Good day, ladies and gentlemen, and welcome to the Q4 2015 Discovery Communications, Inc. Earnings Conference Call. My name is Latoya and I will be your operator for today. At this time all participants are in 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 Jackie Burka, Vice President of Investor Relations. Please proceed.

Good morning, everyone. Thank you for joining us for Discovery Communications 2015 fourth quarter and year-end earnings call. Joining me today are 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, and then we will open up the call up for your questions. Please keep to one question so we can accommodate as many people as possible. Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events and may involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our annual report for the year ended December 31, 2015 and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I will turn the call over to David.

Good morning, everyone, and thank you for joining us. 2015 was a year of solid growth for Discovery Communications. While it was a year that saw secular and economic challenges around the world, including strong currency headwinds, Discovery continued to benefit from our investments in content, brands and IP and our ability to execute in all types of macroeconomic environments. We experienced strong growth last year as we continued to execute on our key strategic objectives of growing global market share, launching new products and platforms and investing in more high-quality content and brand with universal appeal across our worldwide platform, including over the past couple of years, expanding and strengthening our content mix to focus in more on must-have categories that are more appealing to consumers, such as sports in Europe and kids in Latin America. In terms of audience share, our U.S. network delivery again outperformed the marketplace, led by Discovery Channel, Investigation Discovery, Science, Velocity and OWN. We continued to capture more viewers with our 11% portfolio share across cable. Most notably, Discovery Channel was the number one non-sports cable network for men for the year, had its most watched year ever across all demos and grew total audience in the U.S. by 12% with women up high-single digits year-over-year. Investigation Discovery continues to grow and prosper in ways the marketplace still hasn't given full value. ID was the number one network for women in total day in the full fourth quarter and number three for the full year in the United States. For four years, 16 consecutive quarters in a row, ID has been the number one network for length of tune in all of television in total day delivery. Just an incredible performance. This performance also means that ID has significant opportunity to grow CPMs…

Thanks, David. And thank you everyone for joining us today. Despite continued secular challenges in the U.S., and currency headwinds internationally, we are pleased with our 2015 performance and optimistic about our continued ability to execute on our strategic and financial objectives and three-year Investor Day guidance metrics going forward. For full-year 2015, all of our income statement metrics were in line with or exceeded our original guidance metrics. Excluding FX, Discovery's revenues increased 10%, adjusted OIBDA increased 4% and adjusted EPS was up 13%. On a reported basis, Discovery's total company revenues for the year increased 2%, adjusted OIBDA decreased 4% and adjusted EPS also decreased 4%. As expected, given that approximately half of our revenues are now outside the U.S., the strengthening dollar was again a major headwind in 2015, as changes in currency rates, especially the Latin-American currencies and the euro, had a year-over-year negative impact of over $460 million or 8% on revenues and over $185 million or 8% negative impact on adjusted OIBDA and a $0.30 or 17% negative above and below the line impact on adjusted EPS. On an organic basis, or excluding the impact of foreign currency, Eurosport, the SBS Radio sale and the consolidation of Discovery Family, full year total company revenues grew 6% and adjusted OIBDA grew 3%, as we again demonstrated our ability to deliver consistently strong financial results even as we continue to invest in strengthening our global IP, platforms and brands. Full year net income available to Discovery Communications of $1 billion was down versus last year, driven by the negative currency impacts on our above and below the line results, partially offset by the benefit of our lower effective tax rate. Our full year effective tax rate came down another 200 basis points to 33%, as we…

Your first question comes from Doug Mitchelson with UBS. Please proceed.

Oh, sorry. One for Dave and one for Andy. Good morning. So, David, I was just hoping you could give us some more details on the company's digital efforts. And I guess where I'm going is, how are you balancing investing in these digital efforts versus delivering the bottom line results you guided to, and what should investors expect in 2016? Are there any milestones we should be looking for to consider whether or not the digital efforts continue to be successful? And for Andy, you talked about global affiliates growth locked in over the next several years due to contracts. Certainly there's increased investor concerns in media in the U.S. around core cutting and skinny bundle impacts and distributor consolidation. I'm just hoping for clarification on the one comment you just made around the sub trends are better than you thought they would be when you gave guidance back in October. Is that an improvement in the marketplace or just you were conservative in your guidance and the trends are unchanged? And just any reaffirmation that distributor consolidation, particularly the AT&T deal, won't have any impact on trends as you look over that guidance period. Thank you.

