Good day, ladies and gentlemen and welcome to the Discovery Communications Full Year and Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference, Jackie Burka, Vice President, Investor Relations.

Good morning, everyone. Thank you for joining us for Discovery Communications 2016 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 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 thanks for joining us today. 2016 was a pivotal year for Discovery Communications. We reported record revenues, profit and free cash flow and took a number of important steps to ensure our continued success and growth in today’s rapidly evolving media and technology landscape. I will spend a few minutes detailing some of the year’s most important highlights and how they position us for the future before turning it over to Andy for a detailed review of our financials. First, let me start with an update on Eurosport and the Olympic Games, which as you know, are a key pillar of our international growth strategy. Starting January 1 and as we ramp up for the 2018 Winter Games in the Pyeongchang, South Korea, Eurosport is now the official home to the Olympics in Europe for the next four games. We will have an opportunity to reach over 740 million people. We will also be the exclusive home for the Olympic Games in Sweden and Norway, where winter sports are hugely important, and in Germany, the continent’s largest market. In all three markets, we will deliver the Olympic Games across all of our owned platforms and services, including free-to-air, pay-TV, digital and OTT. Many of you have had questions about our investment in the Olympics and other sports rights in Europe. Our strategy has been first, to assure that Eurosport will always be profitable. Second, to selectively increase investments, including around locally important sports rights, leverage these must-have popular sports to drive significant affiliate growth. And as affiliate growth continues to accelerate, ultimately, realize profit expansion. And I am pleased to say our strategy is showing strong progress. And as you look at the aggregate we spend on sports rights, it’s important to note that, over the…

Thanks David and thank you, everyone for joining us today. 2016 marks a great end to my 5-year tenure with Discovery. I am very pleased with our 2016 performance and our continued execution on our stated strategic and financial goals. On our 2015 year end call a year ago, we issued full year 2016 guidance of constant currency adjusted EPS and free cash flow both up low double-digits to low teens. We also said that our 2016 effective tax rate would be below 30% and that we would have full year constant currency margin expansion. Throughout last year, we raised our financial commitments for constant currency adjusted EPS and free cash flow both for 2016 and our 3-year 2015 to 2018 growth CAGR guidance. We also exceeded our effective and cash tax rate forecasts and met our margin growth commitments. I really am extremely pleased that in this constantly evolving and challenging global media and economic landscape, we have been able to deliver upon or exceed all of our financial guidance commitments. For full year 2016, reported revenues were up 2% and adjusted OIBDA was up 1%. Excluding currency, revenues were up 4% and adjusted OIBDA was up 5% and total company margins expanded to 37%. On an organic basis, so excluding the impact of foreign currency and last year’s SBS Radio sale, total company revenues and adjusted OIBDA both grew 5%. I am proud that we were again able to deliver robust financial results while at the same time continuing to thoughtfully invest and strengthen our global IP platforms and brands. Full year net income available to Discovery Communications of $1.194 billion was up 15% versus last year driven by the strong operating results, below the line currency effects, gains from dispositions and lower taxes. Our full year effective…

[Operator Instructions] And our first question comes from the line of Ben Swinburne with Morgan Stanley. Your line is now open.

Thank you. Good morning guys. David, could you just spend a few more minutes talking about, in particular, the Bundesliga contract and strategy around those rights in Germany and particularly, any specifics around Sky or Liberty in that market. And also on the Olympics, give us an update on sort of how far along you are, at least broadly in Europe, in terms of monetizing and positioning distribution of that content across the major markets that you have purchased. And then I just wanted to quickly ask Andy, if it’s okay, the sub-20% book tax rate and high-20s cash tax in ‘17, are those sort of – the go-forward rates beyond ‘17 or are these investments sort of creating a one-time tax shield and then ‘18 sort of moves back up to a more traditional range? Thank you both.

