Good day, ladies and gentlemen, and welcome to the Discovery Communications' Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touchtone telephone. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Jackie Burka, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us for Discovery Communications' 2016 second quarter 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 for your question. 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 provision 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 US Securities and Exchange Commission. And with that I will turn the call over to David.

Good morning, and thank you all for joining us. Discovery Communications had another quarter of strong operating and financial results as we remained focused on maximizing our global linear TV business, strengthening our position on digital and direct-to-consumer platforms and controlling our cost base. A key element of Discovery's growth profile is our continued success in securing long cycle distribution agreements that provide for steady and predictable revenue growth and the optionality for windowing our content on existing and new platforms. Today, I am pleased to announce we have a new long-term comprehensive affiliate deal with Liberty Global, one of our biggest international distribution partners. The new multi-year deal will deliver our full portfolio of networks to Liberty Global subscribers in 12 European countries and includes new linear distribution for some of our key brands. It also includes broad digital distribution on Liberty Global's Horizon platform that will guarantee our passionate super fans will have access to our content on the screen of their choice. The Liberty Global deal is a continuation of several recent renewals in Europe where we're fighting for the value of our investments in non-fiction, sports and the Olympic games. These agreements validate our diversification approach and underscore the potential to drive long-term growth through these long-term affiliate deals. Our international distribution growth is returning to a double digit increase for the full year of 2016 and is poised to stay there for many years to come. This ensures cash flows and provides an investment pool to bolster our content to drive the next generation of growth. There is no question that the addition of sports to our non-fiction portfolio in Europe is bolstering our profile with distributors and reinforcing the must-have nature of our overall suite of brands. Our US and international affiliate revenues comprise…

Thanks, David, and I thank everyone for joining us today. As David mentioned, we are very pleased with the continued financial and strategic progress we made in the second quarter. Our strong sustained domestic and international long cycle affiliate revenue growth, combined with mid-single digit global ad growth, drove 8% total company organic revenue growth. This solid top-line performance, combined with our continued focus on controlling our operational costs, led to a 10% global organic adjusted OIBDA growth, more than triple last year's second quarter growth rate. As we've consistently noted, two of our critical competitive advantages are our flexible cost structures and the fact that we own or control the vast majority of our content across all platforms. These give us tremendous operational flexibility and optionality, and allow us to fully maximize our profit growth. While our international advertising growth has recently been slowed by unusual market factors such as Brexit, we booked very strong U.S. upfront ad volume, our affiliate growth remains stable domestically, and it's accelerating internationally, and we remain hyper focused on controlling global cost growth. With our first half of the year constant currency adjusted EPS of 25%, we are pacing well ahead of our earlier guidance of high teens growth. Therefore, we are increasing our full year guidance for constant currency adjusted EPS growth from high teens to at least 20%-plus. Similarly, our first half constant currency free cash flow growth of 42% is also pacing well ahead of our high teens growth guidance range, which clearly validates our operational attraction and excellence. Before providing more details around our second quarter results, I want to answer directly several of the major questions analysts and investors have been asking us lately. First, with today's announcement, our new distribution deal with Liberty Global, we are now…

[Operation Instructions] And our first question comes from Kannan Venkateshwar of Barclays. Your line is now open.

Thank you. Good morning. A couple of questions. David, on the strategic front, when we look at the cost structure in the US, the variable cost structure has obviously been an advantage helping you manage cost and margin. But internationally, your cost structure seems to be moving more and more towards fixed costs with the higher investment in sports. How should we think about the strategic view you have about international? Is this a bigger threat on digital sub growth or linear ecosystem growing? And secondly, Andy, from your perspective, the comment on Bundesliga breaking even from a cash flow perspective, does that include any assumption on OTT penetration? Thanks.

