Good day, ladies and gentlemen. And welcome to the Discovery Communications First Quarter 2019 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 [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Mr. Slabin you may begin..

Good morning, everyone. And thank you for joining us for Discovery's first quarter 2019 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; Gunnar Wiedenfels, our Chief Financial Officer; and JB Perrette, President and CEO Discovery Networks International.

You should have received our earnings release, but if not, feel free to access it on our website at www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we will open up the call up for questions with David, Gunnar and JB.

Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance, are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events, and may involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our Annual Report for the year ended December 31, 2018, 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 welcome to our first quarter 2019 earnings call.

We’ve started the year with very strong operating momentum across the company, with positive financial results domestically and internationally, as we continue to create, develop and acquire the highest quality content with broad consumer appeal in every market around the globe. I have made it clear.

Discovery’s strategy is different than any other media company. While everyone else is focused on big and expensive movies and scripted series, very crowded space, we have a different approach. We have brand people identify with and love.

We’re gaining distribution in all key bundles in the United States and around the world and enjoy a unique global footprint. We have a proven management team, best in the business. We have a de-levered balance sheet and capital structure that gives us great optionality, I believe we are the leading global IT company.

And we have important, entertaining and useful content in categories that are loved, trusted and of safe. Our content has the broadest multi-generational consumer appeal and high proceed value among advertisers and distributors.

We are powering people’s passions and genres that are central to their lives, and we have niche channels, quality brands and talent that people around the world trust, respect and believe in. And we are now starting to see the results.

From revenue to adjusted OIBDA, to free cash flow and of course, virtually all operating metrics, we are seeing healthy momentum. We are benefiting from continued merger synergies from the Scripps acquisition; from strong consumer demand that is driving our adoption in multiple distribution packages and bundles in the U.S.

and around the world; and progress we are making in building out our suite of direct-to-consumer products with best-in-class IP in passionate entertainment and sports categories. Discovery looks different. Our strategy is different and different is really starting to pay-off. And what a difference a year makes.

This time last year, we have just closed on Scripps. And there were questions about the future of our businesses. Our lack of inclusion on virtual MVPDs, our ability to leverage home and food around the world and the amount of debt we had taken on to close the transaction.

A year later, while we don’t have all the answers yet, we have made remarkable progress. We have proven the durability of our core business, the value of our beloved brands in an OTT world and the opportunities made possible by our global reach consumers in nearly every country.

We have reduced our net leverage to below 3.5 times, and we are seeing a healthy acceleration of our core businesses across the board.

We are excited about our growing portfolio of new global direct-to-consumer services and the management and engineering leadership we are recruiting to Discovery continue driving the strategic advantage we have in our own technology infrastructure.

Domestically, we've continued to make great headways toward near ubiquitous distributions of our key channels across the virtual MVPD landscape, most recently with an agreement to launch nine of our brands on YouTube TV. We now have the most widely distributed cable network group across all key OTT players.

Our team has done a terrific job advancing our position. We are thrilled to partner with YouTube, Hulu and Sling, ensuring that we are well positioned to grow as consumers migrate to new bundles and platforms. Additionally, our U.S. rating trends across many of our key networks continue to improve.

In the first quarter, we have the top four cable networks on commercial delivery for women in prime from 8 to 12, with ID, HGTV, food and TLC, pretty remarkable and a first ever in the cable industry, helping us to drive domestic advertising at the top end of our peer group for a couple of quarters in a row now.

I’m pleased with our performance and the trend lines we are seeing with our domestic advertising business. But as I said last quarter, I think we have some real productivity headroom and we have a number of initiatives in place that I think will advance our returns.

The team has really dug-in and we continue to innovate through our targeted cost platform marketing capabilities. With 4% domestic advertising growth in Q1 and once again feel great heading into this year’s upfront, our second as a combined company, and we’ll keep you posted on our progress.

We are also pleased with our progress and outlook for our international segment as the Scripps content is beginning to gain real traction in key international markets.

Building upon the heavy lift we detailed last quarter with regards to layering in Scripps content across our networks, we have also been hard at work launching new pay, free-to-air and digital branded services. We recently announced we will be launching HGTV as a new free-to-air channel in the large advertising market of Germany.

We also have secured healthy subscriber commitments throughout Latin America, the new HGTV channel launches across all key countries, while at the same time, nearly doubling the distribution presence for the existing food network channel across the Latin America region.

We continue to assess demands in the market and what opportunities exist to fill those holes, both in the linear and digital ecosystems. We are gaining real traction in securing some truly premium IP programming and talent across a number of initiatives. We believe our ten year global relationship with the BBC will be a key milestone for Discovery.

As we created a stronger and more efficient UK business that soon to be rationalized UK TV portfolio; secured some of the highest quality blue chip series for our linear networks, such as SERENGETI, which maybe one of the most visually stunning pieces of programming I have ever seen coming to Discovery Channel this summer; produced by Simon Fuller and Perfect Planet, which was produced by Alastair Fothergill who did Planet Earth for us, which is coming in the fourth quarter; and with the new co-development team, at the BBC hard at work creating a pipeline of high profile landmark factual programming over the next several years that we will harvest for Discovery in the U.S.

and around the world. The most strategic element of our BBC deal was securing all of the SVOD rights for the BBC Library of factual landmark series and specials, a marvel like library for the factual of natural history genre.

Our ambition is to take that library along with the best of the Discovery Channel, Animal Planet and Science Library, together with additional exclusive original content, brands and IP in the genres of natural history, science, adventure, exploration, history, space and technology, packages together into the definitive natural history and factual streaming platform in the world and take that above the globe.

It is the perfect moment to create this type of service, high in both entertainment value and global impact and relevancy.

Blue Planet 2, for example, not only ranks among the all time top shows ever aired in the UK, it ignited a major global call through action, after an episode on the effects of plastics in the oceans led to a ban on plastics in the UK and now adopted across the EU. It is this wonderful content and IP we can aggregate around the globe.