Thanks Ben. Well, first, we have a terrific set of IP in Germany and we went after it with some purpose because it’s the largest market in Germany. It’s also a very competitive market with Vodafone, Deutsche Telekom, Liberty Global, The Zygo, Sky. There are a lot of platforms. It’s quite aggressive in terms of offering content on all platforms. And we own all of our IP in Europe on every platform. And so when we bought this IP, if it shows up on mobile, it isn’t because a league sold it. It’s because we sold it. So we did attack Germany specifically, as having, we think a lot of upside. The Olympics in general, is going much better than planned. We said when we bought the Olympics that it would – that we would make money and we think now we will make more money. We have done a number of deals, many deals. We just did Poland last week. We were able to get in our BBC deal. There were two markets where we didn’t have the Olympics in ‘18 and ‘20. We got back a lot of the Olympic IP and a lot of it digitally in the UK through our BBC deal. Every deal that we have done has been ahead of plan and we haven’t begun to attack some of the other platforms. And in every deal, we have retained all digital rights. So in some cases, we may have given some digital rights, but we still have – we will be the only place that you can get all of the Olympics on any one platform. And so we feel very good about that. And we have also – because of how well we have done, we feel confident in certain markets and take…

Yes. Hi Ben, there is no question that these mid-teen IRR solar investments obviously have a meaningful impact – positive impact on our tax rates. But if you exclude those, you are still looking at about 100 basis point reduction in our effective tax rate and given our deferred tax rate structures, a couple of hundred basis point reduction in our cash tax rate. So as we think about looking forward, very dependent upon what kind of solar investment opportunities we have and some of the regulatory environments there. But think in terms of how the sustainable 26% effective tax rate and a continuing decline in cash tax rate, as again we are really focused on maximizing our deferred tax rate structures.

Thank you.

The only thing I would add, Ben and we said this publicly is that we did not make – we purposely did not have the Bundesliga and the Olympics be part of our Sky deal. And so we have that IP, which we are kidding to do with Sky, do together with Sky and all of us in the market do ourselves. We have full optionality and that will be now Bundesliga starts.

Yes, thank you both.

Thank you. And our next question comes from the line of Steven Cahall with Royal Bank of Canada. Your line is now open.

Yes, thank you. First question on domestic distribution revenue, I think you said that you don’t have any new deals in 2017, but I was wondering if you could give us an update on where you might be with new virtual platforms. And then relatedly, you talked about a bit of an acceleration in subscriber loss, I was wondering if you could maybe give us – it sounds like there was a bit of a mix shift where you lost some subs on some of your lower affiliate fee networks, but you gained subs on lower tiered packages where you have bigger affiliate fees. So, does that mix shift is that neutral to revenue? Is that a headwind to revenue or was that a positive to revenue? And then I have a quick follow-up on the international side.

Well, just in terms of the distribution, we are on Sony, we are on – we have five channels on DirecTV Now. We have – we got out in front of this idea of kind of really focusing our channels. Our deals provide that about 85% of the economics are against five of our channels and we have really focused on making them stronger. So, ID and TLC and OWN being female, ID being number two in America, OWN number one for African-Americans, TLC right now number one in Middle America and strengthening Discovery and Science and Animal Planet. At the same time, there is a lot of talk now of focusing on just the bigger networks. We, over the last 4 years, have – we have been way ahead of the curve on that. And our smaller networks, we have been really focused on making them super fan networks. So we have Velocity that it isn’t a large audience, but it’s very compelling audience. Discovery Español, number one for men in the Hispanic space. Discovery Familia, a family Hispanic service, really focused on the fact that if in the years ahead there is a move to skinnier bundles and I think the – that will happen over time, but over the next couple of years, the impact is going to be quite small. But if it does, we have been on every skinny bundle outside the U.S. And so as we did all of our deals, we structured them this way, because as we have taken 5 or 6 channels in Brazil, we had the same model. We got 85% of the money, but then we actually got more ad revenue, because people spent more time with our channels and our brands got stronger. In addition, we are talking to Hulu, we are talking to Google, we are talking to all the players. And I think we have 12% to 13% of viewership. We have top channels for men, for women in different ethnic groups. And we are – I am not proud of this, but we are 12% or 13% of the viewership and we are about 6% of the money. Most of the money is going to sports and re-trans. And so to carry our channels is quite inexpensive. And so on a practical level, it should happen.

