Good day, ladies and gentlemen, and welcome to the Q1 2016 Discovery Communications Earnings Conference Call. My name is Mark and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to the 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' first quarter 2016 Conference 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 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 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 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, 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. I'm pleased about Discovery's operating and financial momentum, with current trends in the U.S. particularly strong and international investments driving new value across our portfolio. While we continue to face certain secular and economic challenges in various markets around the world, we are evolving in a consumer video marketplace with 7 billion worldwide screens and are optimistic about our global growth profile in the more than 220 markets. As Andy will discuss in more detail, we are focused on spending more on growth, in content and in direct-to-consumer platforms while relentlessly driving down cost growth in all non-content cost areas. If it is not going to nourish audiences or help us grow long term, we are attacking it. As a result, I'm pleased to announce today that we will have real constant currency margin expansion for the full 2016 year. The ultimate goal is to maximize growth. First and foremost, in our linear TV business, while aggressively pursuing new opportunities to diversify and strengthen our content and bring it to more screens and more people around the world. These cost savings will allow us to continue growing our business by focusing our investment in four key areas: more investment in content, more investment in our international growth markets, more investment in digital services and OTT products, and more investment in sports. Our expansion into sports is well underway with Eurosport. We have been on a journey to revitalize the brand with locally relevant sports rights and programming. And we are realizing the potential of this cash flow positive business and we're starting to see meaningful results, including double-digit growth all across Europe. And we're leveraging the power of sports programming by driving meaningful affiliate value across our whole portfolio, which you…

Thanks, David, and thank you, everyone, for joining us today. Before I review our first quarter results, I want to highlight a few very important and positive updates regarding our 2016 guidance. As David mentioned, we are now committing to total company constant currency margin expansion for the year. We want to ensure that we position Discovery for growth in both existing and new areas and continue to embrace change to drive innovation across the company. As the industry evolves, we will continue to evolve with it. We have consistently highlighted our flexible cost structures and the fact that we own or control most of our own content across all global platforms as two of our most critical competitive advantages. And these advantages are allowing us to maximize our profit growth while taking advantage of new opportunities as the media ecosystem evolves. As a company, we have for several years now taken a very hard look at our cost structures and continue to see and realize opportunities to become leaner while freeing up dollars to continue investing in new platforms like mobile and OTT. Spending on global content and IP will always be our priority. We're focused on managing down growth and all other cost areas to ensure that our constant currency revenues will grow faster than our constant currency costs. Our 2016 SG&A cost productivity has been much better than planned. You may have seen yesterday that we filed an 8-K, specifying additional personnel-related cost reduction initiatives that will yield cost benefits in the second half of 2016 as well as full year 2017. We remain highly focused on paring back cost growth in non-content expense areas and reallocating traditional linear business costs to new media platforms and content development around the globe, such as mobile, short-form video, sports,…

Your first question comes from Alexia Quadrani from JPMorgan. Please proceed.

Just on the cost-cutting announcement that we saw last night, I guess, if you could elaborate I think why now is the right time to pursue this? Did something fundamentally change in the market where you thought you had to lower fixed costs? Just any more color on the timing of the announcement.

Thanks, Alexia. We've really been focused little by little on this. If you've seen over last couple of years, we've been focused on it. But we really decided that it was time to kind of to really drive what we call the left side of the business. We broke the business in half. The right side is growth. And we've been investing significantly more in content each year, more money in creating – on the whole creative side of our business as well as our direct-to-consumer business and our TV Everywhere business. And as we look at the overall infrastructure, we just felt that there's lot of opportunity to attack all of our other costs. And the $40 million to $60 million is something that we think will make our company more efficient. We think there's probably more opportunity there as we're looking at additional technology opportunities. We have satellites all over the world, we have technology infrastructure all over the world, and a lot of that over the next year or two we think we could also get more efficient. So our overall strategy of continuing to invest in more content, build relationships with consumers on all platforms, just lightening up our existing infrastructure cost helps our margins, gives us more opportunity to invest in all those platforms and makes us stronger.

Yeah. Just to...

And it sounds – go ahead.

Just to elaborate on that, Alexia. If you think about the thesis that we've laid down over a couple years, we said that we expect to have high single-digit growth in content and marketing and low single on all other costs. And so we've had traction on that for a while now. We've been very focused on what I call base cost productivity. And this is just another example of our driving that. As we think about productivity in some of our people areas, some of our support areas, some of what I call back office, we continue to see opportunities to do things better, quicker, faster.