As we continue to build out our portfolio of brands and world class content, we are thrilled to be back in business with Chip and Joanna Gaines. They are true singular talents with great creative vision and an authentic ability to connect with audiences.

Millions of fans follow their story-telling through the home, the kitchen, the garden and they incorporate strong family values more seamlessly than anyone else. We really want to win together and we are excited to help showcase to gain passion and talent.

Discovery will launch a multi-platform global media business around their Magnolia brand, by rebranding DIY next summer, alongside an authenticated go-app. And we’ll then launch a streaming OTT platform service in 2021.

GOLFTV is another example of where we have strengthened our content offerings with the best talent, most valuable IT and strong global programming. We’re off to a terrific start. The support of Golf is on fire globally and our timing couldn’t be better.

Though still early and in beta, we are seeing real signs of traction in users on GOLFTV, both paid and registered, especially in countries with local heroes, like Japan and Italy and in markets where we’ve taken advantage of Discovery’s local presence.

And in Asia-Pac specifically, we are seeing a nice boost across our portfolio given the local must see nature of Golf. In places like Japan where we have put together a great partnership with J:COM. It’s a great template as we look over the next three to four years for when we will have the full global rights, the PGA tour outside of the U.S.

and be able to offer PGA, Tiger, as well as all of our Golf products everywhere in the world in a full on ecosystem.

We’ve successfully streamed over 35 tournaments across five tours with healthy user engagement, particularly for our Tiger content, Tiger’s Masters' victory was clearly one of the all time great sports moments, and it’s for a welcome and powerful story line to Golf.

We’ll be rolling out the exclusive Tiger Woods and structural master class series later this year. And this is just the tip of the ice berg. I couldn’t be more excited about where this partnership with Tiger can take the platform over the coming years.

Finally, the global cycling network, which brings together entertainment, functional content, deep engagement and mobile commerce into an immersive lean-forward experience, a great example of what mean when we say view and do and this is beginning to gain some meaningful traction.

Every month, millions of cycling enthusiasts, not only visit the site they immerse themselves in the site and with its community. They’re checking out the Maintenance Monday repair videos, seeking help with how-to and ask CCM through the platform and other social media. And they're training along with our pros on famous terrain videos.

And they're coming to our live forms, races and training camps, it’s a full 360 degree cycling experience. We believe all these initiatives make Discovery a stronger company, being consumer obsessed is our mission and guide everything we do.

And last year, we reached outside of our industry to bring in a top executive from Amazon, Peter Faricy, who ran marketplace to further guide us in this mission.

Peter has already added enormous depth to our senior team, has opened up a new office in Bellevue, Washington with a growing product development and engineering team with great depths of differentiated experience and perspective and building leading digital consumer products.

Our office in Bellevue, Washington will be a new hub, driving platform excellence to support our strong global IT. While our eyes are very much focus on the path that Peter and team will lead us on in the future, what supporting at pivot is an underlying core business that is still very healthy and growing.

And there is perhaps no strong reflection of our underlying operating momentum than having achieved the upper end of our leverage target nearly one year ahead of schedule. At under 3.5 times net debt to adjusted OIBDA down from over 4.7 times a year ago, we are finally in the position of being more opportunistic with our excess capital.

As you’ve seen, our board has authorized $1 billion share buyback, which with our strong free cash flow, which over the trailing 12 months basis was over $2.8 billion or about $3.1 billion excluding cash severance, secures our ability to continue to reinvest in our growth strategy, as well as further reduce our financial leverage to align our capital structure to accommodate both the cyclicality of our industry and requisite investment demands.

We are in a great-great position. And this optionality affords us the flexibility to intelligently and judiciously allocate our large and growing free cash flow to further enhance our existing portfolio. We enjoyed a uniquely deep level of engagement with our viewers and consumers, and they look to us to nurture their passions.

It’s a completely different strategy that most of our peers are pursuing we are playing in a different sandbox than anybody else. We have a different look, feel and appeal than almost all other network groups. And as I said earlier, we really see the different is paying off.

And against the backdrop of continued disruption across our industry, I feel confident with our strategic response, the balancing industry headwinds by refocusing and repositioning our portfolio of recognized global brands into immersive passion driven experiences.

We are supported by a strong and de-levered balance sheet throwing off a lot of cash, providing us with great runway and real optionality. And we are confident in our ability to continue to execute during this time of disruption and great opportunity. Thank you. And I’ll turn the call over to Gunnar to take you through the financials and the outlook..

Thank you, David. And thank you everyone for joining us today. I'm extremely pleased with our very strong first quarter operational and financial performance, and with the strategic progress we have already made in 2019 as we continue to transform Discovery. And I remain very optimistic about our company’s outlook.

Let me first share some financial highlights from our first quarter, which caps-off the first full 12 month periods in closing the Scripps transaction. My commentary will again focus on our pro-forma results and we’ll be in constant currency terms for the international and total company commentary unless otherwise stated.

Please refer to our earnings release filed earlier this morning for all of the details, custom drivers of our first quarter financial results. In the first quarter, Discovery achieved or exceeded all of our revenue guidance metrics with 4% U.S. advertising growth, 4% U.S.

affiliates growth, negative 6% international ad growth due to the tough comp for the Olympics last year, which growth excellent -- accelerating slightly towards the fourth quarter and finally, 1% international affiliates growth.

We also grew total company OIBDA by 21% due to continued strong synergy realization and due to the Olympics comp internationally. Total operating costs were down significantly with declines in both cost of revenues and SG&A in the U.S. and abroad. This led to 43% total company margins, up 900 basis points year-over-year with U.S.

margins expanding 700 basis points and international margins up 1,000 basis points.