And from a pure financial perspective, Steven, it’s so important to highlight what Dave said about the 85% and growing share of our 5 tentpole networks. While, yes, there is an acceleration of the digi non-distributed, fully distributed networks, that’s declining more quickly, our economics are not embedded in those networks. The high single pricing CAGRs – contracted pricing CAGRs are all on the 5 nets. And again, that percent of total U.S. affiliate revenue will accrete even higher and that’s where you are seeing more stability on sub declines there.

Great. Thank you. And then just quickly on the international side, I was wondering if you could just shed a little bit more light on the impairment that you took in the quarter? Should we just assume this is snicker or curling or is this something that’s outside the sports network? And relatedly, does all this kind of track back to your plan to drive big increase in OTT subscribership and where are we on those numbers? Thanks.

Great. Well, I will give you the general and Andy can give you more of the detail. More than 20 was Sweden and we have been working very hard on our Northern European SBS business. It’s about 20 million people, but we were running it as – it’s run as four different countries Norway, Denmark, Sweden and Finland and that’s the way all media business are run up there. And there has been some meaningful decline in that whole region and part of it has to do with the fact that culturally everybody speaks English. And unlike most of the other countries in Europe, there is a love for U.S. entertainment content. And so when Netflix went into that market and HBO went into that market, it’s a market that they have done very well in. And so there has been about 20% decline over the last 2.5 years in viewership, which hit us. It’s still a very strong free cash flow asset for us and pretty compelling, but it has had an impact on us in terms of subs and viewership. It’s leveling off to some extent, but I expect that it’s probably going to continue to decline on a secular basis. But what we have done is we have begun to attack it from a cost perspective aggressively. We got Mike Lang now running that business, who ran Miramax and a very strong operating guy. And we are now starting to run it as one unit. So instead of four independent countries, we think there is a more cost we can take out of that business and not affect what we are putting on the screen and be more effective. And we are starting to see that a little bit this quarter as fourth quarter was started to…

And just to provide a little bit more kind of financial perspective on that, we have in the last couple of years, Steven, averaged about $10 million to $15 million of content write-downs in some of our international content, purely in a notion of just being extremely clean on the balance sheet as we go into the next year. 2016 was about $20 million higher entirely driven by the one-time cleanup that David just discussed as we really do deemphasize some of the U.S. content and continue to drive more of our...

The U.S. entertainment content.

U.S. entertainment content.

Our stuff is doing fine.

Correct. And so it is a very much a one-time, I would think in terms of a more consistent run-rate of cleanup in the $10 million to $15 million range going forward.

Great. That’s very helpful. Thank you.

Thank you. And our next question comes from the line of Kannan Venkateshwar with Barclays. Your line is now open.

Thank you. David, looking at Europe overall, the sports component of it will add more and more fixed cost into your income statement, but it looks like that market is moving more or less the same way the U.S. market is moving, if not faster into more of OTT consumption and so on. So just from an investment perspective, what gives you long-term confidence around locking yourself into more fixed cost when the viewership environment is changing more to OTT? Thanks.

