Good day, ladies and gentlemen, and welcome to the Discovery Communications Third Quarter 2017 Earnings Conference Call. As a reminder this conference call is being recorded. I would now like to turn the conference over to Andrew Slabin, Executive Vice President, Investor Strategy.

Good morning, everyone. Thank you for joining us for Discovery Communications' third quarter 2017 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer and Gunnar Wiedenfels, 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 Gunnar and then we will open the call up for your questions. Please keep to one question if possible 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 and 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, 2016 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. This was another pivotal quarter for Discovery. We reported a solid set of operating results driven by gains in global advertising and distribution revenue with steady performance from our linear channels, enhanced by our growing suite of digital products. As we continue the transaction process around Scripps, we remain laser-focused on the two tracks designed to drive long-term growth and value for Discovery. Maximizing our linear business where our dual revenue stream continues to provide a stable, cash generating base and pivoting to become a leader in digital and mobile first content. As subscriber declines continue across the pay television landscape, we continue to pursue our strategic pivot, to take our content to consumers across every screen and service. We are a leading global IP company, and we will only get stronger with the addition of the Scripps content and brands. We will continue to capitalize on our deep global and flexible IP portfolio of strong niche, superfan brands and moreover, as distributors consolidate and mobile and other platform operators look to differentiate their products, owning IP globally, on all platforms like we do, in almost 50 languages, makes us truly unique. And we are convinced will lead the strong monetization opportunities in the year ahead. We are a long IP. With global platform companies serving millions of users looking to offer content, we are one of very few media companies that can offer a global package of content with recognizable brands and IP to all of the world. I'll begin this morning with a few details about our linear TV portfolio, where we are enjoying healthy momentum across our top channels. TLC continues its impressive audience growth, as the network enjoyed growth of 15% in delivery in the third quarter,…

Thanks, David, and good morning, everyone. Our third quarter results were again driven by continued strong global distribution growth and the nice uptick in both U.S. and international ad growth, combined with our continued strict focus on cost management. While constant currency revenues were up 4%, and constant currency adjusted OIBDA was up 3%, our total company reported revenues were up 6% and adjusted OIBDA was up 3% in another quarter with positive impact on our financial result from FX changes. Third quarter reported net income available to Discovery Communications of $218 million was consistent with a year ago. On the positive side, we had improved operating results and a net positive impact of our solar deals. We realized a much higher tax benefit due to deal timing, and we also continued to see positive impacts on tax rate associated with our more global asset base. However, these positive effects were offset by $142 million or $0.25 per share of after-tax costs related to the Scripps acquisition including transaction costs, the unwinding of interest rate hedges in conjunction with the Scripps debt rate and additional interest expense and below the line currency-related losses versus a gain last year. On taxes, based on these trends, we still expect our full year tax rate to be a couple hundred basis points below 20% and net-net, the positive impact of our solar investments on full year net income. Now let us turn to adjusted EPS and free cash flow. Third quarter adjusted earnings per diluted share, which excludes the impact of acquisition-related non-cash amortization of intangible assets, increased 8% to $0.43. For the last 12 months, adjusted EPS, excluding currency, FX and Scripps transaction costs increased 22%. Third quarter free cash flow was up 67% to $699 million, due to lower cash taxes…

Thank you. The first question is from Jessica Reif of Bank of America Merrill Lynch. Your line is open.

Oh, thank you. I guess, first question on International. On the cost side, which seems to be elevated due to sports, can you just talk about like the next three to five year outlook? You've known costs for sports. How do you think about overall expenses? And can you talk about monetizing? It seems like you're making some progress with the Player. And then on the domestic affiliate fees, you did say that it's stepping down a bit. Can you talk about some of the swing factors you're seeing there, both pricing, and what do you see in the universe overall over the next year or two?