Great. Thanks there, Kannan. So, I think our company has really – if you look at where we were three years ago, three and half years ago with the beginning of a cycle of all of our deals coming up with distributors here in the US and around the world and mostly our IP being non-fiction, we really – we made a strategic decision that we were going to invest more in content. We were going to focus our brands to be really around tribes or super fans. Get Discovery back on brand, science, we've driven Oprah to be number one for African-American women, but we also felt that we needed to grow our IP to have strength to really drive our long-term affiliate fees in an aggressive way. And we had said all along that sports was a real lag mover, that a lot of what you saw with ESPN in the 1990s is the way we see the sports market and the way that you saw the kids market in the 1990s is the way that we saw Brazil. So, we've emerged with much stronger IP and we're spending more for it in Europe on the sports side, but we've been very disciplined around it. Almost all of our deals have been low single or mid-single increases and we said we will be profitable on Eurosport with our sports bets. On top of that, we have the ability to sell that same sports IP to other platforms. As you go to Latin America, we have invested more in IP, but Scripps never went down to Latin America, so we have the number two or three channel for women in Latin America, which is Home & Health. So that's the equivalent of home, food and health down there, and…

Yeah, and clarifying the Bundesliga economics is one of the more important goals of this call. As we said, it's a unique opportunity to gain these 45 game, prime time games at very favorable terms. And we've committed to that being free cash flow positive, and that does not include any additional OTT penetration that may be derived from those rights. So again, a very favorable outcome, a very favorable economic result. And again, to the degree that it drives, and it will, higher OTT penetration, that's just all upside.

All right, thank you.

Thank you. And our next question comes from Michael Nathanson of Nathanson. Your line is now open.

Thanks. I have one for Dave, one for Andy. Let's stay on the German soccer league team. David, I guess one of the pushbacks when you think about Europe is, sports rights are shorter term than U.S. rights, so this is a four year deal. How do you protect your operations from the inflations like, or maybe the shorter term football rights versus where we are in the U.S.? How do you think about that impacting your economics of this deal?

Good question. Most of our sports rights – with the Olympics after Rio, we'll get the rings in the Olympic library and we'll be in the business with the IOC throughout Europe for the next four Olympic games, and I'm heading over to Rio tomorrow. Most of the rights we've gotten are in the six to eight year range, and we've gotten all of our rights on all platforms. Four years is shorter than we would like, but having four years start in 2017 we think is attractive, and we don't need the Bundesliga on renewal. Right now we have – we're the leader in tennis, we have all the winter sports, we have track and field, we have cycling and we have MotoGP in all German-speaking countries. So getting the Bundesliga is, we think for us, kind of a real jump start and it allows us to play a lot of the games in terms of mobile and other providers that we think could be quite attractive, and we could learn a lot from it. We don't have any affiliate deals right now that are dependent on that, and we will be charging independently for the Bundesliga, so it will be a separate piece, sort of the way Turner – the way it's been done here in the U.S., so for us it's really a one-off. It's an ability to get the equivalent of Monday Night Football, to go into a very strong market and to take advantage of all the strong IP we have. And the fact that this is the most competitive market in all of Europe. Not just in terms of having a good advertising play, but you have a number of mobile players in that market, you have some very strong cable guys competing, and on top of that, you have Sky Deutschland fighting. And so there is a significant amount of interest in getting, as I said before, one, there is no requirements – governmental requirements – that would restrict us from offering certain things exclusive, certain sports exclusive. We did it in France with Volare (41:16), and so we can make this available to everyone. We can make some of our sports exclusive. We can emerge with an exclusive deal for some of these Bundesliga games. So, it just gives us a lot of vitality, and it takes us through 2021 and then we'll see what happens. We don't need it.

Okay. And, I mean, just ask Andy, now that you have Liberty Global done, what percentage of the Eurosport footprints is now under contract for the next three to five years, and does that underpin a confidence in your guidance?

Well, look, Michael, it absolutely does. It's about two-thirds locked in right now. And, look, it absolutely underpins both our guidance for 2016 as well as our increased guidance for 2015 through 2018. That line of sight we have now, and to a much greater degree than we thought a year ago, around the international affiliate, is one of the biggest drivers of our strength and views of both this year and the next three years.