Okay, great. Thank you, Doug. Okay. First we're off to a very good start where we're attacking digital in, I think, a very sensible way. We've hired a new team which is headed up by Paul Gallardo, and we have an attack team going hard at TV Everywhere and we're starting to reap some real results. We're working very closely with Neil Smith and X1, which is a great platform, and we're finding our viewership there is increasing. And it's really paying off for us and we've always said TV Everywhere is a great platform where we can monetize and we are. I think we are the only company in the U.S. that has created our own aggregated app with D-go, which has all of our channels on it, and we've now been authenticated with commercials through a number of distributors. It's early days. Time Warner is just launching it as well. But the results early have been quite good. The demo is very young. The engagement is substantial. And we have a team that's really working on that and people are getting closer to our brands, and we're talking to our customers. So I think a really very positive turn in terms of TV Everywhere and our own authenticated app. Outside of the U.S., it's really two things. Our Eurosport app is growing quite effectively. We won't reach a million subs in 2016, but we do have a march to a million and we're hoping to reach a million by 2017. And a million at $8 a month would be an incremental $100 million. We have a lot more IP for Eurosport that we've been able to aggregate at very reasonable price increases. Eurosport will stay profitable and this could be meaningfully incremental. When you think about Europe being…

Thank you.

And, Doug, to get back to your question on U.S. affiliate. Back on Investor Day for the three-year period, we kind of assumed that conservatively, that the sub decline would be about 2.5% a year. And if you look at in 2015, we were down 1% the overall portfolio to look at what the affiliates have reported. In the last reports clearly the trends are better. So, look, I think we were arguably conservative back in September and the recent trends are better than that. And regarding your question on consolidation, as far as the deals with Charter and Time Warner and Cablevision, the impacts there should be de minimis, given rate structures. And regarding DirecTV and AT&T, they are both paying at their rates that they always have in the past. And when that deal comes up, we'll have a sense of kind of how that will play out. But right now, the rate structure seems to be very much in line with what we've had in the past.

All right. Thank you very much.

Your next question comes from Anthony DiClemente with Nomura. Please proceed.

Thanks very much for taking my questions and good morning. First for David. David, as you kind of settle into 2016 here and look back on last year a little bit, with Apple, we saw this issue of when Eddie Q and Apple sit down with the content providers and your peers and they all, the programmers are dead set on keeping all of the networks in the bundle, whether it be a streaming bundle the likes of which people thought Apple might launch, those networks would include sport, and it just got to the point where the cost to the consumer would have been too high for kind of expanded online streaming offering. Where do you think we are in that conversation? And from here, is there anything that could change? What kind of has to happen for the industry to get closer to seeing more over-the-top services with fewer core networks included in those services such that they are actually appealing to the customer? And then, Andy, I just wondered if you look at your deals with Go90, Hulu and Sony, can you quantify how much those are adding on a quarterly basis? How much do they contribute to affiliate feed growth in the fourth quarter? And then in your 2016 guidance, maybe you can help us with – I think you said high-single digit for overall U.S. affiliate fees, that's your long term and then it sounds like that's intact for 2016. And then just clarify what's included in that for those three deals. That would be really helpful. Thank you.

Thanks, Anthony. Look, I think in 2015 there was all this noise around skinny bundles, and I've said before that the majority of programmers have contracts at least for the next several years that maybe there could be a little bit of that, but that the ability to really start changing the way you offer services, it's going to be another cycle which will be several years. Having said that, we're very well positioned for that skinny bundle in two ways. One, we have 14 channels that represent 11% or 12% of the viewership, but we are only reaping about 6% of the cost. So we are relatively inexpensive. So when Eddie was looking for channels, and we have the number one channel for men with Discovery and the number one channel for women with ID, and we have all of these Affinity networks, top network with TLC and Science and you could pick up 14 channels for less than the cost of one regional sports network. So, one, it's a very efficient piece. Two is, if we needed to go to our top eight, we make 86% of our revenue and more than 90% of our EBITDA from our top eight networks. And so if it ever did happen here in the U.S., we would be well positioned. I don't believe it's going to, and sitting down with the distributors themselves, with all the talk of the skinny bundle and as appealing as it seems, most consumers seem to want the big bundle. And I think probably the most encouraging thing is that cable seems to be – their numbers have really turned around. As Andy said, we haven't really – we've seen it but we haven't seen the full effect of it because there's a few month gap between when they announce and when we actually get paid, but it's very encouraging that there seems to be a change in the universe dynamics. It's also, as you look at the U.S., I think our U.S. business now looks like a meaningful growth business. We have advertising market much stronger than we expected. Our viewership is growing and the universe decline and the skinny bundle noise seems to have dissipated to kind of a reality, which is not too much on skinny bundle and universe may be turning around. So, I think quite encouraging for the next couple of years. I'd like over the top to happen in a meaningful way because I think ultimately we have really good services. Our channels are on brand and they're reasonable and we'll be one of the big recipients of that, but I think it's going to be a while.