Thanks, Jessica. Why don't I start out with domestic affiliate. We've said that we're done with our deals for a period of time. We got through a cycle very effectively with high single digit increases over the term of those deals. What we're seeing is we're getting hit by the 3% decline. We are on Sony and DIRECTV. And we're not on those other skinny bundles, meaning Hulu and YouTube. And so we're continuing to talk to them and work on that. And we're focused very hard on the fact that the U.S. is the only market that doesn't have a bundle without sport. And we're having some constructive discussions with distributors and some constructive discussions with other programmers. And over-the-top provides a significant opportunity to attack that. We see a meaningful market for that everywhere else in the world. And there is a macro argument that most markets around the world are fairly stable; some are growing. But having the U.S. be the only market with very expensive all sports and re-trans packaging is what's causing this 3% decline. And without that, we might be looking like most of the other markets, where younger people or entry-level have a chance to get into the market, and we might be seeing flat to even up 1%. I think eventually we'll get there. We're at the front of the pack driving that. And when we get the Scripps deal done, I think we'll have most of the really high-quality, superfan channels. And in fact, if you look at the surveys, Discovery, HGTV, ID, Food, are four of the top services that people want for over-the-top. And in many cases, they're ahead of broadcast networks. So we think we're well-positioned on our content and IP. And we're being a little disadvantaged, I think, in the marketplace by not being on those platforms. We've heard it from you, and we're continuing to drive that.

Okay. And Jessica, on the International content expenses and sports specifically. As you know, we haven't given any specific long-term guidance. I think a couple of points are safe to say. Number one, we will continue to be focused on making investments into IP; that's the core of our business, and will continue to be a priority for our capital allocation. On sports, specifically, as you know, we have made some significant investments, and we feel that we're in a very good position now with the Olympics deal and several other premium sports rights that we have secured for Europe. So we're in a very, very good position there. For the financial outlook, clearly, 2018 is going to be the first year with an impact from the Olympics deal. And I've said before that there's going to be an impact both on top line and on the expense line, about $140 million from rights plus additional production cost. And you can assume sort of a very marginal impact on profits for 2018. And I mean, all that being said, if you look at the developments of our cost of sales line internationally, then the majority of the increase is driven by those sports rights and we've been managing content expenses outside of sports pretty much at a very low single digit increase.

Yeah. So you'll see the sports IP relatively steady. And it'll be a little bit bumpy because of the Olympics coming in and out. But Gunnar has made an important point. We are investing for the long-term. And we're very IP long. I mean, if you look back at that moment when John Malone was running Stars, he made the decision to not just buy movie rights for Stars, but he bought it for all platforms. And at the time he said to me, he thinks those other platforms, at some point, will be worth more in value then Stars itself. And he turned out to be right. The other premium providers bought rights just for those channels. That is our core strategy as a company. We own almost all of our IP everywhere in the world on all platforms. In sport, we own all of our sports in Europe on all platforms. So we haven't, at this point, fully monetized that IP. But if gets sold to Deutsche Telekom or Vodafone or BT, if some of it gets sold exclusively to some distributors as we've done with Bolloré and Drahi in France, all of that is upside, because we own all that IP. We have the optionality of doing deals with Amazon or Apple or Facebook or Google. And so that's why we love Scripps so much, because we own all that IP, it hasn't been used globally, and it fits along with our superfan IP global strategy. And so we feel good about it, but we also recognize that we could be dropping a lot more money to EBITDA if we weren't investing in IP or if we were just buying linear rights. So when you hear other companies announce that they're going to go direct-to-consumer, if you hear us announce it, we have the right to do anything we want with any of our content. And I think that we believe that that can be really compelling and will create long-term value and addresses the terminal value issue because we believe that our content long-term is going to work on mobile, it's going to work for Apple, it's going to work for Facebook, and it's going to work for the mobile guys and it'll de-commoditize all of them as they're looking for IP.

And Jessica, on the Player, as David said in his speech, we're seeing some very encouraging progress on the subscriber base. Clearly the theme is the Bundesliga exploitation. The season launched in back end of August, and we're seeing a very healthy uptake. We've also switched our technical platform to the BAMTech platform across the whole footprint, more than 60 markets, and that went very well, with some small hiccups that are usual in these type of launches. So we're very happy there. In terms of the monetization, keep in mind that we're ramping up the subscriber base. So we will see more of an impact going forward. And there's two aspects to this. Number one is I really do think that with this premium right, we have really repositioned the Eurosport brand, especially in the German market, but across Europe. There's a positive pollination effect between the Player and the linear feeds. We're seeing ratings up on the linear Eurosport network as well. So that is all working very well. And then finally, it's a very good learning for us, because we now have some premium rights with a lot of demand on the platform. And we're expecting a lot of very valuable learnings as we come up on the Olympics next year. So I think that's all going very well.