And what we're going to need to do for you, when we get – when we fully lap this sports journey, but here we are a few years in, and we're operating three Eurosport channels. We've gone from 120 million subs to almost 150 million subs. Our viewership is growing. We have a direct-to-consumer product. We've increased our IP. And Eurosport still remains – it has a lower margin, but it's still profitable. It's in the double digit profitability range. And we've said that we will keep it profitable, but when we look at that profitability, we say this is what we're making on Eurosport in advertising and the affiliate revenue that we assign simply to Eurosport. But the way that we're doing those deals is, we're packaging Eurosport together with our 10 or 12 channels in each country, and that's where you see the 10% affiliate growth. That's not driven by subscriber growth. There hasn't been increased fees, generically paid by distributors in eastern Europe and western Europe. We've been getting significant step-ups and long term sustainable growth rates because of the overall package. And on top of that, we have the Olympics, which we said was going to be profitable, but now, based on the deals that we've done, and we're only about 27% or 28% of the way there, but on the deals we've done already, they're substantially more attractive and we think not only will we make money, but it will be quite profitable for us.

Thanks.

Thank you and our next question comes from Anthony DiClemente of Nomura. You're line is now open.

Thank you. I think the Euro questions have been taken, so I wanted to – I want to follow-up on direct-to-consumer, David. You're learning a lot about direct-to-consumer in Europe with Europlayer. How does that inform your strategy here in the U.S.? I wonder, how do you think about direct-to-consumer apps for your fans? I think you call them super tribes. And so what are your learnings in Europe, say about your path to going direct-to-consumer in the US? And then second question for either David or Andy, I noticed the all three media content partnership. You guys didn't mention that in your prepared remarks. I wonder if you could just touch on the strategic rationale for that and does that tell us anything about yours and Malone's content strategy in terms of – I think it's for dramas, in terms of moving away from maybe your traditional comfort zone? And will you use that content from the partnership on the Discovery platforms? Or is it more likely that you'll license or resell that content? Thanks.

Thanks, Anthony. We certainly have a lot to learn. We hired Paul Guyardo, who worked for Barry Diller and ran his new media and marketing operation, and he's now our Chief Commercial Officer and he has deployed Discovery GO here in the US. And, at this point it isn't deployed on all the cable systems. It's deployed to about 30 million cable homes in the US, but it's an authenticated app. It's all 14 of our channels. And we're learning a ton. One is about 60% of the viewership on Discovery GO is in the 15 to 25 age demographic, so a very young demographic is watching our content. Our female content is a big surprise. It's doing exceptionally well. We really thought it was going to be mostly our male content, which research has always shown that people love Discovery, they love Velocity. And so we've hired Paul, we're going to roll that out by the end of the year, probably everywhere in the US, and I think that will be a helper to us in terms of economics, but we're also getting to see what are people watching when they could watch anything. In Europe, we're learning a fair amount on our Eurosport app. Right now our Eurosport app is everything. And we're finding that we have significant churn, but when we're talking to customers, we're finding that they came in for the French Open and then they left. And then, they came in for the US Open and they left and they came in for Tour de France and they left. And so we've hired Mike Lang, who was head of development and strategy for Rupert and Chernin. He also ran MGM. He was one of the architects of creating Hulu. And he's moved to London and…

Yeah, there was an announcement today from all three and Liberty Global on con call (50:18) that they're doing on dramas that doesn't include us. That is Liberty and Virgin Media (50:20) that's not us.

One other point, Anthony on All3Media, just to remind people. Not only was it absolutely (50:30) strategic value that we wanted to achieve, especially around as David said, IP curation and first looks and optionality. But remember the deal structure itself was incredibly capital efficient. We did the deal, as you know, with Liberty Global. We both write an equity check for about a quarter of the value of the company. We're able then to, within the JV structure, do an additional 50% with debt and leverage that certainly makes it more capital efficient. So it is a very strong IP and strategic play and also being very capital efficient.

