Warner Bros. Discovery - Earnings Call - Q1 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Inc. First Quarter twenty twenty Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Andrew Slavin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Speaker 1

Good morning, everyone, and thank you for joining us for Discovery's first quarter twenty twenty earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer and Gunnar Diedenzels, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website. On today's call, we will begin with some opening comments from David and Gunnar, and then we will open the call for questions. Before I 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 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 Form 10 ks for the year ended December 3139, our subsequent filings made with the U. S. Securities and Exchange Commission.

And with that, I'd like to turn the call over to David.

Speaker 2

Good morning, and welcome, everyone, to our Q1 earnings conference call. These are clearly unprecedented times as we confront the challenge unlike anything in recent history. I want to start by thanking frontline heroes everywhere for the lifesaving work, especially here in New York, which has had a big battle on its hands, the doctors, nurses, EMTs, and all of the first responders. And on behalf of all of us at Discovery, we thank you. I am enormously proud of how our leadership team and employees have stepped up and pulled together during this time.

They have done so with resilience, heart, and creativity. Their health and safety is everything to us at Discovery and to me. With meaningful populations across Asia, Latin America, and Europe, we have been at this for about three months, starting with office closures across Asia in January. I'm proud to say that our business has not missed a beat. Our early and continued investment in technology and automation and moving our broadcast and global infrastructure into the cloud is serving us very well at this time.

We are extremely pleased with the level of productivity, the morale of our employee base and how well we are able to serve viewers, advertisers and our key partners, even as we work remotely. We continue to have great command and control across our businesses everywhere in the world. With so much macro uncertainty, there are obviously a lot of questions at this time about impacts on our business, the direction of the economy and markets, and the broader video ecosystem. All well founded, and we are left with a number of unknowns ourselves. Yet these uncertain times highlight the distinct characteristics of Discovery's business and the strategic advantages that set us apart.

We have content leadership in core genres that are durable, popular, and differentiated. We have an efficient low cost content production model with global appeal that offers viewers and partners safe and positive brand environments. We have short production cycles that provide us with the ability to refresh our deep library quickly and efficiently. And we have demonstrated this with more than 50 self shot shows turned around in weeks, sometimes days, including the extension of our TLC juggernaut, 90 Self Quarantined. We have a deep and broad library that we can reach into to nourish and entertain a wide range of consumers globally.

And we have revenues that are 40% long cycle, their contracted affiliate fees, and an asset mix largely insulated from some of the most near term challenge segments, namely theme parks, cruise ships, scripted production, film studios, among others. Our core programming genres, trusted brands, and authentic real life talent offer comfort, familiarity, and consistency to families and viewers around the world, something that is very relevant during this cultural moment. Our talent is enthusiastically creating new content at a time when most others can't. They are proudly taking us into their homes, their kitchens, garages, gardens, or basement science labs. And this is truly what we and what our personalities are all about.

We're about authentic, real life storytellers. As I've always said, we are strongest when we are closest to real and in the moment with our viewers. We've never been so much so as we are right now. As an example, look at Reid Drummington, a pioneer woman from Food Network. Along with her band of kids that are filming her in her home, she is producing fresh episodes that audiences love.

And she is having fun and relaxed around her family and her home. And it shows and resonates. She is nourishing viewers in a truly authentic way. A few weeks ago, Joanna Gaines took viewers into their home kitchen with a special In the Kitchen quarantine episode on Food Network, which was mostly filmed by the Gaines kids. Close to 3,000,000 viewers tuned in, the network's highest rated in the kitchen ever.

And a little over a week ago, we leveraged DIY's newly expanded reach for a four hour block to preview Magnolia Presents, a look back and look ahead. The special drew over 2,500,000 viewers, DIY's highest ever. But more tellingly, the seven p. M. Episode on DIY with Chip and Joanna was second only to CBS's sixty Minutes in the time slot.

It also helped to drive a meaningful uptick on Go for DIY. We believe there is a huge and special appetite for Chip and Joe, two strong and authentic voices, and they are curators across television and streaming, supported by their combined almost 20,000,000 followers on Instagram alone. Their inspiring focus on home, family, food, faith, and community has never been more resonant than now. We're seeing that with everything they come in contact with, including Joe's cookbooks, which were number one and two on the New York bestseller list last week. The audience reaction, and viewership we have already seen for Chip and Joe as well as their programming gives us a real sense of confidence that we will be able to successfully launch Magnolia Network to a very large audience, both on cable and online.

Viewers in general, who are home around the world, are indeed finding us. In April, our portfolio continued to outperform the marketplace with significant ratings growth, led in prime time in The US by TLC, the number one cable network among women. And the function and utility of networks like the Food Network, HGTV, DIY and the Cooking Channel has driven meaningful viewership gains. And we are proud to have supported the many global distribution partners that have asked to include a number of our channels in their free previews for broader availability to their viewers around the world during this time. While this incremental distribution will mostly be temporary, Viewership across networks like DIY are up over 100%, and many of our networks are reaching all time highs.