Additionally, we reported $498 million of free cash flow in the first quarter of 2019, which brings our trailing 12 months free cash flow to roughly $2.8 billion for the first full 12 months as a combined entity, which is after more than $300 million of cash severance and restructuring cost, as well as higher digital spending in the same 12 month period.

Our laser focus on cash flow and cost management has allowed us to end the quarter with the net leverage ratio below 3.5 times inside the top 10 of our target net leverage range well ahead of our original stated goal to be back within our target range of 3 to 3.5 times by early 2020.

Against the backdrop of this strong improvement in our financial putting, I’m pleased to announce that our board has authorized share repurchases of up to $1 billion. We continue to feel very comfortable with the company’s outstanding ability to generate cash.

This authorization increases our optionality and gives us yet another lever to create shareholder value. Regarding capital allocation, our priorities stay the same. Number one, optimize leverage. And within our 3 times to 3.5 times net leverage range, we currently plan to prudently de-lever towards the lower end of this range.

Number two, at the same time, we will continue to evaluate value enhancing investments back into our business and strategic M&A. And number three, returning excess capital to shareholders.

Before I move on to our forward guidance, I would like to comment on our recently announced UK TV transaction that results our 50-50 joint venture, and the formation of our new SVOD partnership with the BBC. As part of the JV resolution, Discovery will take full ownership of three lifestyle channels in the UK.

The transaction is currently expected to close by early June with the following financial impact. Discovery will consolidate the three networks post close. So we will no longer be including the small amount of earnings from our 50% share of UK TV earnings in our equity earnings line.

And we will receive cash payment of around $240 million in total over the next two years. All of the three lifestyle networks revenues currently come from advertising, and will be consolidated post closing, and we’ll provide a couple of hundred basis points uplift to international advertising growth assuming the full year of contribution.

From an adjusted OIBDA perspective, we expected 2019 impact will be minimal but ultimately, we would expect more meaningful impact over the next six to 12 months as we integrate the network and capture additional synergies. We are also extremely excited about the new 10 year SVOD agreement, which will showcase iconic BBC Natural History content.

And I will note that any costs associated with this had already been baked into our digital investment guidance that we gave during last quarter’s earnings call. And now let me share some forward looking commentary. First, I will start with our four key revenue drivers on a pro forma constant currency basis for the second quarter 2019. First, for U.S.

advertising, growth is expected to be similar range as the first quarter, up 3% to 5%, driven by similar dynamics, continued pricing increases and the continued monetization of our digital and Golf product, partially offset by lower linear ratings on a year-over-year basis.

Our ratings performance for the quarter as always will be a key determinant of where we will fall within our guidance range. We would note we expect continued outperformance versus the market, helped by our recently announced YouTube deal in addition to the uplift from now having additional mix on Sling and Hulu. Second, U.S.

affiliate growth is expected to accelerate versus the 4% in the first quarter, primarily given additional virtual MVPD carriage. As noted, the first quarter should see the lowest growth of the year. Though, as always, this assumes no major change in subscriber content.

And while there are lot of moving pieces, both headwinds and tailwinds, we still feel very comfortable with our full year guidance of U.S.

affiliate revenue growth in the mid single-digit range, especially given our recently announced YouTube deal, and now best in industry representation across domestic, traditional and virtual distribution platforms. Third, international advertising growth is expected to be up mid-single-digits.

We expect sequential improvement across all regions and further continued monetization of our digital products. Note this also assumes around one month of contributions from the three new UK TV networks. And finally, international affiliate growth is expected to be up low single-digits.

Underlying trends remain relatively consistent with last quarter across our markets, and we also continue to drive monetization of our digital subscription products. Turning to total company guidance.

As noted, we still expect another year of healthy free cash flow goals in 2019, and we will continue to be laser focused on driving free cash flow growth even after making the investments necessary to build out our direct-to-consumer portfolio.

Our view on the puts and takes behind our ultimate full year free cash flow results have not changed versus what we laid out last quarter. As we had outlined, growth will be based on adjusted OIBDA growth and lower cash restructuring expenses, partially offset by increasing investments in direct-to-consumer, higher CapEx and higher cash taxes.

I continue to expect an incremental $200 million to $300 million of direct-to-consumer investments over last year. And the negative impact on the full year 2019 adjusted OIBDA is still expected to total around $300 million to $400 million on an absolute basis.

Please note that a vast majority of the spending is still to come, and will be back half loaded given the timing of roll out.

Given this cadence, as well as the fact that we have now completed the full four quarters of initial cost synergy capture post the Scripps deal closing, full year margin expansion will primarily be driven by the upside from the first quarter versus additional year-over-year margin expansion in the second to fourth quarter. Moving on to taxes.

Please note there is a one-time accounting driven and non-cash structural impact that will significantly lower our book tax rate in the second quarter and in the full year 2019 that I want to draw your attention to. As part of the integration of Scripps, we are in the process of streamlining and rationalizing our global legal entity footprint.

The most significant accounting implication from these internal restructuring will be a one-time $450 million to $500 million tax benefits in the second quarter as we are recording in deferred tax assets, which will make our second quarter book tax rate a negative one.

With that, we now expect our 2019 full year book tax rate to be in the low to mid single-digit range. Again, this is a non-cash benefit and there is no impact to our cash taxes or to our free cash flow. Before I close, let me quantify the expected foreign exchange impact on our 2019 results.

At current spot rates, FX is now expected to negatively impact revenue by approximately $180 million to $190 million and adjusted OIBDA by $70 million to $80 million versus our 2018 reported results. In closing, I remain extremely satisfied with the financial footing of Discovery and optimistic about our outlook.

Our strong balance sheet and financial performance will allow us to accelerate the transformation of our business, drive free cash flow and ultimately generate significant long term value for our shareholders. Thank you again for your time this morning. And now David, JB and I will be happy to answer any questions you may have..

[Operator Instructions] Our first question or comment comes from the line of Alexia Quadrani from JPMorgan. Your line is open. .