Thanks very much.

Thank you and our next question comes from Ben Swinburne of Morgan Stanley. Your line is now open.

Thank you. Good morning. David, just to come back to Europe since that's the big news this morning and a driver of the higher long-term guidance. When you re-cut this Liberty deal, were there any restrictions on your direct-to-consumer flexibility. I'm thinking about, for example, taking your linear networks on, I think it's on DMAX or future products direct-to-consumer in any of the markets? Were you able to keep all that and get the step ups that you've laid out here? And any comment for us on your Sky relationship. You probably have lots of different deals with Sky around Europe. I'd imagine that's a huge part of what's left to do and then I just had a quick follow up for Andy.

Thanks, Ben. First, the economics isn't driven just by Liberty Global. We just happen to be announcing Liberty Global. We've been able to do very favorable deals in Latin America. We're able to do very favorable deals in Europe. As you know we pulled our signal on three occasions in the last six months. So, it was a cultural change of – not only is our IP better but we're going to stand up for the value of our content and that's reverberated in Asia as well. The other piece that's helping our affiliate line which I think has more sustainable opportunity for us is that more and more content players want some exclusive content in order to de-commoditize their platforms. So whether it's a mobile player or whether it's a satellite operator or whether it's a cable operator in a particular market, more and more they want some exclusive content. So that when you buy their service you get something you don't get anywhere else. And we've been able to take advantage of that (52:56) in the Middle East and OCN (52:59). So we did our full package of services in the Middle East and then we offered some extra content to BN (53:03) and some extra content to OSN. That was all incremental and that's exclusive content. We have a huge library. We did the same thing with Bolareux (53:13) in France, and so more and more we're having discussions where we provide our base of services into the marketplace but then because we have a real opportunity we can just create a kid science channel. We can create a male channel very quickly in a market. We can launch another female channel. We can launch a young female channel and we can do it at very low cost with our library. So that's one of the things that's been helping to drive it. We don't comment specifically with respect to Sky or any of the other players in the marketplace in terms of when their deals are coming out or what the status is.

Okay, fair enough. Andy, just quickly, a clarification. I thought you said that you would recognize half the cost of Bundesliga next year. I think it is a four-year deal, so I was just wondering if you could clarify on that. And then on US affiliate revenue, which was healthy in the second quarter, should we expect similar sort of 8%-ish growth in the back half? Thanks.

Hey, Ben. Yeah, Bundesliga it's really half the annual cost will be recognized in 2017. It is a four year deal, but because it's only six months of 2017 it will be one half of one year as license fees.

Okay, got it.

Yes, is a four year deal. And look on the affiliate line, no question that our pricing escalators certainly reflect the 8% plus growth that we're now at. The question is and you all can model this yourself is what would happen obviously with the sub universes and what those declines may or may not be. And again, a lot of our penetration rights protect us but clearly the pricing escalators and other deals we've done reflect that sustainability of growth.

I mentioned this in my comments but when you look at 50% of our revenue being long cycle, for us I think we've worked really hard over the last three-and-a-half to four years to get significant increases and it's paying real dividends us now. In an environment where the universe declines, we're still growing very, very healthy and we will, even if first declines increase. In markets where there weren't increases, we fought to get the increases. In Latin America, and in Europe and we sit now with 50% of our revenue very strong. Almost like a bond. And so if you have 50% of our revenue growing at 8%, 9%, 10% then the question is what do we do with our IP and our existing platforms? And what happens to the advertising market? If we grow 2% then maybe we're a 5% growth business. If we can grow around the world 5% then we're 6% or 7% or 8% growth business. If the advertising market – or we do a better job programming our channels and we can get advertising around the world up to 8% or 9% then we're a double digit growth business. And so I think, we are really going to focus in now. We've done a really good job on focusing on our brands. We have done a good job of getting our IP strategy in place with kids in Latin America and sports in Europe and in Asia now we have sports and kids at a much lower cost. But the incremental on top is if we could now create extra revenue by going to other platforms, that's all incremental. And so we're going to spend a lot more time on the other 50%, which right now is ad sales and viewership share of all of our brand as well as taking all of our IP to every other platform in every market in the world to get more dollars.