We believe that some of these viewers who have reengaged or discovered our networks for the first time will continue to make us a part of their everyday viewing even after this moment passes. Internationally, our portfolio has enjoyed a strong uptick, both in linear and in our DTC next gen initiatives. In Q1, we delivered the highest ever average audience for our total international portfolio, which was up 4% in overall share. Additionally, we saw best ever viewership for a number of key brands in the quarter, including TLC, D MAX, HGTV and Food Network, the latter driven by impressive growth in Italy and new network launches in Colombia, Peru and Ireland. In terms of our streaming portfolio, Dplay, Motor Trend, TDN's Player, GO and Food Network Kitchen are all seeing strong upticks.

And Food Network Kitchen also took a meaningful step forward last week with a strong and expanded Amazon partnership, which is offering this first of its kind food and cooking product to tens of millions of their Fire TV users, free for a year, courtesy of Amazon, along with marketing by Amazon on Fire TV. And it's off to a great start. Gruner will take you through the quarter and provide some color on the current state of play, though I'd like to offer some high level thoughts on the industry and our place within it. Clearly, these are challenging times. And while there is significant uncertainty from a cyclical perspective, I don't subscribe to the view that consumption and behavioral patterns being shaped by the coronavirus will be permanently disrupted.

The nearer term question is, of course, what is the magnitude and duration of this quarantine moment? And what will an eventual recovery look like? In many countries, operating trends may worsen before they get better. But given our unique reach and coveted demos, we like our portfolio and we really like our hand. Anchored by strong verticals and endemic advertisers, we have a differentiated offering when the marketplace resumes to more normalized operating conditions.

And the idea that we will emerge with significantly more share and having had for weeks or months people spending a lot more time with our channels, our characters, and our brands, we think will provide nothing but value. As for distribution, we naturally won't be immune from subscriber churn from pay TV, particularly in cases where it is driven by economic pressures. Though we are as well represented as anyone across the OTT and skinny bundle landscape in The U. S. And around the world.

And we continue to enhance our portfolio of global AVOD and SVOD content and lifestyle platforms. We've recently completed distribution renewals with some key partners in The U. S. For carriage of all of our channels. There was a time when many questioned whether in our renewals we would be able to include all of our channels.

We have, which underscores the value of our characters, our programming and most importantly, our brands. We remain confident in both our financial and operational model, which is one of the most efficient in the industry. We drive an unparalleled conversion of OIBDA to free cash flow. And though there remain a number of moving pieces, we would expect this to continue. Gunnar and his team have been opportunistic and have done a great job managing our leverage portfolio and maturities, which he will touch on shortly.

Lastly, we've adopted and evolved as a leadership team. And I am proud of our performance, and I'm confident that we will emerge a stronger and more focused company when we resume business as usual. Before I turn the call over to Gunnar, I'd like to once again thank our hardworking employees for their dedication and resiliency in this most uncertain time to deliver an outstanding product on a global scale. And now I'd like to turn the call over to Gunnar.

Speaker 3

Good morning. Thank you again for joining us this morning. I'd like to echo what David said and thank all of the frontline workers who have tirelessly provided critical services. And a big thank you to Discovery's dedicated employees working from home to ensure that our business remains on track. Turning to our Q1 results.

We had a solid January and February before we began to feel the impact from the COVID-nineteen pandemic. We did note a very modest impact to advertising, specifically in Asia, when we spoke with you last on February 27. This naturally evolved throughout the region and then into Europe beginning in early March, with closures in many of our key markets such Italy and Poland, among others, followed by closures here in The U. S. For a good portion of March.

Though even with that, total revenues in Q1 were largely flat on a constant currency basis, while OIBDA declined 3% year over year ex FX, as we've continued with plans to invest and support our next generation initiatives. As a reminder, in late March, in conjunction with the move of the Olympic Games from this summer to next, we recalled our forward looking financial projections and outlook for both Q1 and the year. Let me review our key revenue drivers, beginning with U. S. Advertising, which was flat versus the prior year.

As noted, we did see some impact from the lockdowns in March with an uptick in cancellations and deferrals. To some extent, the rise in cancellations in March was offset by higher audience deliveries. With people isolating at home, delivering the People 25 to 54 demo across our portfolio of networks increased by over 10% in total day versus the pre stay at home period. Audience growth has been particularly strong for our food and home networks, which provide useful ideas, comfort and inspiration for families who are hunkered down and more engaged with cooking and home projects. A number of Discovery's largest advertising categories are holding up nicely, such as certain CPG verticals like food and cleaning products, pharmaceuticals, insurance, financials and e commerce companies, while travel, movie studios and some autos and retailers understandably cut back significantly.

