looking at it. We’re thinking hard about it as is all content owners in the business join to get that out. So we’ll continue to do that. On the CPM side, it’s we’re very focused on driving CPM value and we will often hold on price and walk away from business because in the long-term getting the value that we deserve for the quality audience we provide is how we’re gone get meaningful growth. And so you probably see us at the front inline of standing on price. And it does take longer with some of the newer networks and so we’ve been working with the advertisers and we feel like the more term is been with Destination America, Velocity, ID the more they’re gone want to come back. But on the volume side we walked away from dollars there and we’ll continue to.

Thank you.

Your next question comes from the line of Michael Nathanson from MoffettNathanson. Please proceed.

Thanks. Let me just ask Andy. Andy, firstly you mentioned and we saw the cost were down in the US this quarter. So we look at the year as whole where do you think the right level of cost growth for US to the US for the whole year?

Yes Michael we’ve been very focused as we’ve talked about the cost structures and driving productivity and showing that we can sustain the level of profit free cash flow growth and part of that comes from just management of cost as aggressively as we can. So I think for the year, we expect kind of a mid-single-digit cost go through the U.S. net. We’ve talked about kind of on the content side be a more kind being in the mid to high and on the SG&A side kind a being low to mid. We have in the last several quarters only increased content spending growth kind of mid-single-digits which is certainly help the content profile going forward. There will be one meaningful exception to the growth rate which is the – another walk that we have in the fourth quarter. We’re excited about that and the impact that it will have on ratings in the top-line but to assume it’s a meaningful cost associated with that kind of live event.

Okay. And then maybe I guess follow up on ad slot. Are you sort any – deals in the second half of the year within your guidance?

No we’re not. So basically where we are assuming a continuation of the current deals in place so not assuming any large deals. So for the year approximately $10 million of kind of SVOD revenue from the Netflix deal that we already had previously.

Having said that, we see significant value in our basket of content. We own all of the content we put on our ‘14 channels, the quality of that content it continues to get better the characters to storytelling the diversity of audiences. So we think that content is very valuable in on all platforms including SVOD as do the SVOD providers. And we’re in discussions with all of them and if we feel that whether it’s over the next few months or longer we will have some SVOD relationships that are benefit that are mutually beneficial.

Okay thanks, David.

We have time for one last question operator.

Your last question comes from the line of [John Chennades] from Jefferies. Please proceed.

David you’ve talked about tripling of viewership share. Since last quarter’s call there is been concern about TV ratings broadly. Can you talk about the weakness, do you think it’s in your pocket on the content side of the business, the change in viewership average timing issue or something else.

I think viewership on cable is pretty stable it’s not a great story in the US, it’s flat. People are spending more time watching TV in general that’s what the data says on the other hand when you added all up, it’s basically flat. So it’s you have to you need better content, we’re focusing on instead of just more content having be stronger better characters better story more on brand. But the U.S. market is a bit of a challenge, but the good news is we have very good creative team over the last few years we’ve been able to grow. The as you look at the first half of the year I think cable in general outside of us is down about five but we’re up about one. So outside the U.S. we’re up almost 20. So it’s not easy picking here and most of the share that you get if we gain share somebody else loses share. Having said that the fact that when we own our content there are lot more buyers for it now there are number of players in over the top space that when acquire our content is SVOD. And mobile domestically in around the world that becoming more and more interested in content. And so I think the ability to grow in a big way here in the US aside from new channels which is where a lot of our growth is coming from is definitely not as easy as it used to be.

Thank you.

Thank you everyone for joining us. If you have any follow up questions, please let us know.

Ladies and gentlemen that concludes the call. Thank you for your participation. You may now disconnect and have a great day.