I guess my question for David maybe is on the international side. It looks like you guys are making a big push internationally. You guys had such great success out of senior legacy Discovery business and now you’re making a bigger effort on the Scripps side as well.

Can you talk about how big the opportunity is for the Scripps assets? And when we might begin to see some of these newer initiatives you’ve talked about earlier in the call that is it results? And then I have a follow up after that..

Historically, we’ve gotten most of our growth by gaining market share. And when you take a look at our international results now and as we look going forward, we think we’ve really turned the corner around our accelerating. Our market share is growing broadly. And now on the advertising side, we see mid single, which is a real acceleration.

In the affiliate, we see low single. So we’re back to being a growth business again. The Scripps content is starting to work in some markets really quite well. But I'm going to pass it on to JB as we talk about how we think we’ve made this turn. It's been a lot of hard work. And JB is on the ground running that business..

Alexia, as David said, when you look back a couple of years ago, it’s a great -- the growth rates of C&I. The international business is really driven by share growth, as David mentioned. And after a while having utilized a lot of the Discovery legacy content to its max that began to slow in part.

And then what’s happened over the last six to nine months as we’ve gotten Scripps library ingesting and started to take more advantage of it, we’ve really seen content driving better audience share performance in a major way. And that’s really begun to turn the story around for us.

And so as an example, in the UK, we had our best quarter ever from a share perspective. Unfortunately, the markets obviously from an advertising perspective are little bit of a mix bag. So the advertising market in the UK was still down mid single, but our shares were way up.

And so while we’re not expecting a major turnaround in the marketplaces in some of the more challenged international markets, we'll make this feel particularly optimistic and positive about what’s coming is that our shares are growing, the Scripps content is working better and better and helping. And we’re also launching new networks.

As for example, the launch of our free-to-air HGTV in June in Germany, the biggest end market in Europe, the doubling of our footprint from a penetration and the subscriber perspective on food in Latin America with the launch of HG in Latin America.

And so we’re seeing the theory that we have talked to you about a year ago of utilizing the Scripps content working better across Europe and Latin America, in particular.

And then as David referenced in his comments, in Asia, which has been a trouble spot for us candidly, we’re up content had been performing less well and maybe little less well of it. The great news is things like Golf has completely change the game for us.

Where we weren’t having conversations or people weren’t engaging with us in the same way, now all the sudden with Golf, we’re having conversations -- active conversations in markets like Korea, which have been underrepresented by Discovery, historically, about launching new channels and new opportunities in that business, a lot of it drilling by that, the Golf product, as well as the coming BBC product, which also has enormous appeal, particularly in Asia, which has an overemphasis, obviously, on education and smart programming..

And just a quick follow up on your comments on the use of cash, thanks for that. I just wanted to clarify.

Can we assume that you can balance being active in the new buyback authorization was for prioritizing investments in business and M&A?.

I think that’s a good summary, Alexia. As I said, we’ll for the time being, also focus on bringing down leverage a little further to the lower end around 3 times rather than 3.5 times given where we are in the transformation. And other than that, our priorities haven’t change.

We’ll continue to make all necessary investments in the business, drive future growth. We’ve talked about all the organic investments that we’re making and we’ll continue to balance that. I'm very, very happy with where we are.

Keep in mind, it’s been 12 months, we’re down 1.2 turns on leverage, $2.8 billion cash flow generated in the first 12 months after closing the deal. So I think we’re in pretty good shape and have a very, very strong balance sheet at this point..

This team is really impressive. The Scripps transaction has really worked. We’re now free and clear of that. We have some more synergies coming through. But we were at about $1.4 billion of free cash flow, they were at $700 million.

And I’ve been saying for a long time that this transaction, if we could really execute; makes us a free cash flow machine and set out a target of $3 billion that we would more than double our free cash flow; and the execution to be in a position now we’re a year ahead; we’re below 3.5 times levered, $2.8 billion in cash, $300 million on transactional related costs; and being in a position now to have full flexibility of investing in our business of looking at acquisitions.

There's loads of companies now that we have the flexibility to be looking at strategic assets that are sustained -- that provide sustainable growth, buyback and de-levering a little bit more. We’re going to be generating lot cash. And so we don’t see anything major.

We love where we are right now; we don’t see any major M&A; but the idea that we have all this cash and we have an ability to use it strategically in an unencumbered way around the world. It's just an exciting moment for the company..

Thank you. Our next question or comment comes from the line of Brett Harris from Gabelli Research. Your line is open..

I wanted to ask about the competitive landscape for non-fiction programming. It seems that non-fiction would fit naturally into an SVOD service but most major services are really focused on general entertainment and you characterized that as crowded in your opening remarks. Hulu made an announcement about some cooking theme shows.

Any sense that SVOD services are moving into non-fiction? And I guess the broader question is how should we think about your advantages as incumbent non-fiction provider?.

When we look at IP, we've worked very hard over the last five years to transition into really compelling IP, and what will people pay for before they’ll pay for dinner is our mantra. And that’s been a guide post for us.

The excitement for us is that Netflix getting to 250 million subscribers it is they created a road and a path where people get used to paying for content. And 50% of what people watch on TV is scripted series and scripted movies, and they’re going to be able to gorge on that stuff.

There's loads of opportunities from $7 to $15, and it will go up over the next couple of year. And people will probably have one, two, three of those and they're going to love them. And maybe they’ll churn between them based on who has the great series or who has some great movies. But that’s 50% of what people love.

There's another 50% of what people love and that’s what we have. And there is really nobody in our space. Yes, Hulu is doing a few food shows and Netflix does some stuff, a little bit of natural history. But all of the BBC content is coming off of Netflix.

And the ability to create series and new big event programming Planet Earth 3 is coming to us globally everywhere in the world and the next Blue Planet is coming to us, our ability to use all of that IP. But in addition to that, those brands stand for big entertainment that’s why people buy them. They want to see the great series Mrs.