We have predictably seen higher cancellations and deferrals in Q2. And based on preliminary results, April is down around 20% year over year. And based on business booked for the remainder of the quarter, both May and June are looking slightly better than April, though we remind you that this is a very fluid marketplace at the moment with a lot of cancellations rolling month to month. And where appropriate, we're accommodative as best as we can to our partners' needs. US distribution in Q1 was up 2% year over year as rate increases were partially offset by linear subscriber declines.

We recently completed affiliate deals with some of our key distribution partners, which we believe helps underscore the value of our content as well as provides visibility on rate increases. Subscribers to our fully distributed networks, which account for around 80% of total U. S. Distribution revenues, were down 4% year over year at the March, while total portfolio subscribers were down 6%, in line with our prior commentary of reverting back in line with the broader industry trends. As a reminder, this is the first full quarter having fully lapped Hulu and Sling.

We haven't seen any distinguishable COVID related impact on subscriber trends, though we don't necessarily have real time color as we receive ringlets one to two months in arrears. And we obviously aren't immune from overall trends, which are naturally dependent on the magnitude and duration of this current moment across the country and potential long term macroeconomic implications. Turning to international. Advertising in Q1 was flat year over year ex FX. For the first two months of the year, international advertising was pacing up 5%, which include the previously noted deferrals in APAC.

As many of our key advertising markets in Europe began to shut down, we saw a more pronounced impact with March down nearly 10% year over year. Unlike The U. S, which enjoys the benefit of a structured upfront marketplace, many international markets are more flexible with advertising volume, reacting more immediately to changes in economics or viewing shares, both down as well as up. Based on preliminary results, April is down about 40% in aggregate across all international regions. Depending on the market, the range is anywhere from down 30% to down 50%.

And though early, and only one data point, we are starting to see some signs of stabilization in markets like China, Taiwan and Korea, though this is a relatively small portion of our mix. International distribution was up 1% year over year ex FX in Q1. As we've mentioned before, we are accelerating the rollout of our services like dplay, in some cases coming at the expense of our linear business, which is a response to market behaviors in countries like Denmark. Consolidation among distributors means that we have to push harder to get full value for our content portfolio. As such, we have continued to play more offense, which infers that we may and are facing incremental top line headwinds.

This is even more pronounced at a time when there are no sports, as our value proposition in key markets in Europe is predicated on local sports, for example, in Denmark and Sweden, where dplay has near exclusivity on certain football rights. Naturally, with no sports being played anywhere in the world, both Eurosport Player and GolfTV, and even certain premium tiers of dplay have seen a pullback in activity, which has weighed on segment performance, though we expect momentum to continue whenever play resumes. Though even without sports at the moment, we are seeing nice momentum in Dplay subscriber growth, driven by our compelling entertainment offering. Similar to The U. S, we have not seen any material change in net subscriber trends.

Though where appropriate, we may work with distributors in an effort to be good partners and helpful as they seek to absorb near term churn. Even amidst the uncertainty surrounding our revenue, we feel very confident in our ability to flex our cost structure to mitigate as much of the top line shortfalls as we can. As you know, following the Scripps acquisition, we've been disciplined about the management and transformation of our cost base and rightsizing our operations to reflect the state of the industry. While the merger provided a great opportunity to open up and examine many of our practices and procedures, so too, we believe, will this moment. And you should expect us to be appropriately focused here as well.

We are learning valuable lessons during this lockdown period. Case in point, as David mentioned earlier, content produced by our talent at home has proven to be some of our most successful programming, and we're not making just an hour here or there. So far during the lockdown period, we've been able to create nearly three fifty hours of new Premiere content. Furthermore, with traditional content production largely shut down or paused, we expect to see content amortization savings versus our 2020 plan as less originals premiere even as we continue to make certain content investments in our next generation initiatives. With sports currently sidelined, we're not expensing the rights cost, though these costs are only being deferred until later in the year if and when sports return.

We are also refining all marketing and personnel related expenses as we've implemented a hiring freeze and, as you could imagine, T and E spend is minimal currently. At this point, we currently expect total operating expenses to be around flat with last year on a constant currency basis as we continue to reallocate investment to our next generation portfolio. Accordingly, we expect expenses related to the core traditional business to decline in the mid- to high single digit range. To the extent that there is either a faster than expected return to normalcy or a far more protracted one beyond the end of the year, we would expect total expenses to fluctuate a few percentage points above or below our current flat outlook based on how quickly we can begin to ramp up production and see a recovery in advertising sales. Turning to free cash flow, which was down year over year in Q1.