Thank you both.

Thank you and our next question comes from Todd Juenger of Bernstein. Your line is now open.

Hi, thanks. Given the time, I'll try and keep it quick. Andy, I think just a clarification. I thought I heard you say, but I want to make sure I heard you say it, that your portfolio subs – I think you said they were down 2% year over year for the quarter. I think in Q1 you said that was 1%. I don't know – first of all I don't know if I heard that right. But if I did hear that right I don't know if that is anything peculiar to your particular mix of networks or if that tells us something about the universe of overall US paid subscribers. And again, just trying to keep it quick. The second question, I think you characterized your upfront as strong. I didn't know if you would be willing to make that any more specific in terms of either CPMs or ultimately actual dollars collected. Thanks.

Sure. Yeah, Todd, we did say down 2% versus down 1%. That nominal acceleration at 2% is a combination of cord cutting and cord shaving. But again even including that down 2% we still had – it's really a growth of 8%. So it really speaks to the extent at which our affiliate pricing contracts had been sustained. And what was the second question? Yeah, and the upfront, Todd, was – look, it was very strong for us. Without getting into too many details, broadly speaking pricing was high single. We were able, given that pricing dynamic, to sell out a little more of our inventory while still leaving room for the strong scatter. And so net-net, really couldn't be happier with the pricing. David mentioned the dynamics around OWN. We also put a lot more of the ad volume into our digital platforms, and so couldn't be more happy with how the upfront played out and how we're able to monetize that strength.

Terrific, thanks.

Thank you and our next question comes from Alexia Quadrani of JPMorgan. Your line is now open.

Thank you. Just one quick follow-up on your commentary. The move of Shark Week, which you highlighted, hurt ratings a little bit in the quarter. I assume that is not a permanent move, that it goes back to the normal timeslot next year. And I guess, just given the comments you just gave right now on the underlying – the advertising market is very strong upfront. You are (59:11) you've made in content (59:14). Should we assume – I guess, what's your assumption for the longer-term kind of domestic advertising growth for you guys?

Thanks, Alexia. Well, first, Shark Week was down this year. It was still the number – maybe fourth most successful Shark Week. But we think it should be much better. We got it to a whole different level in the last two years and it dropped off. Part of that I think is, we made a mistake. We moved it too early. We did it for two reasons. One, we wanted to get out of the way of the Olympics and two, we thought it could be helpful to us to align with the July 4 weekend, but I think in retrospect, doing a lot of the research, I think that it was too early. There were a lot of people still working. When we've done it in August, we get a huge boost in date & day and late night, because people are just hanging out, and the kids are – kind of the dog days of summer. So I think you'll see next year, it will be going back into late July, early August where we found the most success. The only – one other thing I would say about the overall ratings and advertising market, advertising market feels strong. Scatter is better than double-digit above last year. The volume is quite good. We have been hurt in the U.S. by the strength of the news networks, they're up almost 100%. A lot of the viewership that's going for those networks is coming from some of our channels. Discovery's still the number one channel in America for men. But there's no question that both our male and female channels are getting hurt a little bit by that. So we're looking forward to the Olympics being over and early November, for the elections to be over, because we think…

Thank you very much.

Thank you and our next question comes from Doug Mitchelson of UBS. Your line is now open.