And as Gunnar said on Eurosport, which I think is an important point, is right now it looks like we could find value in two baskets. Last year was a record year for Eurosport with ratings. And Eurosport ratings right now are up 20% over that, at the same time that we're taking that IP direct-to-consumer. And we have a right to take any of that IP. So if we talk to someone who wants a certain kind of IP, more on the Player, we can just make the decision to take it off Eurosport, deliver it to the player and then promote on Eurosport that you can get that match or that game on the player.

Thank you.

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

Yeah. Thank you, good morning. Maybe just first to follow up on the strategic pivot that you mentioned, and you just threw out Apple, Facebook and Amazon as potential partners. So I guess, number one, can you talk about any burgeoning relationships you might have on that side for content partnerships? But then also, how you're thinking about the sale of content into licensing and how that may exacerbate some of the pressures that you're seeing on the linear side and how you're thinking about managing that pivot. And then separately, maybe regard to the Olympics. I think there's been some press reports about Eurosport taking a more holistic approach to measurement across all the platforms. I was just wondering if you could give us a little more detail on what sort of traction you're getting with that currency, and how you might be able to adopt that as you become a more multiplatform-centric company over time.

Thanks, Steven. At this point, what we're trying to do is figure out where the soccer ball is going to go. And so we're trying to both build our core company, which is very stable and still providing real growth with the global footprints that we have, more channels in more countries, with core niche content that people love. But then we're really starting to get some momentum in this idea of, at least our strategy of where we think that ball is going to be. And that is owning IP, and being in a position that you can sell that IP in different windows to different distributors. In the case of the big four, we've never seen, in my 30 years in this business, distribution platforms like Facebook has with 2 billion, like Amazon and Google and Apple. So we're talking to all of them. We have deals already with Amazon in the UK, Germany and Austria. They're quite creative. In those markets we're going direct-to-consumer with Discovery for 4.99. We're selling Eurosport on Amazon. Amazon is selling our Player in Germany. We think the ball's going to go to the place that if you look back three years ago, those were platforms. Today, they're all in the game for IP. And so, AT&T can go out and buy Time Warner. That makes a lot of sense in a market like the U.S. that's 350 million people. And that's probably going to be a very effective transaction for Randall. But as you go across Europe and you go across Latin America or Asia, and you're a distributor, if you're Polsat in Poland or if you're Canal+ in France, at that point, it really is not going to make sense to go out and buy a big media company. So you're going to go to media companies and say, what IP do you have? And so we think that if Apple wanted to do a deal with one person and offer a family pack everywhere in the world, or if Facebook wanted to do that or Amazon, or if the mobile players wanted to do it in Europe, who could they go to? There's very few companies. It's maybe less than three. And we have brands that we've been working on in those countries for 20 to 30 years and we have massive amount of content and we think that Scripps will add to that and renew that and rejuvenate it. And as we've said, we see Scripps as a beginning. Within two years we'll be less than 3.5 times levered, and then we'll be looking for what other IP do we have. How to we accelerate direct-to-consumer? How do we accelerate our overall market share? And so we think we're trying to be where the ball is and we see those big distributors looking more and more for the ball. And the ball for them is content.

Okay. On the Eurosport question, I mean, as we have said multiple times, we're going to make sure that these games are the most digitally accessible games ever. We will be making available every event on a wide range of platforms. And obviously, that does put us in a position to also deliver an audience across these multiple platforms. And one of the big benefits is that we will have people signing up for the Player so we will have the personal identifiable information which, especially in Europe, is a very big advantage because there's a lot more strict data protection rules over there. So we really see this Olympics event as a sort of kickstarter or a booster for our ability to deliver targeted advertising and data-driven products into the audience. Clearly, for any specific numbers, of course it's too early right now.