Some of this was timing related, like our cash tax payment, while the rest was related to the increased level of planned investments prior to the pandemic. While we don't anticipate sustaining the same level of free cash flow generated last year, we still expect to achieve an industry leading AOIBDA to free cash flow conversion rate, though there are a number of moving pieces on the working capital front that could influence free cash flow in either direction, based upon when we begin to ramp production as well as how the cash cycle in the advertising ecosystem evolves. We remain comfortable with our balance sheet and our current leverage ratio at 3.2x on an LTM basis. I am confident in our liquidity position, having finished the quarter with roughly $1,500,000,000 of cash and another $2,000,000,000 of availability under our fully committed revolver. We have $600,000,000 of debt coming due in June and no additional maturities until June when $640,000,000 of notes mature.

The rating agencies have remained supportive of our business plan and capital structure, an important signal during this moment. We remain committed to our investment grade credit ratings, as recently affirmed by the rating agencies, and to our longer term net leverage target of three to 3.5 times. We filed a separate eight ks this morning outlining an amendment we signed with our bank group. You can refer to the eight ks for additional details. This amendment reflects the gross leverage covenant in our revolver to 5.5x beginning in Q3, returning to its original 4.5x threshold by 2021.

While we do not expect to approach this level, we requested this change out of an abundance of caution in order to preserve full access to our revolving credit facility throughout this period of uncertainty. Any increase in leverage, should it occur, should be viewed as temporary and related only to impacts of COVID-nineteen rather than a change in financial policy. And with respect to this additional cushion, when reflecting on the point that David made, I believe it's worth reemphasizing that given our asset mix and what I would consider to be very flexible and adaptive methods of production, should our traditional production chain be impaired for an overly long period of time, we would fare relatively well from a cash efficiency profile. That is to say, we would be able to produce impactful and relevant content on very attractive unit cost per hour for as long as needed. Turning to capital allocation.

In Q1, we repurchased $523,000,000 worth of shares, reducing our share count by over 19,000,000 shares. We have largely been out of market since we reported our 2019 results with the exception of a short period in late February, early March, in which we purchased around $200,000,000 of our equity. We have $1,800,000,000 net on our authorization. And finally, FX was approximately a $30,000,000 drag to revenues and a $10,000,000 drag to AOIBDA in Q1. For the year, based on current rates, we expect FX to have a negative 130,000,000 to $140,000,000 impact on revenues and a negative $30,000,000 impact on AOVDM.

With that, I'd like to turn the call back to the operator to take your questions.

Speaker 0

Thank And our first question comes from Jessica Reif Ehrlich from Bank of America Securities. Your line is open.

Speaker 4

Oh, thanks. I just have a couple of questions. First on sports, Gunnar, it wasn't clear I I wasn't clear on and you're not recognizing sports costs, but on a cash basis, are you paying right now? And if you are, what flexibility will you get kind of in the back end? And are you changing your approach to the Olympics now that they moved?

Is there anything different? Will the loss be the same a year from now? That's the sports is one thing. Direct to consumer on Food Network Kitchen, this like, every day is like your Super Bowl, unfortunately. I mean, it's good for you, but it's can you can you give us an update on, you know, how it's doing?

I know you moved out Magnolia timing, but if you can give us an update on direct to consumer. And then finally, sorry for so much, but cancellations were due last week for a third quarter. Can you give us some color on what you're seeing? Because your advertising actually, what you're seeing so far seems actually pretty good.

Speaker 2

Sure. Why don't I get started, and then I'll pass it over to, to Gunnar. Having no sports is a challenge for all of us. But 90% of our deals have either, force majeure provisions or or provisions that specifically relate to us not paying for content that we don't get. And so I think we did a particularly good job in, in our sports deals, which we expect that they'll come back, and it'll just be a move.

But to the extent that that, they don't, we have a a real opportunity, with that. On the Olympics, we think it's gonna probably be a little bit better for us because one of the issues with the Olympics is separated by such a long period of time. In terms of building, our our digital direct to consumer platform, the fact that we'll have summer and then winter only a few months apart, the fact that, we can get advertisers in, to both of them together where where we could string it together. And we're hoping that, that that when people get to Tokyo, it's gonna be, you know, a real opportunity for people to get back together with a lot of excitement. I think when sports does come back, it's gonna come back very big.

People are really yearning for it. I'm excited in talking to Jay Monahan, who's doing a terrific job as commissioner of PGA, and we're, as you know, partners around the world. Hoping to come back, in June and has a great plan for it. And we're rooting for that. I think that, you know, we really need we need we need sports.

Having said that, you know, that what we're experiencing is different than what's here in The US. As I've said for a very long time, sports works differently outside The US. When people want sports, in most cases, it's on premium, and they're making the choice to pay for it. Here, we have an overstuffed bundle where sports has been stuffed in and leveraged in, which is one of the reasons why we see this you know, the the challenge that The US marketplace has been seeing where subs are flat or slightly growing around the world and declining here. It's because $20.30 between 20 and $30, sometimes more, of sports rights are being paid by consumers, and they're not getting.