Thanks so much. I was just curious; you said on the U.S. app getting to the full market by the end of the year would be a helper for economics. Just curious how that flows through from your affiliate deals if that was sort of a separate – separately priced product. And then lastly, David, you talked about advertising and viewing a lot being sort of a core focus, as it always is. You often give us sort of international viewing and talk about how your focus is on global viewing, not just U.S. viewing. Any sort of update on sort of viewing by region and overall international would be really helpful. Thank you.

Okay. You know, Discovery GO, right? We're talking about an authenticated app where we're working together with the distributors. So we have TV Everywhere, which we now have deployed everywhere possible, and we have our own authenticated app which allows us to get incremental advertising, but also reach a very strong Millennial population. So our CPMs on that are quite good. Our viewing globally is up. One of the things that – it's a little bit of a tale of two cities. Northern Europe is a challenge. It's been a challenge for the last year and it continues to be a challenge. Advertising was actually down in northern Europe. If you took northern Europe out, we were double-digit growth everywhere else in the world. And so we are finding that northern Europe, through very high penetration of high speed, very expensive cable, high penetration of HBO and of Netflix, and a very strong appeal of U.S. content with a high English-speaking population that loves the U.S. stuff, that it is having a significant impact on viewership in northern Europe. SBS has been a good transaction for us, it's a free cash flow machine. It's been very efficient in terms of the price we bought it at and the synergy we got. But of all markets around the world, it seems to be the one that has the most challenge in terms of viewership on traditional platforms. The good news is, it doesn't feel at all like it's contagion. In fact, Netflix penetration and SVOD penetration outside of northern Europe is much lower than everybody thought. Local content is working better for those players throughout most of western Europe and Latin America. So our viewership overall is up. It's up in the mid-single range, and we're fighting very difficult economies around the world. I mean, you have almost every country in either Latin America or Europe either flat or down, and advertising tends to follow GDP. The reason that we're still growing is that our share is growing and we have some efficiency and we've been able to get a little bit of market power as we've gotten bigger. But we don't see the economies improving anytime soon, and we don't see northern Europe improving anytime soon, but the rest of the market feels rather healthy to us, and our ability to continue to get double digit feels sustainable.

Great, thanks so much.

Thank you and our final question comes from Vasily Karasyov with CLSA. Your line is now open.

Just wanted to follow up on the domestic subscriber conversation. Is there any difference that you see, A, by your channels because you quote 2% decline for the portfolio. Is there one particular channel that drives that or is it across the board similar declines? And then, do you see any difference in terms of subscriber dynamics by type of distributor, I mean satellite versus telco versus cable?

Thanks. Andy can get into more detail, but in the aggregate we were down 2%. You are seeing, I think, a little bit of a changeup. I don't want to call who the winners and losers are. You can do it. We see announcements of a number of guys gaining. Some of that hasn't flowed through. We don't know whether there are a number of platforms. In some cases we have some consolidated players that are looking to transition some from one platform to another. So we're getting some movement. Whether it's a sustainable 2% or whether that ameliorates based on the press releases that we're seeing from some of the bigger distributors that are saying that they're growing. We're also being helped a little bit by TV Everywhere and X1 is quite a compelling product and that's a big helper to us. And with Charter now and Time Warner coming together be Rutledge being an aggressive proponent of TV Everywhere, I think that will also be a helper. But what happens to the universe as some of the platforms are losing and some are gaining, we have a little bit of a lag, it remains to be seen. Right now it's looking like 2%. We'll let you know in the next two quarters whether that was high or low.

Thank you.

And from a network perspective, Vasily, it's kind of a mix. The bigger drivers, which is good for us, so the decline is really what we call the digi nets, or lesser distributed networks. And it's good for us because that's not where the economics of our US business are at. And so the bigger, mostly distributed, higher CPM networks are kind of growing at or below that level. And then we're still seeing, by the way, growth on Velocity and some of the other networks that have a particular affinity group that we continue to see traction on. So, it's kind of a mixed bag, but again, good for us that it's the lesser valuable networks that are seeing the greatest extents of decline.

Thank you and that concludes our question-and-answer session for today. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.