Okay. Thanks, Kannan. Well, first let me just disagree with the premise of that. And if it turns out that you are right, which we are betting that that’s directionally where it’s going to go, it’s a homerun for us. But viewership on Eurosport was up more than 20% in the fourth quarter, 23%. Viewership so far this year is up significantly. The brand is stronger. We have more live content. We don’t expect that we are going to spend a lot more year to year. We don’t need to spend more. We feel like the IP package that we have right now for Eurosport is about right and it’s actually paying off for us. It’s strong enough that we can package it together with Discovery, which is number one in the market in factual and our female networks and put it all together and get very significant increases, which we talked about, where it’s going to – you are going to be seeing 12, 13. And a year from now, you will see higher than that as we continue to grow our affiliate fees, which we have been – which we said we were going to do and we did it. We do own all these – all of this IP direct-to-consumer. And if in fact there is a transition direct-to-consumer, there is only one player in Europe which is more than twice the size of U.S. that’s playing that game. And that’s us. We have been out in the market now for 1.5 years. We have been talking to consumers. We did our deal with BAM six months ago. We are going to begin to roll that out in three months. It will be fully rolled out in six months. And we are the only pan-European player. We…

And I think it’s very important to highlight and walk through kind of the economic model that we developed here. And again as David said, just to really highlight that we have done what we said we were going to do. If you look at what we have highlighted a couple of years ago, step one was investing in exclusive content as David said, allowing ourselves to have more must-carry content and have a greater sense of affinity groups. Step two was taking that content and having it drive an accelerating contracted affiliate revenue growth curve. And clearly, you are seeing that not only in ‘16, but are highlighting the 12% to 15% growth and accelerating further in ‘17 and ‘18. So step one and step two are done. Step three then is, as we are now invested in the content that we need, we don’t see a further acceleration of sports content spend really in ‘18 and ‘19 and ‘20. So what you are going to see the step three being is a real acceleration of profits as margin, as you have the contracted affiliate growth, you then have a stable sports rights investment and then now you really get the margin accretion out of that model. So we clearly had this planned out for 3 years and it’s developing and progressing quite frankly exactly as how we had kind of modeled it and expected it.

Your discussion point about transition to direct-to-consumer, for the last 4 years, we have changed our view of not just how does our content work on linear, but how good is our IP for any device. And that’s why we focused Discovery to be more on brand, even if – we are not going for ratings. We are going for a core super fan audience, on OWN, on Velocity, on all of our channels. And we have invested significantly in Kids in Latin America, where we beat Disney, because we think owning the Kids IP is going to be over the longer term very important for growth and we are starting to see that now with our Everywhere product in Latin America.

Very helpful. Thank you.

Thank you. And our next question comes from the line of Drew Borst with Goldman Sachs. Your line is now open.

Thank you. I have two questions, one for David and one for Andy. David, I wanted to ask about the U.S. networks business and your outlook for the operating expenses there over the next year or so, I think it was an interesting year for you guys in 2016 in the sense that operating expenses were flat, I think your EBITDA margins were either at peak or maybe above peak, but you also had some ratings challenges over the course of the year, so I wanted you to talk a little bit about how you are thinking about reinvesting in programming on the U.S. networks?

Sure. Well, for the – I feel pretty good about where we ought to start the year. We got Discovery at number one. And we have for the first time, TLC, ID and OWN all working. We have worked very hard on getting TLC turned around and we spent a lot of time talking to the audience. So I think we have four – those four networks are very strong. We have Science and Animal Planet, I would say, as our blockers. We have National Geographic out there and we have Science now with ratings that are exceeding Geographic and Animal Planet with ratings exceeding Geographic. And we think that’s important that we keep those brands strong, more niche, but also kind of as a blocker, as Discovery is that number one channel for men. And on the content costs, I would say, focusing more on the bigger networks, but we have been doing that already and the smaller networks, our cost of content is a lot lower. We are doing a lot more content on Velocity for a lot less dollars. Bob Scanlon is a great operator there. He worked at ESPN and Speed and he is doing a great job of building that affinity group. And the overall – I think non-content costs, we think we can take that down even a little bit. And over the next 2 years, I think you will see flat to slightly down. So I think the U.S. is a good story. We have gotten our affiliate deals done. It would be better if universe decline was less than 2 and having it be in the high-2s, but our deals are pretty good. We are very well protected in terms of how we are versus everybody else, certainly in terms of the limits of how we are packaged and offered. So I think if we can continue to reduce our non-content costs and continue to invest in our channels that are working and building those super fans that we can have a nice growth business – continue to have a nice sustainable growth business in the U.S.