Just the technology of cloud computing itself, we have one of the largest media libraries in the world over the last 30 years that we've aggregated and digitized. We have all of that on the ground. And the ability to use cloud computing just gives us the chance over the next two years as we move more and more toward that technology to reap additional significant economic benefits. And we're looking to take advantage of every cost opportunity we have so we can spend more on telling better stories and engaging people on every platform.

And there's one more important point to make. The $40 million to $60 million is the restructuring costs that we've outlined. The actual benefit – annualized benefit of that is significantly higher. Those restructuring costs, but then benefit annualized is going to be kind of 2x plus that. So the benefit we're going be seeing both on the cost, on the cash and the P&L is going to be meaningfully more significant.

And it sounds like that benefit is a little bit towards the tail end of this year but also maybe bulk of it in 2017; is that fair?

That's correct. Some of the benefit would certainly help this year. But all of it – all of that two times the $40 million to $60 million that I just spoke about will all be in 2017 and beyond.

Thank you very much.

Your next question comes from Todd Juenger from Sanford Bernstein. Please proceed.

Oh, hi. Good morning. Thanks. A super quickie and then a little bit of longer one. The super quickie, just thanks for your insight into how Q2 domestic advertising is pacing. I just wanted to clarify when you said it would be similar to Q1, was that including the change in timing of Shark Week or that was sort of not including that change in timing? And then the longer question, I guess, there's been so much press this week with the New Fronts going on, with all of these new apparently over-the-top maybe skinnier type of bundles being contemplated. Right now, you guys I don't believe are on Sling in any way. I don't know if you've been talking – you're not part of the Hulu group. YouTube is out this morning. There's all these things going on. So just anything you can share on your conversations and just your attitude about being included in those groups, your willingness to put some of your networks versus all of your networks in those groups, what sort of terms on on-demand and sort of affiliate fee and rate increases you would need to see to be included? Thanks, guys.

Sure, Todd. To answer the first question, it does include Shark Week being earlier, but I'll say that it would be high single-digit, both with or without.

And Shark Week will be four days in the quarter. So the advertising market remains robust. We'll talk about it a little bit later. We don't have that much information on the upfront. But the pricing in scatter is very strong, and cancellations and options are down significantly from the last few years. So the environment feels quite good going into the upfront I think for us and the whole marketplace. On the point of over-the-top, I think one of the things that makes us very well-positioned is we have our 14 channels, which represents about 12% of viewership on cable. And even though we're looking at high single to double-digit affiliate growth domestically, we still only get about 5.5% of the economics. So 12% of viewership, 5.5% of the economics. And you have – ID is the number one or two channel for women, the most valued channel on cable in Discovery. Oprah, the number one channel for African-American women with OWN, and TLC, one of the top two or three networks in Middle America. And so we're very, very good value with our channels, including Animal Planet being one of the top three or four channels that people value in terms of brand, but also in terms of economics. If you took just our top six channels, that represents about 83% of our affiliate. If you only took four, it would be 70%. We are talking to everyone. And one of the things – I think there's kind of two baskets. If it's a non-sports package then I think we will be an extraordinarily powerful piece of that, as we bring so many demos and so much strength to a package like that. But for all packages, we're very economically attractive. And with Discovery, ID, Animal Planet and Oprah, it's very difficult I think to have a compelling package without us. So we're talking to everyone. The reason that we're not on Sling right now is that our deal – Charlie tends – those deals tend to get done on Sling as the deals come up and our deal with Charlie is not up. But we look at over-the-top as a real opportunity. And we could even see it in our TV Everywhere product how much our content is being consumed by consumers, which is quite attractive.

Very helpful. Thanks, Scott (35:03).

Your next question comes from Michael Nathanson from MoffettNathanson. Please proceed.

Thanks. I have two for David. David, firstly, over the past few years, you've been very candid and also early about talking about U.S. cable advertising weakness. So I wonder what do you think is driving this market to these now strong levels? And how do you feel about sustainability of this market past 2Q? And then I have a follow-up.