Maisel, Game of Thrones that’s the business that they’re in. We’re really much more in two different businesses, we think Natural History can be massive, every family, everyone in the world should want to have this.

And as I’ve said, it will be less than $5 but it’s a product more and more is about learning, being smarter, being aware of the planet, this young generation cares deeply about what’s going on. And we’re going to be documenting the planet.

And we’ve gotten huge feedback from lots of players that say they want to be part of this in front of the screen and behind the screen. But then when you look at some of these sub-groups, whether its food or home, we have a tremendous amount of talent that are affiliated with this, and we think we could build real ecosystem.

We’re doing with cycling now. We’re doing it with Golf. We think we can do it with food. We think we can do it with home design. And so it’s great that they want to play a little bit in this space, but we feel very comfortable. We also know how hard this is. Loads of people are playing in the crime space.

Loads of people have tried to play in the food space. We are self-strided at the TLC. After several years, we ended up with one show. And Ken Lowe and the Scripps team they know who are the best producers in food and they know -- they work through all the best talent. They have a fine team online that they build up.

And so in each of these areas, we have a real expert team working with great producers, many of those producers only work with us because our production in each of these areas are so strong. So I think it’s a wide open field for us. And ultimately, we should be able to build significant businesses around all of them.

I think the biggest one being Natural History and Factual as a global initiative that has really driven by family values. And then whether it’s the games, or opera, or food, or home, or crime, I think we have a real, real opportunity.

And it’s exciting, because everybody is chasing that same ball and we like the best of the field and we’re seeing it with Golf and cycling already that it’s meaningful..

Thank you. Our next question or comment comes from the line of Jessica Reif Ehrlich from Bank of America Merrill Lynch. Your line is open..

I have a couple. I’ve lost count of how many direct-to-consumer services you’re launching over the next two to three years. But interested in how you're approaching the revenue model. Can you just talk about how you -- subscription versus advertising in both U.S. and non-U.S. markets. Next or second question is on advertising.

You guys have done some of your upfront presentations. How different do you think the selling approach of process will be this year, and can you talk about expectations for the market? And then finally -- sorry for all the questions but finally, you're in a unique position as you mentioned earlier.

You're on every virtual MVPD and of course on every distributor, traditional distributor given the loss of subs in the traditional universe.

What are you seeing on the other side? Just overall what do you see the market going for Pay TV subs in the bundle?.

One, I’ll just start up with the bundle point. I mean the smaller bundles I’ve been saying this for a while. We’ve seen it outside the U.S. where if we can get -- if we’re 8 or 40, we tend to do much better on the advertising side. Our brands get stronger. Our content is more aggressively viewed.

And if we can capture 85% of our revenue to 90% or between 80% and 90%, we end up with a net positive and in some markets very positive. So it’s very hard for us to project where things are going. But we are on older bundles now and we’re moving for all of them.

And the skinnier bundles in many cases maybe much better for us, because people will spend more time with our channels and it's a younger audience, and we'll be able to monetize them with better CPMs.

And so the good news about us right now is whatever happens, Malone said to me four years ago, the key to long term sustainable growth in a business that has challenge is beyond every platform. If you’re on every platform, you’ve a real game.

And if you can be on every platform and have top services on those platforms then you could find significant growth even in the business that’s in long term secular decline. And so that’s the position we’re in. We’ve worked hard to get there. And on those new platforms, we also get a lot more data and analytics that give us the superior CPM.

So it’s really additive in that regard. On the pay and free, we’re already in the market with MotorTrend, and it’s doing very nicely for us. We have the Eurosport Player, which we’ve been at for 4.5 years. We’ve learned a ton.

And it’s what led us to Golf and cycling as individual sports and not just being sport but being transactional and providing a full social ecosystem, as well as information everyday that people can get up and read like you read a daily magazine, we've talked about Natural History. But in each of these, there are really two pieces.

There’s the funnel where you can go and see stuff for free. So eventually, Golf might be -- a 100 million people are playing around the free funnel and then that -- yes, we can promote in every country everywhere in the world what we have, funnel number one, which almost nobody else has in every language.

Funnel number two, is the free funnel where you don’t have to give us your credit card and you can just hang around and see some tiger, or see some of the golf, or play around with the cycling. And here people talk about what else is going on behind the pay wall. And we can monetize that from an advertising perspective, which we are.

And then that leads into the pay and so each one will be the triple funnel. And I think one of the reasons why we got the PGA and one of the reasons why we’re so confident about our ability to aggregate and scale in this business is we have these affinity groups globally in every language spending time with us. And we did this with Eurosport.

We built the Eurosport Player for free I mean the Eurosport.com and 30 million to 40 million people across Europe come to us with a number one place people come for free. And then we get to say to those people. Well, here’s what we have behind the wall.

And so there is no other company that can do -- look affinity groups in every country [Technical Difficulty] and then you get the credit card. And so we're at the very beginning of this. But we think this could be quite compelling. And then we’ll deploy our capital as we see it.

If Golf looks like it’s accelerating in a meaningful way, we’ll accelerate in a lot of harder. Cycling is a very big global business and opportunity for us, and spend more money there.

On Natural History, we’re ready to spend the significant amount of money, because we think that everyone that has Netflix or has Disney’s product or HBO, what family shouldn’t also have this companion product. And their kids can see the greatest science and the greatest Natural History and learn all about space.

And so that’s the funnel environment that we have.

Gunnar?.

I agree with all of that. And then, Jessica, I think one additional point is what you may see is that this evolves overtime. And we have that very unique position of having that global footprint in place with linear networks across the world.

So for some of the deals that may be sublicensing elements in individual territory that’s the benefit that we have combining the total rights that we’re buying of our long deal terms, and owning our content and having their international complete global footprint in place.

So from the perspective of our ability to exploit this content and contain the risks with some of the investments, I think it's the best position we could be in..