And, Anthony, to address your U.S. affiliate questions, without giving specific numbers, SVOD in 2015 and 2016, the less than 1% of total U.S. affiliate, so certainly is not a growth driver in 2016 versus 2015. Also, to clarify, Sony actually is non-SVOD. It's in the overall kind of – yes, it's in the U.S. affiliate. But we don't really categorize that as SVOD. And then your other question about high-single digit, what we said in the past was that the pricing clearly is creating higher, and we've seen that now for a couple of years going and we'll see it again in 2016. What we said was that it would be high single digit predicated upon kind of a stable universe, and so we had some expectations of what that universe decline would look like. So, we are not giving any specific on 2016 affiliate guidance, even though very clearly the deals we've done and the deals that we anticipate doing will increase price and continue to drive growth there.

Okay. I guess maybe this is just a little bit redundant, but is your guidance contingent upon any specific renewal for 2016 specifically?

Well, look, we're not going to talk, Anthony, specifically about any deals that we have coming up. We have expectations of what those deals would look like. At this point we have a lot of confidence in those outcomes, given the deals that we've done in the last several years. Again, about 80% of our U.S. subs have been renewed in the last several years. So, yes, we have an expectation, we're not going to say specifically what they are or how much it is. But again, the confidence is the deals that we've done over the last three years.

Got you. Thank you very much.

Your next question comes from Jessica Reif Cohen with Bank of America. Please proceed. Ms. Cohen, your line is open.

Go to the next question.

Your next question comes from Ben Swinburne with Morgan Stanley. Please proceed.

Thank you. Can you hear me?

Yes.

Okay, great. Andy, just on the guidance, if you could help fill us in. I don't know if you want to comment on OpEx growth expectations domestically and internationally just to help us think about kind of margins for the year. You can obviously ex currency, probably easier. And then maybe just to clarify from Anthony's question on affiliate revenues, can we assume the Comcast agreement will be represented in the first-quarter results, since I think that deal was signed last summer? I just wanted to see if you'd comment there. And then, David, I heard your comments on the Telenor situation was really interesting. You know better than anybody that there are big differences between kind of European distribution and U.S. distribution dynamics. But how do you look at the increasing tension between programmers and distributors in Europe as you move forward? Do you view it as an opportunity to maybe celebrate your business and maybe you were underpaid historically or do you think that's going to create more volatility in the results? What can you tell us, since you're closer to that than we are? Thanks.

Thanks, Ben. So, with Telenor and with Telia, we were able to get meaningful step-ups and increases. Remember that Europe and Latin America are a little bit different than the U.S. in that historically, Latin America has been mostly no price increases. Your increases came from sub growth. And Europe was working like that until two years ago. And so, we started to drive that idea in the last two years and we've been getting increases. But in the last 12 months we've taken the position that we need much more substantial increases. And putting kids together with our channels in Latin America and sports together with our suite and free-to-air and IP and all of our content together in Europe has helped us get bigger increases. But in order to get it, we really need to stand up for the value of our content. So we had to pull our signals twice. So, I think there's two buckets. One is you're going to see us fighting for significant incremental affiliate revenue, and between the Olympics and Eurosport and the strength of Discovery and the strength of our female portfolio around the world, we think that we can get that, and you'll start to see our affiliate line growing in a meaningful way over its long cycle over the next year, two years, three years, just like we did here in the U.S. And we have some optimism that maybe we could even do meaningfully better than that because our IP we think, is quite good, but we're going to have to fight for it. I think the reverberation of pulling those signals in Northern Europe has been valuable, and the deals that we've done recently have been very, very favorable. That's one. Two, you bring up a point that…

Helpful. Thank you.