Well, the market is certainly robust and it's very hard to predict, so I'm not going predict where it's going to be in the quarters ahead. We thought in second and third quarter of last year that it was going to really be a challenge. Some of the things that are happening is: one, the measurability is getting better. A number of companies that moved more quickly to digital found that their market share – they had market share challenges. And so I think you have two baskets: how effective is television advertising? It's still probably the most effective of all advertising. And two, knowing that you're getting the actual value and it can be proven. And, in fact, when you get paid only on L3, for us, we leave about 14% of viewership on the table. And there're a lot of people in the industry that do more than that. So the fact that you're getting – that the advertiser is getting the full value and they only pay on what you watch the first three days, they've actually an over-delivery. So, at least for now, I think the view is that it's quite an effective way to reach a broad audience and to reach across demos. And you don't get embarrassed by finding out nine months later that there was an issue with it. And you don't have to worry that it's not going to deliver in terms of your – the ability to move product. It does feel good right now. The whole U.S. market feels good. I think this whole narrative of – toward the end of last year, this idea that universe numbers were declining precipitously as a result of distributors losing subscribers, that overall viewership on cable was declining, that advertising was going to decline at an accelerating rate, all of those have moved I think in our favor. So, at least for the near term, we see the U.S. now as a meaningful growth market. And for the near term, I mean for the next several years with having high single-digit affiliate growth locked in, with 80% of our deals done, even if the universe declines, which we don't – which it looks now like it's stabilized, and even if the advertising market declines, we'll still have a U.S. growth market. And if the advertising market stays like it is now, we'll have a very significant U.S. growth market. So it feels good for now and let's hope it continues.

Okay. And let me just ask this. The past couple years, you've been – you've acquired, you consolidated SBS and Eurosport. What's your appetite to do more deals of that size at this point?

Michael, one more time. Sorry, I missed it here.

I was going to say, over the past few years, you've done some very large international acquisitions. And I wonder at this point what's your appetite for doing more large deals abroad? Or are you happy with the footprint you've built now?

Look, we're the number one pay TV media company in the world. The good news for us is we did go on a – we've had a different strategy than most media companies. We have local infrastructure around the world. We're embedded with creative talent, commercial talent in serving 220 countries. And all the cost has been embedded. When we did do Eurosport and as we've tucked in channels, we've been able to get meaningful synergy because we have 10 to 12 channels in every country. We're always opportunistic, but I think we're very happy with our existing mix. The way we see it now is we have this great sports IP in Europe and Discovery is on brand and growing with real pull-through. And in our most recent deals, the negative is we've had to pull our signal three times. We did it with Telenor, the largest distributor in the Nordics. We did it with Telia in Sweden and we did it with Boxer in Sweden. And so we took near-term hits by doing that. But in all three cases, we were back up and we got very significant increases. And the deals are long term, which give us – which move us from the potential to go from mid single – we're now at high single – and we're looking to get to double-digit. And so we think we've improved our IP portfolio. The same is true for us in Latin America where kids has gotten a lot stronger and we have a number of female networks that are stronger. So I think we're in a very good position now. We've improved our IP. As our deals come up, I think you'll see our affiliate line growing internationally because our content has improved. We're taking some of that content direct to consumer and we're having some success. And so we would have to see something that would help us grow faster because we sort of took a step back with SBS and we took a step back with Eurosport. We've acquired the sports IP we think we need, and I think we're making the turn. We're very happy with the Olympics and margins should start to grow now on Eurosport. So I think we like the position we're in. We've worked hard over last three years to get in this position, to get all the infrastructure in place. And so we got the synergy if there's a good asset out there, but it's going to have to help us grow faster.

And just to elaborate, Michael, on that. From a pure financial perspective, we've long said that the criteria that we use for any acquisition is A) it has to be free cash flow and EPS accretive day one; two, it has to have an un-levered IRR of at least low teens; and third, maybe most importantly, it has to have a better IRR than allocating capital buying our own stock. And so when you look at our free cash flow model and our IRR from a free cash flow perspective, it's such a strong mid-to-high IRR that it's an important threshold that we look at a lens through on all allocations of capital.

Hey, thanks, guys.

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

Thank you. Good morning. David, could you spend a little more time just revisiting one of the themes from last year's Investor Day on international distribution and sort of the state of TV Everywhere overseas versus the U.S.? We've seen Sky roll out a number of – I don't know if you want to call them OTT platforms or skinny bundles. The market over there, particularly in Europe, seems to be evolving quite rapidly. Just talk about how Discovery sees that landscape, how it fits in, and are there changes you're seeing going to help drive acceleration in the high single-digit growth you've been putting up internationally? Or how should we think about the financial (42:20)?