And doing a deal with Snap across Europe, we think will bring in a younger demo. And with Facebook, we already have a very extensive partnership. With Group Nine, we're one of the leading providers of short-form, and when they launched mid-form, we were one of the leading providers of mid-form. And so I think staying close to those companies, figuring out what they need and catering our superfan baskets, both in terms of type of content and mid-form, short-form, long-form. We've come a long way from two years ago. We have a full menu now.

Thank you.

Thank you. The next question is from Jason Bazinet of Citi. Your line is open.

Yeah. Maybe for Mr. Zaslav, you mentioned the U.S. is the only country that doesn't have a non-sports package. I assume that's on linear. I was just wondering if you could give us a little bit of a history lesson in terms of why that is. And then how easy do you think it is to change? I presume it has something to do with some of the bigger sports channels out there and the distributors' minimum guarantees that they have. But any color that you could share would be helpful. Thanks.

Sure. Well, the U.S. is the only market that has retransmission consent. So we'll start out that broadcasting is truly free in every other market. Here now, the broadcasters are charging $2 or $3 a month, which is quite good for them, but it's not so good for the consumers, and it's not so good for the distributors who have to eat that additional cost, and it becomes a level of entry. It's also the only market where, because the sports channels grew up in this market and use their leverage to require full carriage of all of their sports channels, together with the fact that most sports channels are owned by the re-trans broadcast companies, you have a combustible combination. And so if you want to get the broadcast network, if you want to get the regional sports – and this is the only country that really has an extensive regional sports network structure. So between regional sports networks, big sports networks and re-trans, which is driven mostly by sports, sports has been effectively hyperextended here to the point of are you serious. And so that's the marketplace that the consumers are dealing with. And it's one of the reasons why we believe that the market is down 3%, because the cost of entry, 65% of the entry level market in Mexico is the skinny bundle and you're in for $15. In Brazil, 90% of the growth in the last four years has been the skinny bundle. And then, in every other market, you could then get your sports to your ticket. And so I think it's that combination. Look, one of the reasons we went to Eurosport was because it's very early stage in Europe, it hasn't been done before, and we said that's a pretty compelling concept…

Very helpful. Very helpful. Thank you.

Thank you. The next question is from Todd Juenger of Sanford Bernstein. Your line is open.

Oh, hi. Good morning. Thanks. I got a couple just housekeeping for Gunnar and then David, boy, I'd love to just pick up on that great discussion you just had with Jason. Gunnar, just super quickly, two on affiliate fees. So on domestic affiliate fees, I'm sorry if I missed this. Just wonder if you'd give us a number without the content licensing, so just sort of a clean distribution affiliate fee number for the quarter. And any comments on the ins and outs of licensing sort of next quarter or forward would be great. And also where did that licensing go I wonder? Because I don't know – in the states, I know you're not licensing I think to the SVOD player, so if you're willing to say that, that'd be great. The other quick one, sorry, I promise it's quick. On International, I think you guys had indicated double-digit constant currency International affiliate fees for the year. I just wonder if you still feel that way. Okay. And then David, just sort of picking up, I can't help. It's such an important topic and you're sharing some thoughts on it. On this sort of skinny non-sports bundle, you did mention that your traditional distribution agreements, you're sort of through the cycle there. What are the implications, if any, if you were to team up and launch some sort of over-the-top non-sports package on your existing distribution agreements with your NVBDs as they exist and maybe even if you think about the next cycle, how can you go ask for pricing increases from the cable companies if you have a low priced over-the-top option for consumers? Thanks for bearing with that guys. Appreciate it.