You know? And so right now, consumers in this difficult time, you know, this it really highlights the idea that that there's a huge subsidy that's being paid for sports. And now at a time when they're paying the subsidy, you know, which creates, I think, even more of a challenge when people say, why am I paying that? And that may be one of the reasons why you're seeing some people, disconnect. Having said that, you know, I look at food and HG and cooking.

We're the new sports. Our channels are the new sports. The numbers are huge. The engagement with our characters and with our talent is enormous. We're the real time player right now on television, whether it's Mike Rowe on his couch or Guy Fieri, or Ina Garten or, you know, or or, Reed Drummond.

We're three hundred and fifty hours of live content that's really working with our characters. And so, I you know, we've we've skirted most of the sports issue, but I do think it's an overhang here in The US. And we're leaning into our our channels like we are sports. We are real time in many in many ways. And as you look at what's going on in The US, you have news networks, and then you have TLC and h g h, HGTV as the big networks.

So, with that, I'll just say that Amazon, it just started a week ago. But whether they have 30,000,000 or 40,000,000, they have tens of millions of subscribers to fire. They love Food Network Kitchen. They're they're providing the opportunity for people to get that for a year for free, which we think is fantastic. The partnership is strong, and they're marketing it.

And I agree with you that this is a moment where we can we can really shine with that. So Gunnar?

Speaker 3

Yeah. So maybe just a couple of points to add. I mean, on the cash flow question for Warts, it's going to be a mix so far. Most of the events have been postponed rather than canceled. So you should expect not only P and L but also the cash profile to be adjusting accordingly, and we will keep an eye on this as we go through the rest of the year.

Regarding the Olympics, we will have two events much closer together, which should be a positive. We also have a little more time to get to prepare and to prepare the ad market, to go to market with bundled packages. So those would be positives. But bottom line is it's a little early to sort of start about a specific guidance. But right now, I wouldn't see a material change versus what we had guided for this year.

And then regarding the cancellations, you're right. The upfront option cancellation period has started. It's way too early to have a view. And as I said a couple of minutes ago, we will make sure that we work in partnership with our clients here and work through this together.

Speaker 4

Thank you.

Speaker 0

Thank you. We'll take our next question from Ben Swinburne from Morgan Stanley. Your line is open.

Speaker 5

Good morning. David, I just want to pick up on the comments you were making before about the sort of sports subsidy in The U. S. And what's happening to the ecosystem. I think everything you're saying makes a lot of sense.

And all of these trends are probably accelerating because of this financial and health situation going on. As you pointed out, you have been talking about a U. S. OTT offering of your sort of core content now for maybe a year, maybe a little less. And I'm just wondering if what's happening in the marketplace with cable operators increasingly just passing on these sports costs to the consumer, pushing people out of the bundle is accelerating your thought process or changing how you think about it.

And your reach is falling in The U. S. Really with no fault to you guys. It's really an industry issue. And you've got obviously massive consumption through streaming, including on a lot of your products.

But you still haven't at least laid out to us or thought talked publicly more about how you plan to expand kind of the core IP. So anyway, I don't know if you're ready to talk about that in more detail, but I'd love to just get an update on that because I think it's a really interesting opportunity for you guys.

Speaker 2

Sure. Well, look, I think the the advantage to us right now is is that people are spending a lot more time with our channels. Our share is up really significantly everywhere in the world. And it's, you know, it's two months here. It's it's longer than that in a number of areas in in Europe and Asia.

And behaviorally, people are spending a lot more time with our characters and our and our channels. And we think that that's a huge benefit to us on a on this existing platform because there's a real habit here. And as and as well, we're seeing it in a meaningful way on Go. We're not able to fully monetize all this share, obviously, domestically and around the world, But it's a you know, we view this really as an important moment for us because as a company, our focus is to entertain, and when we're at our best, to inspire. And that's what, we have a great, great creative team that's doing all kinds of content from home.

We're learning a ton. And, it's resonating with distributors. They've come to us and said, could we add DIY? Many many of them to all of our subscribers. Can we add cooking to all of our subscribers?

You have a lot of other channels that are very strong, your Hispanic channels. Can we add them? This is going on in Latin America, in in in Europe, in The US, and they're getting very good feedback, and the viewership is increasing significantly. Significantly. And so I think it the viewership we're getting in the in the, average age on GO of 26, the viewership we're getting for all of these channels and all of our characters around the world reinforces how valuable what we have is.

And it it it also, as as these distributors take a look in The US, there's gonna be, I believe, more and more pressure on on them because it's just becoming abundantly clear. First of all, peep and now for two months, people have been enjoying cable for two months. So it raises two questions. What am I paying all that money for sports for? But, also, this is a great product.