And advertising?.

Jessica, so you've got all the questions. You’re covering the gamut. The upfront looks -- we finished our five city tour. We hit the upfront as strong, or stronger than we’ve ever been.

We have top, the top four channels for women, we were the number two TV company in America in terms of reach, now we’re number three but only by a smidgen with Disney pulling in Fox, they were a little bit bigger than us. But we are one of the three big scale players in the marketplace.

And so the upfront feels pretty good, scatter is strong that’s accelerated. We feel stronger probably in all ways that it has. We don’t know how long it’s going to last. But the last few weeks have been very, very good, some of it maybe that there is a lot of underperformance at the broadcast and some other and some other places in the cable industry.

And so there is not a lot of inventory out there, a lot of people have a lot of make goods. So I don’t know whether we’ve been getting a unique advantage or whether that’s the current situation.

But we also have, as we go into the upfront, we think we have a unique advantage, which is if not a good it’s a baddy for us, but it’s a goody if we can turn it. And that’s that you look at two guys in front of us their prime CPM is $55 plus. CBS's prime CPM is $55 plus, and so is Fox. So we got the four players around us in price at $55 plus.

We’re aggregating audience in prime across our networks. That’s bigger than all of them and we’re at a fraction of that. And so that’s always been the case with cable.

But now I went myself and that with every major agency and I’ve been meeting with clients, saying, broadcast is terrific and you can do the $55 and the $55 plus, whatever the increase is and the upfront whether it’s seven, eight, nine, 10. But you could also move some money that where you’re paying $56, $58.

And we can give you a spot where you reach everybody at once across all of our -- across our top six networks. And we can deliver 20% of women in America. We can deliver 20% of prices. And we could do unique things with our advertising. And so how quickly that will happen remains to be seen. I’ve been all over it. I’ve been all over the city.

We’re starting to get some traction. And the final thing is that the broadcast inventory, in general, as you go between the rating decline that they're on together with the fact that there’s more sports and broadcast. Broadcast prime is shrinking. So that’s a real goodie for us.

And then we have DGO, which our authenticated apps where we’re doing better than anyone else, because we have passionate affinity groups that have downloaded those apps and are spending -- a young generation spending a lot of time. So I think we’re probably as well positioned as anybody right now, and we’ll just have to see how the market plays out..

Thank you. Our next question or comment comes from the line of Drew Borst from Goldman Sachs. Your line is open..

I just want to go back to the U.S. affiliate guidance, the mid single-digit you guys have. And I was wondering if you could comment on what assumption is baked into that number with respect to subscribers. And you probably should pull out the virtuals right, because you guys have picked up a whole bunch of incremental carriers.

But I'm just trying to understand how you guys are thinking about the traditional facility based sub counts for the balance of the year?.

So again as I said earlier in the call, we’re very confident in our mid single-digit guidance. In terms of assumptions, this guidance is always a probabilized estimate of all the various individual drivers that we’re seeing. Clearly, YouTube is helpful, you’ve pointed out, for MVPDs, in general. That’s clearly a helper, a helper this year.

You’ve also seen -- and mentioned the traditional subscriber numbers that come out in the first quarter and that’s certainly working against the trend to some extent. But again, we have a lot of confidence. Our core networks in the first quarter have been down one. Obviously, continue to see larger numbers for the digital smaller networks.

You can expect a little more support starting from the second quarter with YouTube rolling in, and that’s -- and we’ll take it from there..

And then another question on free cash flow. You guys mentioned that when you look at the trailing 12 months, you’ve done $3.1 billion excluding restructuring charges to a reported really impressive number. The street is sitting at -- for this year, sitting at about $2.8 billion, $2.9 billion of free cash.

Can you help bridge that? I know the quarter was quite strong. But can you help bridge that. The street is basically not forecasting much growth.

Are we being too conservative on the outlook for free cash flow in ’19?.

Drew, two months ago when we reported fourth quarter earnings, I said that we feel very strong about our ability to generate cash flow. I'm very happy with the first quarter numbers.

A couple of points as to remember that I pointed out when we reported 2018; we are going to see some more CapEx; and we are going to make those additional incremental investments in digital; and for what it's worth, we haven’t -- the incremental investment hasn’t been huge in the first quarter and there’s a lot coming through towards the second half of the year.

I continue to see a total absolute dollar amount of $300 million to $400 million of negative impact on our P&L when we ramp up all the initiatives that we’re working on. But that being said, I also see a lot of opportunity. The restructuring expenses, as you know, are going to come down very significantly. So I feel very good about it.

But as I said, when we have spoke last time, we want to maintain the flexibility, because some of those investments are going to be on different timing and there is some variability. So I don’t want to put out any specific guidance at this point. But I’m very, very confident..

Thank you. Our next question or comment comes from the line of Doug Mitchelson from Credit Suisse. Your line is open..

David, on the Natural History and factual OTT service, which hopefully you'll give a name to relatively soon, so we know what to call it.

But any thoughts on -- at what point is there a trade-off between building these OTT services and your affiliate negotiations with Pay TV providers, even its for the digital channels that are already have bigger declines.

And Gunnar, as these services get launched, is there any rule of thumb that we can use in terms of how many subs were breakeven? David talked about the TAM being fairly large for the Natural History and factual OTT services.

Is there any target that we all should keep in mind as we think about the growth prospects for those businesses?.

Well, first, Discovery is a primarily series-driven product. It tends to be the number one channel for men around the world. And as you look at our audience, the majority of our audience right now is coming from series.

We’re going to put in some -- we think we can get some meaningful upside on Discovery around the world and really super-nourish the brand by bringing in some more meaningful blue-chip content with this BBC relationship, as well as some other blue-chip that we’ve had in the work. And so we’ll put that on Discovery.

And whether that blend is 90-10 or 80-20, it's mostly series with big tentpole content. The Natural History and Factual product is a little bit different, or a lot different. We have the entire BBC library. We have all of their titles. We have our blue-chip library. We have all of our space content, all of our stem content.