I'll just answer the last one. We have no restrictions so we can do. And it's already being done. I mean, YouTube is an offering that's in the marketplace. Hulu has an offering that's in the marketplace. Philo has an offering that's going to be in the marketplace. DIRECTTV NOW is an offering that's in the marketplace. So I think you're starting to see some additional offers in the marketplace. And we're agnostic. We would do an over-the-top direct with a bunch of others in a package. We would do an over-the-top with the existing cable operators. We would do an over-the-top with existing mobile or satellite providers. And you're going to see, as there's subscriber decline, a lot of them are trying to figure out what could we do to serve customers? They're looking at that decline and saying, hey, I don't like that. Why is Netflix gaining and why are we losing? Is there a product that we can offer? And in the end, as we face customers, we had this discussion last time. I don't think anything has changed. Our channels are stronger now than they were a year ago. We think one of the things that helps us with Scripps is we getting even more strength with a lot more channels that are very important. We then have five channels that people would rate as either their most important or their second most important channel that they watch and care about in terms of length of view, including the broadcasters. And when you put us together with Scripps, we might be 20% of the view, but we're only about 7.5% or 8% of the money. And so that's not something to brag about, but it does mean that we're not getting paid a lot of money. And there's an opportunity to pay us more, and is it really worth having an argument over so many good channels when the price increase is a fraction of what you're paying to one regional sports network as an increase for 20 channels?

Okay, on domestic affiliate revenue, let me give you some more color. So the Q3 numbers, as you see, are very well in line with the guidance that we've given for the full year of mid single digit. And as you heard, I also reiterated that guidance for the full year. So that's still the best estimate that we have. In terms of those content licensing revenues, you know that we do not single out individual contributions to the distribution line. As we have said previously, those content licensing deals are small in the greater scheme of things, but as I said, we have seen a bit more often impact in the third quarter. That's why we pointed it out specifically. In terms of who we're selling to, you will find some of ours stuff on Hulu. And we also do very selective deals with Netflix. So for example in the case of a miniseries where we might get a lot of value from Netflix, we're fine to engage in a deal like that. But again, that's always going to be a very careful decision that we're making. And as the landscape evolves, this type of deal is just going to be a more common part of our distribution strategy of monetization. So as we said previously, we will see more of these SVOD revenues come through. And by nature, they are slightly more lumpy than the very simple subscriber number times ARPU kind of business and the very traditional linear distribution. But again, I mean it's a small component and the way to think about it from a sort of linear perspective, again, as we have said previously, in the last cycle we were able to secure high single-digit CAGRs on the pricing side for our deals. And that's still valid and then obviously, our subscriber loss numbers work against this.

The other side of our strategy of investing more in IP and owning more windows is we are quite strategically selective about how we monetize it. We could be doing a broad package to some of those SVOD providers, and you could see a very different result this year and next year. But we've opted not to do that, and we're holding onto it. We think it could be much more compelling in our own offering or much more compelling to do something with an existing player and us in an offering. And we view it as building terminal value.

And then on D&I affiliate, as I said during my speech, so we've seen a 9% underlying growth in the third quarter. And we also guide for slightly below 10% for the full year. If you look at the individual contributions to that growth, we continue to see healthy double digit growth in Europe with a lot of success on the sports side. What has not come through as we had hoped it would is recovery in Latin America. We had planned for a bit of positive support there in the second half, which just hasn't happened yet and we're not anticipating that anymore in our planning. And we've also had a slight negative headwind in Asia with a few renewals recently. So now the outlook is just below that 10% guidance that we had given previously. And then there's also been a bit of an impact from the natural disasters that we've seen and that's why we just wanted to be slightly more conservative as we look forward now.

Thanks. Yes, great.

Thank you. Okay. And the next question is from Alexia Quadrani of JPMorgan. Your line is open.

Hi. Thank you. I might switch gears to the advertising side. You've seen some good ratings momentum, some improvement at some of your key networks, which I think you highlighted like TLC and Discovery and ID. And I was wondering if you have good inventory still available to monetize that in the scatter market? Are you somewhat constrained by make-goods? And just any color in general about the health of the scatter market, what you're currently seeing in the market.

Great, thanks. The scatter market, the volume is good. The pricing is above upfront, but slightly below what pricing was on scatter last year. So we could use a little bit more of a push on pricing. We don't have a make-good issue in any meaningful way. And in fact, the fact that TLC is up, I mean, it was the number 12 network for women. It's now the number six network; it's up 15%, has helped us. ID continues to grow and Discovery has really stabilized. The upfront was quite good for us. We did well and we sold a little deeper than we normally would. We got a little bit of a strategic sense that there might be some of the scatter market money moving to the upfront, and so we took a little bit more of what we thought was good money to hedge our risk that if – at this point, volume is up, but if volume next year drops a little bit, we thought it made sense to take a little more dollars. So it was quite good for us.