I'm spending a lot more time, and I'm really, really enjoying it. So what what what we should have in The US, is what everyone else has, which is a bundle of content that doesn't have sports that would be very affordable. And we would likely see, you know, a very quick turnaround in in in this issue of of subscriber loss because we're saying take it for 80, take it for a 100, or don't take it at all. Even services like Filo are seeing, which we're an investor in, is seeing, you know, big, big uptake in this idea, and then they even have the broadcasters. And so I'm hoping that, you know, you follow the behavior, you follow the need in the marketplace, and you follow what's equitable and fair.

And, ultimately, it might, you know, might put pressure on some of these big sports players that are bundling and forcing and leveraging and jamming to say, even in this moment, alright. Enough. Go ahead and I'll give you more flexibility to give America what they want, a chance to buy a multichannel and broadcast package without stuffed sports.

Speaker 6

Right. That's helpful.

Speaker 5

I just

Speaker 2

You know, we we are we we have been building. We we we have a very strong team. We have over a 150 people and engineers working. We're slowed down a little bit because we can't hire new, but we're on we're on track with our platforms. All of the platforms we have outside The US are working exceptionally well.

They're ours. And the platform that we have that we're working on here in The US, to give us full optionality to go right to the market is, is doing very well. And so I think you'll hear more from us, but I think our IP looks stronger. And more and more, a lot of these other platforms that don't have a lot of content are are seeing how much people are spending time with us, and they're talking to us about whether, you know, whether our content would be available to them. And right now, we think our aggregate content is most valuable for us and for us to be able to continue to look at going to non cable subs ourselves.

Speaker 5

Right. That's really helpful. Just one quick follow-up on Food Network Kitchen. The Amazon announcement was quite interesting. I don't know, you probably not want to share specifics, but I'm just curious if you're getting wholesale revenue or anything you can tell us about sort of the financial impact or even the kind of marketing push that's gonna be associated with that Amazon, offer to their Fire subs Fire users.

Speaker 2

Yeah. I would just recommend that you all go to to Fire. We're on the front page. We're getting equal billing with with Hulu and some of the other big, great platforms. And, there are some days where they put us on basically take over most of the page.

And so they're a great partner. They love the product, and, we're rowing together.

Speaker 6

Thanks a lot.

Speaker 0

Thank you. Our next question comes from Michael Nathanson from MoffettNathanson. Your line is open.

Speaker 6

Great. Thanks so much. David, a couple of questions for you. On the European side, where you have your Sportsnet, are there any minimum number of hours you need to deliver to maintain any type of license fees? So that's one.

And two is given how clean your company is on cash flow and the balance sheet, can you talk about maybe leaning into M and A and how you would think about M and A given how dislocated some of valuations are on the world?

Speaker 2

Sure. On the sports side, we don't have anything in our existing deals. When you look at our aggregate package that people are paying for in Europe, what we're delivering to customers is is meaningfully higher than it was before. Ratings are down significantly on Eurosport, and, we're we'll be very excited when the sports comes back. But, no, there's nothing in those existing agreements.

But, again, the the sub fee for whatever it's worth is is relatively small. It's very different than here in The US. It's not in the dollars or almost $10 range. It's much smaller. And so distributors tend to look at our overall delivery, and they're seeing we're either the top performer or one of the top performers in every market in terms of what we're delivering on a multichannel basis.

On M and A, all I would say is that we took us a very short time to absorb Scripps. Ken Lowe built a great, great company with a great culture, and we've integrated it fully. We're really this is everything is the best of what Ken built and the best of what what what we built. We have a great leadership team that's fully integrated. We view it as as, really the best of both companies, and it's presented that way.

We we're grateful for the for the great comfort channels that we that are now part of our portfolio, here and around the world. It's been a huge help to us. We're we're so proud of those those brands and all all of that great talent that was added. And we're we that deal worked out really well. As you know, we we added over, a billion dollars in free cash flow, and we did it in eighteen months.

And we went from 4.8 times to to three times levered, to below three and a half times levered. And so I think what we show to our board and to ourselves is that, this is what we do, and we do it well. Having said that, that was a really good transaction for us, not just because of synergy, but it was we really bought IT, and we bought something that that with great characters that added to our overall bouquet. We believe that there's some good stuff out there and great companies that might not be in the same kind of free cash flow position with the same kind of balance sheet as us. So we are looking at everything.

We're gonna be but we have a great hand right now. But I do think, you know, depending on how this goes over the next several months, there will be some companies that have great IP or, you know, great assets that are that that are in that are facing some difficulty. And many of them, some of them, you know, have already come to us and said, hey. We look a lot better with you. You have all that free cash flow instead of having to cut all this and try and figure out if we could survive.

And no other company has we have 10 to 12 channels in every country in the world. We have so we have synergy in every country. We have an ability to promote those channels of promotion in every country. And so we're gonna be very careful and deliberate. We got a great board that's good at this.