And to address your OpEx question, I appreciate there's a lot of moving parts here with some write-offs and one-time items in the fourth quarter. So let me just provide some clarity and perspective. For 2015, kind of apples-to-apples constant currency, SG&A total company was up low-single digits, with content costs up low double, as we invested in Rich Ross and Discovery, and sports, et cetera. As I look into 2016, we see constant currency OpEx, SG&A up again only low-single digits with the cost of revenue being up high-single. So total costs up, call it, mid-single, for 2016. Just to again to clarify the foreign exchange impact in 2016, we're saying that for OIBDA, it will be about $115 million to $125 million. And as David said, look, clearly, foreign exchange has been a very challenging element for us given the size of our international portfolio. The good news, I'll say, on FX is if you look at some of the movements in currency last year, some of these markets really can't get any worse. If you look at Venezuela, for example – in Venezuela, we went from a 5-to-1 exchange rate at the beginning of 2015 to a 200-to-1 at the end of 2015. And so in some of these markets, we've kind of taken the full brunt or the hit. We'll see what happens from here. But I think, in terms of OIBDA being about $115 million to $125 million. And then, lastly, on Comcast, yes, the Comcast deal is effective January. And so that new deal will be in our first quarter reported results.

Thank you, both.

As a reminder, ladies and gentlemen, we will only be taking one question. Your next question comes from Vasily Karasyov with CLSA. Please proceed.

Thank you. Good morning. I wanted to ask about OWN. First, could you please speak in a little more detail about our trading trends there, specifically advertising revenue growth and (50:25) maybe relative to your U.S. Networks supported networks? And then, what's your view on the ownership structure right now? Is it optimal? And do you expect it to evolve at all and what would that depend on? Thank you.

Okay. Thanks so much. OWN is doing very, very well. It's a top 20 network for women. It's the number one network for African-American women. On Tuesday nights, we're the number one network for all women in cable. And the channel is on-brand with some great content from Oprah. So we have a happy audience that we're nourishing that are spending a lot of time with u;, and Oprah is very engaged. We grew our audience double-digit. We have a very strong leadership team there with Erik and Sheri Salata working very closely with Oprah. She worked with them for many years at Harpo. And so, I feel like we're on a very strong trajectory. In terms of affiliate fees, more than 80% of the affiliate fees are locked with meaningful increases, and the channel is in almost 90 million homes. And so we took a channel that was in 75 million homes and had no sub fees four years ago. It's in almost 90 million homes. It's making a lot of money. It's a top network. And Oprah has created a great success. The channel is owned 50/50. As we disclosed when we did the deal, Oprah has some stage puts that she can elect to take or not. The first election opportunity is this year, and they're staged throughout the next 6 years or 7 years. And we love the channel. If over time, the channel ends up – we have an opportunity to own more of the channel, that's only a good thing for us. We're very confident in it. We think it has a great niche and some very strong IP. And over time, as our interest grows, if we have an opportunity to consolidate it, that would be very favorable for us. But in the meantime, it's a 50/50 venture with Oprah having rights to put interest to us over time beginning this year, and she is very happy with the venture. We're very happy with the venture. And it's quite a success story.

And just to put some financial metrics behind that. Look, again, the results for us continue to get better. As I think everyone knows, all the free cash flow comes to us in the form of a loan repayment. That amount in 2015 was $85 million, $20 million more than it was in 2014. The loan has gone from over $500 million two years ago to $380 million. We expect that loan to get fully repaid over the next several years. And so, look, the financial trends are very good for us. As David said, we don't consolidate today. So, while we talk about our free cash flow growth and how we're accreting that important line, the cash flow growth out of OWN is not included in that. But yet, it certainly is part of our treasury and part of our overall capital availability. So, the trends are very good financially for us as well.

Thank you.

Your next question comes from Alexia Quadrani with JPMorgan. Please proceed.

Hi. Thank you. David, just following up on these exclusive custom package deals you spoke about in (54:01), can we assume they're accretive to the profitability just given the incremental cost for this exclusive content? And I guess can it eventually come to the U.S. or not really realistic, given so many more distributors in the market? And then, just a follow-up for Andy, if I can, on the domestic advertising outlook for 2016. I know, in 2015 you talked about reducing some advertising load. I just wondered if we cycled through that for 2016.