Okay. Thanks, Ben. Look, I think the thing that's going to drive our distribution revenue the hardest is the fact that our share has been growing over the last several years. And as these deals come up, we have more share and we have – as well as sports rights or kids. And we've been standing up for our value in a way that we haven't in the past. And part of that has to do with – through this recession and challenge over the last eight years, most content players have reduced their content investment. So we go into these deals where we've increased our investment, we've increased our share, and we've been able to get more significant dollars. The second piece that is important is that there's been a change in the marketplace over the last year, and that's distributors are now looking to decommoditize their platforms. They don't want to just be pipes to the home or pipes to a device. So they're looking to get exclusive content. So what you saw us do in the Middle East where some of our advertising revenue went away, it's because we did exclusive deals with OSN with beIN for each – we did our regular package and then we gave each of them some exclusive content and we were able to get significant economics. In addition, we did a similar thing with Canal Plus and we're in a number of discussions with distributors. This is something that could – right now you see our affiliate line internationally growing. We want to push that to double-digit. If the opportunity for exclusive content continues, you're going to see that line begin to move up higher in a way that's a lot easier to be moving the advertising line. Our goal on…

That makes sense. And just one follow-up maybe for Andy. Just on the domestic affiliate revenue, the nice number in Q1, Andy. Is that something that we should expect to continue through the year, even including any impact from Charter-TWC? Or should we be thinking about some moderation at all one-time?

Well, look, Ben. It is strong. It does reflect the continued – every deal we've done has accreted greater pricing and has continued to increase that line. We do expect that pricing benefit to continue as new deals come in. Look, one of the variables is obviously what happens with the sub universe, but our pricing growth and the inclusion of Comcast continues to be a benefit as we roll in all these new deals.

Thank you, both.

Your next question comes from Doug Mitchelson from UBS. Please proceed.

Thanks so much. One for David and one for Andy. David, when we're thinking about the upfront, one, I'd love it if you were willing to offer what your scatter pricing is versus the upfront these days. How should we think about your positioning going to the upfront versus broadcast pricing? I'm sure you heard Les say the other day he's expecting double-digit pricing for CBS in the upfront. How should we think of Discovery relative to broadcast pricing? And for Andy, looking at your balance sheet, it seems that access to that capital might not change that meaningfully even if you decided to go down a notch. And I'm just curious if you've thought about whether it's worth getting more aggressive with the balance sheet relative to any impact on debt market access? Thank you.

Thanks. So, as I mentioned, scatter is up high teens or in the 20s%, and volume is up. So that all bodes well. I love the fact that Les is talking about being double-digit. On a practical level across all of our domestic portfolio, we tend to be maybe one point behind. So if broadcast gets nine, maybe we get eight. If broadcast gets 11, maybe we get 10. If they get six, we get five. That's the way it's been historically. Having said that, our channels are very firmly on brand. And we've been able to get some significant benefit. So some of our channels like ID and Velocity have been up 50% or 60% higher in CPM over the last year. Discovery CPM is up higher. So I think there's a real benefit as you look at OWN, ID, Discovery, Velocity, even Science. So we've worked hard to get back to brand and to really be nourishing a very specific demographic audience. So we've been rewarded on those channels I think a little bit more. ID still has a lot of headroom for us. Its length of view is the highest of any channel on cable, and we have an ability to reach women all day where we're number one on cable. Late night, we're number one and so we think there's still some significant upside on that. But when you average all of our channels together, we'll tend to do about – a little bit – probably a little bit behind what some of the – maybe the best broadcast network does. And if we can get a little bit lucky with ID and pushing it, maybe we can – even though we don't have the same amount of reach in terms of being able to roll out a product, we could maybe reach it. But we'll do well I think.

All right. Thank you, David. That's helpful.

Yeah. And then, Doug, just to go through your capital question. Look, there's a couple of important points here. One, we are extremely committed to investment grade. It gives us access to launch from capital, gives us access to multi-currency commercial paper. So it absolutely is the right kind of capital assessment for us in investment grade. Also, if you look at our access to capital today, we issued a long-term bond earlier in the year, many times oversubscribed, rates that were actually more in the BBB rating. So even though we intentionally took our rating down to BBB minus, the markets still view us as being more BBB, especially with our mid-teen free cash flow to debt yield. And look, the other point I'd make, Doug, which I think is so important. When you think about our capital expansion, given our high single OIBDA growth and given what is an improving currency environment, we're seeing a lot of available capital based on just our profit growth and our ability to leverage that profit growth. So there's no shortage of capital that we have to be proactive and to play offense with either buying stock or allocating capital towards acquisitions.

Well, that makes sense. Thank you.

Your next question comes from John Janedis from Jefferies. Please proceed.

Thanks. David, maybe going back to the sports theme, there seems to be a little less demand for smaller sports properties in the U.S. and rights fees have moderated with less competitive bidding. So I'm wondering if there's any early sign or potential for that in Europe, and to what extent that could accelerate the margin opportunity outlook for Eurosport? And then maybe along those lines in terms of non-U.S., can you give us a little more color on international ad trends? Thanks.