And Alexia, as I said, going into the fourth quarter, we see similar low single digit growth for the U.S. ad number for us.

And then just a quick follow-up on your networks here, you talked about how you're seeing obviously much better subscriber trends in your core networks, in terms of the rate of decline and the fact that there are a little bit higher declines in some of your non-core networks and your smaller networks. Does that influence the way you think about your investment spending ahead? I mean, are you likely to just sort of reallocate a bit more of your investment spending to some of your bigger networks?

I think generically yes, and we've already been doing that. We did it in our deals where the overwhelming majority of economics in our deals are to our big six networks. There's some exceptions. We have Velocity, and Velocity is a very compelling superfan network. We did something quite creative. We put the channel together with the direct-to-consumer business, together with the 30 titles of magazine titles. We didn't actually buy the magazine business, but all the editorial, the pictures, all the short-form content that was being generated around cars, and all the IP that we have on Velocity, the library, the car content as well as the live auctions is all in this new basket that we call Motor Trend OnDemand. And so you'd see that at the top and below would be Velocity, this cable channel that's in 60 million homes that's quite profitable that has real superfans. And we can move that IP now between that and Motor Trend OnDemand. And then we have all of these great writers, and we have all of this short-form video and these terrific 30 brands that we get to use as well as lists that go along with the magazines to drive this direct-to-consumer business that we start with about 100,000, little less than 100,000 subscribers paying $5 a month. So it's an experiment. What happens when you take a huge auto library together with a dominant position in auto, live auto auctions together with 30 titles of auto enthusiast material, together with editorial in short-form? We were enthusiastic about the fact they have almost 100,000 subscribers without any long-form content and any real promotion and any live auctions. And so this is part of our strategy of building a direct-to-consumer business as a side-by-side. On the other hand, we have some smaller channels that don't have as big of an audience, and we already started that cascade of investing less and focusing more on our core brands that we think are sustainable on linear and sustainable on mobile and sustainable globally.

Thank you very much.

Thank you. And the last question will come from Michael Nathanson of MoffettNathanson. Your line is open.

Thanks. I have two for David. Can I go back to the non-core versus big six change in distribution? Is the fall of the non-core channels a function of maybe those platforms falling? Or the fact that perhaps you guys had maybe loosened up some of the minimums and traded that loosening for better pricing? So you talk a bit about, was this a self-planned type of erosion of the non-core sites?

No. It's actually, I think you could just say it's shaving. It's basically somebody that would be paying $130 for cable. It's saying for those extra 30 channels, I'll save the extra $14. It's not being tiered. It's just somebody looking at the very high price of that and broadband being expensive and saying, do I absolutely need that.

Okay. Okay, that makes sense. And then, you haven't talked about Sling at all, which seems like a pretty good fit given their pricing and given their tiering. Is Sling a function of you having to get a dish deal done or can Sling be done outside of a normal linear deal being done?

I don't want to speak to this specific. I think Sling is an effective platform. I think Charlie's attacking the very issue that I talked about earlier. And I think he's one of the people that's being innovative along with almost every other distributor that's looking at an industry in secular decline and asking themself the question, have I agreed to do two agreements that are restricting my ability to serve customers, and am I driving customers to Netflix or driving customers away from my platform? And for us, I think, eventually, we'll probably be on those platforms, because as I've said that, if you look at all the recent studies, at the very top of the list, we have six channels that are either equal to broadcast or just behind it or ahead. And the cost of all of our content is significantly less than one retrans channel. And so I think we have a great value to consumer argument. I think getting more aggregation, when we close Scripps, gives us even more quality viewers and more versatility and optionality. And over time, we would like to be on every platform. And I think we got a good shot at it if we keep doing a good job programming our channels.

Okay. Thanks, David.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.