Yeah. Look, for international, we've acquired all this content with the assumption that we were going to use it on our linear channels, that we were going to use it on TV Everywhere, on VOD, direct-to-consumer. We have this huge library of content in kids and sports and in non-fiction and drama that we own. And so, the deals that we've done is almost all incremental because we haven't bought any content to provide these exclusive packages. And so, whether they come in the form of launching an additional two or three channels in a market in language or whether it comes in providing exclusive content, it's content that we already own. And so, it's all incremental. I think it's less likely to happen here, and we will see how things develop. Right now, TV Everywhere is our number one priority giving our content to the distributors. We – here we are in the U.S., we're having high-single digit affiliate growth. The universe is starting to hold its own, and our viewership is growing. We have a very healthy U.S. business. And so, I think a part of that is going back to our distributors and working with them on TV Everywhere, working with them on VOD, working with them on authenticated apps, which benefits both of us. And so, I think that we've started to tilt. We got a long way to go. But we started to tilt in a very positive direction with TV Everywhere, which is a very attractive instrument versus kind of the blunt force instrument of a – of some of the SVOD platforms that have no advertising, no branding and are kind of operating outside the existing infrastructure.

And, Alexia, just a couple of ad sales comments. Look, if you told me a year ago that we'd be having the ad sales performance today with fourth quarter up 5%, the third quarter strong, some very good mid-single digit growth, as we've said, going into the first quarter, I would have been thrilled. I mean, we're clearly – the scatter markets today are – volume is strong, pricing is strong, far better than we had expected and clearly better than we thought back at our Investor Day. With regard to the ad load, look, today, we already have an ad load that's less than the industry average. Yes, we have pulled back ad loads in some of our networks, which I think is one reason why our delivery continues to outpace the industry. And so, all of our guidance that we've given and some of the first quarter numbers that we've had reflect the fact that in some of our networks we have pulled back inventory.

Thank you.

And our last question comes from John Janedis with Jefferies. Please proceed.

Hi. Thanks. Maybe a related question. Andy, thanks for the comments on the ad side of the business. But can you give us a better sense of how you're thinking about the Olympics impact? Meaning, is the assumption that it has maybe a direct couple of hundred basis point impact on the quarter and then money may also get pulled into or pushed out of other quarters, and is it your sense that the dollars flowing to digital have decelerated? And if so, is it a measurement issue? Thanks.

Hey, John. I just wanted to hit one point on the Olympics. When we did the Olympics, we said that the Olympics would be profitable. We completed our first deal with the BBC, which was very favorable. It's a – we created a kind of a partnership. We didn't – we have the Olympics all across Europe from 2018 through 2024 except for in France and the U.K., where the IOC had already done deals in 2018 and 2020. As part of our BBC deal, we got back the rights to the Olympics in the U.K. in 2018 and 2020, where they'll have one free-to-air channel and one red button digital channel. But we'll be the only place to get all of the Olympics in the U.K. for the next decade. We were able to get pricing that was significantly more favorable than is in our plan, and it also allows us now to do a pan-European fee to the Olympics from an advertising perspective also because we can reach almost all 700 million people. So, I would say that, from something that we felt in terms of modeling, that would be profitable. Given the conversations that we're having across Europe, owning the Olympic IP, we feel confident that it will be meaningfully profitable over the decade, but also that it will be a big helper to us as we build our mobile strategy, as we build our direct-to-consumer strategy and as we look to drive affiliate revenue because all distributors now that we were doing short-term deals with, they wanted to go – they want to go longer term to include the Olympics.

Just to add a couple of more comments there, John, with regard to our Olympic rights that we have – because David said it will be cash flow positive over the 10-year window, it'll have a de minimis impact on our 2016, 2017 results. And the early activity that the team is delivering on is clearly better than what our expectations were when we did the deal. With regard to the U.S. Olympics, which may be a part of your question, yes, we do expect it to have an impact certainly on our total ad sales in the third quarter, as obviously that's a large amount of ad sales to fill. And with regard to kind of the move to digital, look, clearly, what we're still seeing is the trend out of print, out of radio, out of outdoor into TV and into digital. And so, when we think about the TV ad sales clearly doing better than people thought 6 months to 12 months ago, I think it does come down still to reach. I mean, if you look at Racing Extinction, for example, it reached 31 million viewers. That kind of reach is invaluable and very hard to achieve on digital. So, those kind of shows and assets for us clearly drive a lot of ad sales, volume and pricing. So, I think we're still seeing some of the more secular trends into TV and digital with the Olympic impact being really isolated for us only in the third quarter.

Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect. Have a great day.