We have the best largest science library in the world. And you have 5G coming into the home and the ability to see we did a series, When We Left Earth, which is an eight part series where we took all of NASA family library converted into HD, put together a comprehensive great documentary.

If you like that you're then going to get recommended into another 150 different things series that you can learn more about space or podcasts. And so we see this as both entertainment and life learning.

And it’s going to be really driven by -- and there is a whole piece of this, there is a generation that has reached out to us about helping with this idea of understanding what’s going on around the planet. And this stuff, if you look at Blue Planet 2 in the UK, it was the number one series, number one series for the entire year in the UK.

And this content we think is very different, because it’s -- people aren’t going to be watching it and as a streaming product like they’re watching Gold Rush, and Deadliest Catch and Naked and Afraid -- Myth Busters. We have great, great content on Discovery and we think we can grow it.

But we think this is a different an ecosystem, which will be nourished by families that want to see some of the greatest IP out there in terms of blue-chip, but then really do a real deep dig down on history and science and space, and create a place that people can hang out like you would with Netflix, very different than Discovery, or Animal Planet, or Science.

But we will promote. We have those affinity groups that are spending time with us. And we’ll be pushing back and forth. But one is not a replacement for the other..

And Doug, on your breakeven question, I totally understand the desire to get some support and modeling that’s out. Obviously, we have our business cases. We have discussion scenarios. We’re looking at all those questions from a management perspective. But we’re also realistic enough to know that we don’t have all the answers yet.

And some of those assumptions are going to change as we go through the roll out, either because we’re learning or because we're actively making different decisions. If we find something is really starting to work really well, we might want to get behind it with additional content investments, additional platform, whatever.

So I don’t want to have any expectation out there. So this is the number of sums we need to get to. That’s why we’re absolutely not at the point to communicate anything there yet. Operationally, that’s the second point.

With Peter Faricy’s arrival, I mean he and the team are very focused on operating metrics on the consumer experience on engagement et cetera, much more at this point than financial metrics and taking about revenue growth and breakeven.

We are seeing some first growth contributions, but that’s absolutely not a priority right now, and from a purely financial perspective that is perfectly fine for me. The way I look at this is we have a portfolio of very, very attractive initiatives.

I think we have all the ingredients in terms of the content, the global footprint and most importantly, a very, very incredible team for these offerings. And I look at the overall financial envelop. I’ve given you guidance on how much of P&L loss we’re absorbing in 2019.

And I look at this and I see that the number is small enough to be absolutely acceptable from a risk perspective and large enough to allow some of those initiatives to really start having a positive impact a year, two years, three years from now..

The key is, before we were looking to drive scale. So big mistake. First, create a great product that people love. Create a Golf product that people say. And if you love Golf you don’t have this you crazy, this is the greatest thing. And that’s what we’re finding now with cycling.

We have an ecosystem where people are telling each other, you’re not on this. This has everything you want around cycling. Then we can apply an aggressive subscriber acquisition program.

But JB has been is on the ground around the world looking at the interest in Golf and balancing that with Peter on, as well as cycling and now the BBCPs, which JB was a driver on with me, because we both think it could be quite big..

The exciting thing we see from global opportunity is that these opportunities right now are still very early and very and we’re at the beginning. But it’s a playbook than we know extremely well. And if you think the Discovery playbook of taking products out of the U.S. and taking around the world, which has been our marquee for 30 plus years.

The GC and cycling example, we have an English language product today that is working incredibly well where we are then doing exactly the same playbook we had where we’re launching in German, in Spanish, in Japanese and taking that same product around the world, utilization the discovery infrastructure to help localize it.

And so I think the growth opportunity when you do that across the different opportunities, we’re just beginning to tap into what we think is going to be a very clean and robust global scaling of those products as we take them around the world..

Thank you. Our next question or comment comes from the line of Rich Greenfield from BTIG. Your line is open..

David, you called out digital as a tailwind to ad spend. I think you mentioned some of the watch stuff earlier on in the conversation. But just -- and I look at the billion dollars of advertising that you’re now reporting on a quarterly basis.

How big is digital? Can you give us some sense of like how significant it now is that it’s actually providing a tailwind to the whole number? And what are the key pieces within the digital that are really driving growth? And then just a quick follow up for Gunnar. When you look at the Q4 results, you talked about your core networks were flat.

This quarter, you said they were down 1%, which surprised me just because you brought on Hulu late in the quarter, and you had Sling. Is that just a fall out being the traditional players, or is that actually some of the MVPDs losing subs as they raise pricing in Q1. I’m just trying to square the sequential deceleration that you saw there. Thanks..

Rich, I think, number one, you’ve seen the numbers that have come out on the traditional side. One technical point is when we talk about sub losses on a quarter-by-quarter basis we’re looking at the end of the quarter numbers. So you’ve essentially had Sling and Hulu in the number for the fourth quarter.

So you wouldn’t expect any incrementals outside of the growth of those platforms. And then clearly, YouTube has not come on yet, I think that’s the explanation for that discrepancy that you’re seeing there.

And then regarding the size of the digital businesses, again, we don’t carve that out, it’s part of our reporting segments and its, I should say, that it's still very small in terms of absolute numbers.

But given the contributions to growth and probably the most important point here is TV everywhere, our Discovery Golf platform, which we’re selling on an integrated basis with the linear traditional advertising. That’s been contributing to our growth quite nicely for now a year and a half, almost two year now.

So, on a relative basis meaningful, I mean, JB, I think you also saw some very nice contributions in the Nordic from that….

Rich, you've heard us. We’ve talked for a while about some of the challenges we face in the Nordics and Northern Europe, which have been some of the markets that have been most aggressively globally hit by sub level declines over the last several years.

And we’ve been obviously finding that hard with pricing growth on ad sales and trying to get our digital products in better shape.