Okay. Thanks. And then just a housekeeping question for Andy, with respect to the 2017 adjusted EPS growth guidance, could you just clarify whether the base year of 2016 includes or excludes some of the gains and losses that you ended up booking like the Lionsgate and Group Nine?

One point that I just wanted add that’s important for why we are different than everybody else is, when we invest in Discovery, Science, Animal Planet, ID, we are investing in channels that create IP that we take everywhere in the world. And so that investment – and we tend – we are investing more in channels that work globally. So when we see ID up 15% in most markets and we see Discovery growing around the world, we are – we have this unique model where we invest in one piece of content, convert it into 52 languages and take it around the world. And I think continuing in that discipline of investing more in the global content, which gives us a much stronger return than investing in content that works only in the U.S. And Velocity falls in that category of global as well.

And Drew, the question about 2017 guidance, it’s clearly off of simply the reported adjusted EPS of $2.13. We provided that ex-Lionsgate, ex the gain on Group Nine, only to provide some clarity on what would say is more of an organic operating view. But our guidance is clearly off of the very simple reported adjusted EPS actual for 2016.

Okay, thank you both.

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

Hi, thank you. Just one follow-up on some previous comments, I think you were talking about the content costs, the programming costs and I wanted to ask you given that you have always had this big – one big positive drivers for Discovery has been the lower cost of program, but we have seen a bit more of the switch toward more event programming or scripted shows by you and some of your peers, I guess, does that change the model at all or how we should think about the cost structure going forward?

Good question. I mean, for us, the answer is no, because we are doing basically one scripted series a year and we are focused on making sure that it’s content that works globally. So, Harley and the Davidsons was very successful for us. It lifted the patina of the brand. It was kind of a special treat for our audience, but it’s expensive content. It worked out for us, because it worked so well. But I think, at least for us that’s not the core of what we do. It’s part of a tentpole. We have also accelerated our content that’s in the natural history in animal extinction, science, more traditional areas, space for Discovery and that content is relatively inexpensive and we don’t do that for ratings. In most cases, it underperforms, but it overperforms on the brand and it overperforms for kind of that super center of people that love Discovery because we satisfy curiosity. And so we have built the whole team, Rich built the whole team with a whole documentary unit that where we are putting more of that content on. So net-net, we don’t see cost being an issue and we are not moving more into scripted, which is more expensive.

Thank you very much.

Thank you. And our next question comes from the line of Anthony DiClemente with Nomura Instinet. Your line is now open.

Good morning and thanks for taking my questions. David, as you know, FOX has really stepped up its investment in Nat Geo. Seems like they are really stepping to what’s typically been your core genre. You mentioned, I think a minute ago, Science and Animal Planet ratings. Are you concerned? Should we be concerned about increased competition from Nat Geo either as it pertains to ratings share or carriage with the new virtual MVPDs where Nat Geo seems to be included in a lot or most of the skinny bundles? And then Andy, first off, wish you all the best going forward. I wanted to just follow-up on the questions earlier about trajectory of content spend at the U.S. Networks in ‘17. So specifically, what’s in your outlook for programming expense growth for the ‘17 budget? I think you said globally you are expecting high singles to low doubles, but what – just for the model, what should we expect for U.S. Networks? Thanks, guys.