You know? We we have Bob Myron and the Newhouse family that are focused on quality and spending money on content and owning content globally. And we have John Malone who's fully engaged in in in looking at our balance sheet and looking at our overall strategic assets around the world and seeing what would make us stronger. And so I think this is a really unique moment where we could lean into we got a great board with, and we have a great leadership team, and we have a great balance sheet. So we'll be patient.

And if you see us do something, it'll be because we think it's going to help us grow faster in this new and changing world.

Speaker 6

Okay. And can I ask you one last one on the upfront? Given the strength of your verticals, given that you can actually have fresh content in

Speaker 7

the fall, how are you

Speaker 2

thinking about going to market in

Speaker 6

the upfront where others maybe can't sell anything right now? So what's your strategy there?

Speaker 2

Well, there is a divide in the market, and you'd expect that. It's such an unusual disrupted moment. But there's a number of the big we're talking to all of, all of the big players, and, they're gonna ultimately make the decision for their for their advertising clients. I'd say more than 60 to 70% of them are saying or more than 50 are saying, hey. We're gonna go we're gonna do a regular upfront.

And a number of them are saying, maybe we shouldn't do a regular upfront. Maybe we should go later and see what happens and move later. We're open for business. We have fresh content when others don't. And one of the things that we're seeing is the live and engaged viewership on our channels have never been higher.

And when people when the advertisers are putting on content that's in the moment, that recognizes what's going on in the world, the viewership of those commercials are up, you know, dramatically. People are watching the commercials when they're talking about, you know, this is a tough moment in America, and here's what we're doing. People are are watching it. And so, you know, we're open for business. Those that wanna move in the traditional window, we'll move with them.

Those that wanna move later, we'll move with them. And it's not for us to decide who's gonna do better. It may be that the ones that moved early do a lot better, and maybe the ones that moved later do better, but we're open for business. And in the meantime, we're reducing our no. To to the extent that we're not sold, we're reducing the amount of inventory that we're selling, and we're finding that that also is helping our ratings.

And that's something we need to do as an industry anyway.

Speaker 6

Okay.

Speaker 0

Thank you. Our next question comes from John Hodulik from UBS. Your line is open.

Speaker 6

Okay. Thank you. Two questions. First, David, anything you can tell us about the pricing you saw on those recent renewals you mentioned? And then a follow-up to Michael's question.

Obviously, 1.5 in cash, a lot of liquidity. You bought back more stock than we expected before the outbreak. Can you talk about what you need to see going forward, maybe just from a stabilization of the ad market? What it would take for you guys to restart the buyback?

Speaker 2

Gunnar will I'll have Gunnar answer. Why don't you start off, Gunnar, with answering that the second part?

Speaker 3

Yes. So yes, I mean, as you read this morning, we did buy back some stock right after our full year earnings call. As you would expect us, we've been a little more careful since the beginning of the full outbreak here. And as you would expect as well, we have taken precautionary measures to make sure that our capital structure is in good shape. And again, from what we're seeing right now, we continue to have a lot of confidence in our ability to generate free cash flow.

We were free cash flow positive in the first quarter. From what we're seeing, we're going to be free cash flow positive in April, etcetera. But as you would expect, we don't have a lot of visibility into the second half of the year. And so from the perspective of what I would have to see, clearly, we'd be looking at a signal of the pickup in ad markets. And again, we're not giving guidance here.

We don't have the visibility. We thought it was helpful to provide you with what we're seeing today, which was, which is the April numbers and from a booking perspective, slightly better in May and June. But as I also said, I'm just giving that to you guys in full transparency here. We're seeing a lot of rolling cancellations, etcetera, so take it with a grain of salt. But so that's really the point on capital allocation and buybacks.

And then the pricing on recent renewals, your first question. As you know, we don't disclose any details. But what I can say is that I'm very happy with those deals. As we said many times before, we do believe that we have amazing content, provide amazing value to our affiliates. And I'm not surprised that, again, we were able to strike deals that are mutually beneficial, additional value on both sides.

And in in terms of, the the the size of the portfolio, you know, no reteering, etcetera, etcetera. So top to bottom, you know, deals that are in line with what we've, what we have been, seeing in the past. David, any anything else?

Speaker 2

The only other thing I'd say is that the there was a lot of talk. We even we even changed over the last several years so that more than 80% of our value was against our top eight channels. But all of our channels were renewed. Right now and in and and we got additional carriage for some of our channels, in in the renewals, in some cases, meaningful additional carriage. And, you know, we we after Fox News launched, the next channel that launched was OWN, which, you know, became the number one channel for African American women.