And exciting thing for us in that market is we’ve finally seen over the last few months a return to growth, largely driven by digital, both ad and the fact that through Peter's work and his team's work, we’ve gotten our product in much better shape from two star rating to a four plus.

And we’re starting to seeing subscriber growth really turnaround and turn that region back into a growth story, which has been -- and that’s the case for the last couple of years..

So two points there, JB just said it, but we’re bringing in Peter. And he brings in a team, including one of the top technology people from Amazon. And they created an attack team of -- look we got to make the products we have better.

And so we de-play have a lot of great content, because we’re the major scale player in Northern Europe with free-to-air and cable. Improve the products from a two star product to better than a four star product.

And we started to see acceleration with time people spend on it and with the number of people -- and the number of people that are recommending it. So I think our products are getting better, it’s a process. The other piece on digital is its just encouraging from a consumption standpoint. As I talk to my peers, they don’t have Discovery.

They don’t have these DGO products. You can’t have DGO for general entertainment service.

You have DGO, because people love food and they will authenticate and take a few minutes as cumbersome to get it on their device so they can watch all their favorite food shows, or all their favorite Discovery shows, their favorite home shows and it’s scaling in a meaningful way. We get a lot of data. They're spending more time on it.

And the most important thing is that the average age is in the 20s. So what it says about us is yes the people that are watching HG, and food, and some of those channels are older.

But by putting ourselves -- by having this authenticated platform, we’re seeing that a lot of young people really, really like our content and the advertisers are seeing it. So it’s a real plus for us..

Thank you. We have time for one more question. Our final question for the Q&A session comes from the line of Ben Swinburne from Morgan Stanley. Your line is open..

Two questions, David. One, you talked earlier about productivity headroom and ad sales. I think you mentioned in U.S. and that is your largest revenue stream. I wonder if you could talk about what you guys are doing there. You mentioned some initiatives to try to drive that even higher in any timeline we should be expecting.

And secondly, you mentioned that now that you've de-levered, you’ve got a lot of flexibility to look at strategic assets to help sustain growth. And I know you don’t want to be specific nor should you be. But when you think about Discovery, historically, international was the driver of growth pre-Scripps and Scripps has made you a much more U.S.

based business from an EBITDA perspective. I'm just wondering if adding international depth and breadth is something that you think would be interesting for the company longer-term..

We look at everything, but we really like the company we have right now. There’s nobody -- the only thing in our way is ourselves and satisfying the consumer with something they love. And if we do that this global IP company is going to take off, because we now have a traditional business. You look at this quarter coming, we were mid single.

When you look at our affiliate domestic and international and our ad domestic and international, four major metrics, four are up mid and one is up low. We got a growth business. And on top of that, we got a lot of great content. And so we feel good about that.

The piece about advertising, we’re just way under -- we’re just punching the way under our way here. We're the third biggest TV company in America. And unlike tuning in for a series, people are watching HG and food like they watch Fox News or more, the length of view is higher.

The largest length of view in America and the number one channel for women is ID we have. And with networks like Food and MotorTrend and HGTV, their advertisers that absolutely need to be on. So we are outperforming the marketplace with a great, great sales team.

And so on traditional metrics, I believe we will continue to outperform significantly in a meaningful way, because we got a great team. We also have -- the second piece that we have is I think we got a great trend. Broadcast is going to decline much faster than one us.

I think the board interest cable channels are going to decline faster, and people still loving spending time with us. But even though we have a great team and we’re outperforming the market, I look at it and say, we have real meaningful opportunity. The average CPM for broadcast is 55% and for us it’s $20, or less.

And we can provide you -- so you can go to a broadcast and buy a 0.8 for $55 or $58 and you come to us and buy a four for 40% of that. So how do we capture that? We put together a program that I’m going hand-to-hand with Steinlauf and fighting for, to say, hey, I don’t do this as the favor to us, this is great for your clients.

And here is the program that we can provide for you. And we’re messaging that. We’ve already gotten some money at much higher rates, but we wanted to be more scale. In addition, we’re not sold out anywhere close on all of our digital products.

And we have a team that's great at selling linear and we’ve been doing -- we’re in on weekend working on this DGO product, its hell of a product. And we’re not sold out enough on it. It's great and people that are on it, they’re doing very well. So how do we drive sell out on digital.

And then how we do -- we have to use the fact that we have these incredible audiences and the ability to put a spot across five or six of our networks and get a four, five or six. And so, I expect we will outperform the market in the traditional sense.

Then we’re going to get better at doing our digital products and selling them out, which will give us some incremental growth. We have DGO, which nobody else has, which is accelerating.

And then we have this value proposition of, hey, if 8% or 9% more on $55 for a 0.8 on a broadcast network, if that’s making you crazy, we got a great home for you here. And we got a great deal and we think we could deliver for you.

So I think you're going to -- we see that acceleration already, but we’re going to the upfront really in a collaborative way this time. We’re already in deep conversation with a lot of people about these initiatives. And they’re listening, because the decline of broadcast is a big concern and we could be the answer to that, which could be a win-win..

Ben, can I add one point to the question about the locale of our investments. Given that a lot of the stuff that we’re working on into direct-to-consumer space, what’s driving those $300 million, $400 million investment today as discussed, all of those are global in nature.

So by that very nature, those are going to be internationally focused, because the U.S. is one market in 220 territories. So you should assume that a lot of that is going to hit the D&I P&L, both regarding initial start-up losses but also in the case of success obviously regarding growth rates.

And then I also just want to be clear that when we talk about those investments, we feel very strong about what we have. There is no need for making any further investments. There is nothing coming through the pipeline that’s visible right now. So just want to clarify that as well..

Thank you, ladies and gentlemen. This concludes our Q&A portion and also the call. Thank you for participating in today’s conference. You may now disconnect. Everyone, have a wonderful day..