Thanks, Anthony. Well, I have a special affection for National Geographic, because I helped create it years ago and worked with Chase and the Murdoch family in partnership, because we owned it when I was at NBC together. And I think it’s a great brand. And it’s one of the reasons why we have invested in Science and Animal Planet and really are very focused on what they are doing. They are spending a lot of money. I think they have a lot of ambition for it. And I think they are really good. At this moment, we have some significant advantages. In 220 countries we are in, we are on basic. We are the most distributed and we are number one in virtually every market against them. And in almost every market, we are number one for factual. We did launch Science and Animal Planet in every market in the world really as a way of kind of creating a flanker against Geo and History, which is also a great channel that does great nonfiction content. And I think they woke us – both History at least woke us up a few years ago. History was beating Discovery at one point. And Discovery, 6 or 7 years ago, we were cheating a little bit on the brand. And we got – it forced us to get better. It forced us to get more focused on our audience, what do they love about Discovery, how do we create more content that satisfies curiosity? And I think it made us better. Discovery Now, for 2 years, has been the number one channel by a lot for men and number one around the world and it’s helped us with Science and Animal Planet. So, I think competitive competition is good, but they are both great services and we are going to have to continue to really bring our A game, because both of them have really good teams and they are – they got us in their sights.

Yes, I appreciate your comment about the next move. It’s – I am excited, but look it’s always one of those but we are leaving a company that you truly do love, one thing a lot of you have commented on and I will say which is unique here is a CFO-CEO relationship is so important. And Dave and I are genuinely – very genuinely, very good friends, very constructive. We’ll continue to be great friends and talk in the future. So look, it’s hard to leave a place you love, but I am excited about the future. So look to get into the U.S. content spend, without giving too much detail, call it roughly mid single, the good news is we definitely see U.S. SG&A being down just given the phenomenal work, we have a CFO there, Simon Robinson, who is doing a tremendous job of driving cost productivity, utilizing technology to really think about means of delivery. And so we have sustained cost controls in our U.S. business that we see for the next several years that gives us a lot of perspective on – even from these levels, continued margin growth out of our U.S. business.

Thanks a lot.

Thank you. And we have time for one final question. Our last question comes from the line of Todd Juenger with Sanford Bernstein. Your line is now open.

Wow, pressure is on here. Let me just keep it to one question, if you don’t mind. I guess turning back here, David, I know you like to use the analogy of the sports for Netflix. And so I guess one big difference between Netflix and a company like yours is they aren’t also simultaneously trying to run the linear network services. And I just like you to reconcile maybe how you are thinking about the future distribution sort of strategy and growth, especially in Europe, with the presence in sports. Right now you are getting double-digit increases from your traditional distributors. When you have this realized sort of Netflix-like sports product available as well, is it your expectation that you can both get paid still strongly from linear and also have the direct-to-consumer product and also, by the way, launch and increase the number of free-to-air channels, which I know probably are on sports, but they are still Discovery content. How does that all work together as opposed to eating each other? Thanks.

Sure. Thanks, Todd. Well, the opportunity that we have is we have a massive amount of IP. So when we are showing – if you are in Italy and you are looking at the Australian Open and we have three sports channels, we are showing three matches. But if you have the player we have 20 courts. And for showing the Australian Open for the whole weekend, then during that weekend is the World Speedskating Championships and we are not showing that or we are only showing two courts of tennis and one on speedskating. We are not showing the slalom. And so one is, we have a lot more IP. Two is there is a lot of IP we are not showing. We own all the snooker. We are not showing most of it. We own all the squash we are not showing most of it. We own all the speedskating. We are not showing all of it. And so the ability to go to super fan affinity groups and have them like they would go out and buy a magazine, if they love golf or tennis, they can get a seasons pass for their sport, we think is quite interesting. The other piece is there is a lot of people in Europe. It’s only about 50% penetrated on multi-channel television. And so 50% of Europe is – doesn’t have access to it, but there is a huge portion of that, that has broadband and so the ability to access them as well. And so we will nourish the existing audience with the quality content that we have and we see a sustainable opportunity here. In fact, I think we are just getting started. If you look at what happened in the U.S., it started with double-digit and teen…

It will be fascinating to watch it go. Thank you very much, David.

Thank you. And ladies and gentlemen, that does conclude today’s question-and-answer session. Thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.