Sure. The U.S. market is really quite different from the international market because the U.S. is really just one culture and it's one satellite. And so it's football, baseball, basketball, hockey. And because there's a very competitive environment by some of the biggest media companies to get into that space, because that's where most of the affiliate revenue has gone over the years to those that have those sports rights. Those rights have accelerated, as you've seen. And the fight for those four sports more and more has generated huge increases. In Europe, you see that for soccer in market. So you've seen that kind of huge increases on renewals. What we've been able to do with Eurosport is we've done over 70 deals on Eurosport, and all of our deals are in the low single to mid single-digit increase. Even on the Olympics itself, we were able to get the Olympics for mid single-digit increase on what it had gone for four years earlier. And so we've been quite disciplined about getting our sports rights. And Eurosport now remains profitable. We've made the turn. We don't think we need to own a lot more IP. We'll do it opportunistically. And again, when we pick up speed skating, we're picking up a sport that might be the number one sport in four markets, all across Northern Europe. When we pick up handball, we're picking up a sport that's the number one sport in Poland. So a lot of the – picking up tennis and cycling. So, for us, we're sort of the home for everything but soccer. And we've also picked up a lot of IP for very little. And remember, there is no bidder for sports in Europe that can provide the platform that we provide. Eurosport has three…

And John, just to add to that. We have to look at the regional components of this. We're still seeing very strong double-digit growth in Latin America, Southern Europe and Eastern Europe with Eurosport. So yes, there is some nuances. Telenor, the Brexit exit discussions that we laid out that's coming up. But no question, strong double-digit growth in the second half ad sales and the majority of our regions are seeing strong double-digit growth still as we've seen the last several quarters.

Thank you very much.

Last question comes from the line of Anthony DiClemente from Nomura. Please proceed.

Good morning. Thanks for taking my questions. I have two. I totally understand that the cost-savings initiative here is aimed at non-content-related costs. Andy, you were clear about that in your remarks. But I wonder, will there be any realignment in terms of the networks, the infrastructure costs against your networks? I just wonder, just given the underperformance in terms of ratings at some your networks if, as part of this initiative, you would consider rationalizing any of the underperforming smaller cable net? And then secondly for David, just going back to the theme and the subject of new over-the-top platforms in distribution, I feel like we all went through this period of hand-wringing last year about whether Apple was going to launch something like this. And I think you and I spoke about it. My thought was that profitability was the real reason that Eddy Cue and Apple decided not to move forward, the fact that the RSNs were just going to be too costly as part of this sort of virtual MVPD bundle and so forth. What do you think about the fact that the new Hulu venture is likely to be unprofitable out of the gate? Does it surprise you that others are deciding to move forward with a business like that, even if it's operating at a loss or as a loss leader? Thanks a lot.

Look, Hulu's a great product. So I don't want to speak specifically to Hulu. But in general, we as an industry have to make some compromises. And if we do, I think we'll be healthier. So, if in the end we're going to do an over-the-top bundle that's 30 channels for $30 then each of the media companies can't have every one of their channels, every one of their sports channels, every one of their regional sports channels carried. For those that have the leverage to include all of them, then it's not going to be the best of what we have to offer. And so, for instance, we have 14 channels. Having six or eight of our channels carried in a package to me seems quite effective. We would get 85%, 86%. If it's only six, we'd get 83% of our dollars. We've done this in a lot of markets where – a lot of it happens in Brazil. The major programmers all decided, look, we'll get a little bit less money, but we'll be on this beginning tier. It will serve a different audience. In the case of Brazil, it was the C class. In the case of the U.S., it would be more of a millennial audience. And so if we all came together, and if you saw it's kind of the best of cable, where we would have six of those slots, then I think it can be quite attractive. But if we each try and put all of our kids in there, which is how we are used to doing business, I think it's going be overly bloated. There's going to be a lot of channels that aren't that strong. It's going to be quite expensive, and it's not going to be that attractive. But…

And part of that, Anthony, is a few important cost points. Look, as we've highlighted, we are ruthlessly driving down non-content costs. Look, Dave and I also look at content spend and any spend as being an investment. And we need to get the best return and the best growth for that cost investment. So that's certainly part of our rationalization and reallocation, which is why look, an important thing that we said today in this call is that we're committing to margin growth. You saw it in the first quarter, up 70 basis points, and we are committing to revenues growing faster than costs. And so those are two critical elements of our strategic financial plan, and a big piece of that is not only accelerating top line but managing cost so that it grows slower than revenue.

Thank you very much.

Ladies and gentlemen, thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.