That was us launching new assets with new IP that we could take around the world. Then ID, which which became the number one channel or number two channel for women in all day, which was our second asset that and we think now looking at DIY and the ratings and the fact that it's in more homes and what and what, Chip and Joanna Gaines have been able to do and the reception for the great content that they created, not even just what they're what what they're doing themselves, but their curation and taste, that we have a chance to launch, you know, another good asset, really good asset that advertisers love, both on cable and and and, in digital. So, we're we're very pleased with, you know, the the the negative is that, look, we're we're cheaper than one regional sports network. So in some ways, we're providing all this value with all these characters, and we are we are the new sports, our our key networks. But on the other hand you know, so we're we're very inexpensive.

And I think the power of our channels is much more now as they take a look as operators, you know, take a look at distributors. How much time are people spending with food and HG? They're watching it all. The length of view is higher than, you know, almost any channel in on cable. And so, you know, I

Speaker 3

think the good news is that

Speaker 2

we were able to do good deals. The issue is that, we're not getting paid close to what we deserve, a fraction of what we deserve for what we're delivering. But we're going to keep working on it.

Speaker 3

David, let me add one more point, reflecting on, Michael, on your question and, John, your question as well, both for M and A and buybacks. You heard me say earlier that we're in a very constructive dialogue with rating agencies, and you should know that we will we're continuing to honor our investment grade rating. It's a big priority for us. And that's the backdrop against which you should take all these answers regarding whatever M and A, buybacks, etcetera.

Speaker 0

And our next question comes from John Jangas from Wolfe Research. Your line is open.

Speaker 6

Hi. Thank you. David, you guys talked about pushing your OTT solutions more aggressively in Europe. I'm wondering, does the COVID impact the rollout? And can you give us an update on the Dplay expansion?

And then separately, you talked about your short production cycle in fresh content. Can you give more detail on how you're thinking about availability of originals across the platform later this year and into 'twenty one relative to normal? And to what extent a nonscripted programming is better positioned relative to script when production comes back online?

Speaker 2

Sure. Look, Kathleen Finch is, is just a great creative executive. Nancy Daniels, we have we have creative leaders on each of at each of our channels, and we have go to talent that that that are authentic. They love to cook. You know, they they Mike Rowe, I've been on the phone with him three times in the last week with ideas of what he could do and the excitement of shooting before the catch from his couch.

So we have a fully engaged creative team. And as Gunnar said, over 50 projects, three hundred and fifty hours. And one of the things that we're this idea of we're best when we're closest to real. You know, if you scripted the talent on there, they can come out and people know them. But, you know, the idea that that we could get Guy Fieri, you know, you know, even, you know, close to live and maybe even eventually live, from his kitchen, from his barbecue, and we have found that the audience will go with us.

And in some cases, they love it. Oh, look at that. Look at Guy. His son is shooting it. I wonder what his son looks like.

Look at his living room. Look at his kitchen. Guy, what's that book behind you there? You know? Did did you get any recipes from that?

And so we're seeing big social energy around it. Our talent is getting stronger. So we already had a short cycle. But now we're finding that we can produce all this content, and it's dramatically cheaper. And in many cases, it feels more authentic, and the audience loves it.

And so we're just leaning into it. Kathleen and Nancy and and and and the whole team, Courtney White and Jane Lapman. Jane runs HG, and and Courtney runs food. You know, they're we're on the phone with them every day. They're just super excited, and so is the whole creative team that they could do this.

And so I think you're gonna see a robust slate of content from us, that will continue. And I there'll be others that'll be, you know, idle. We won't be idle. Our issue is gonna be where's the advertising market? I think, you know, there's no question.

Every week, our ratings go up. Every week, people are spending more time with with with our portfolio, and they're enjoying it more. And so the question for us simply is that we're dramatically under monetizing it right now, which is okay. But

Speaker 8

we're

Speaker 2

also learning that with less commercials, we're actually finding that we're doing better. So, I I think the slate is gonna be a huge advantage for us and our characters, and their engagement is, is a huge advantage. On Dplay, we I think we have the right strategy. Local sports, local entertainment. And large library of local entertainment that you grew up on.

It's compelling. It's and it's understandable. So, okay, I got Disney plus, great product. I have Netflix, great product. I got Amazon Prime, great product.

But almost all of them are, you know, very little amount of local. Whereas we're local local, and people get it, and it's growing, and we're leaning into it. In some cases, we've decided to lean harder. And, yeah, that's what you see with that we did in Denmark because it's a it's a it's a market that has been accelerating with direct to consumer. They have, you know, a huge penetration of of broadband, high speed.

And so, we're leaning into it. And JB and his team, are doing a great job with it. And I and we we think the strategy is starting to break through. It's gonna take more time. But this moment is putting a lot more attention on all the direct to consumer products in a good way.

Speaker 6

Thank you.

Speaker 0

Thank you. And we'll take our next question from Alexia Quadrani from JPMorgan. Your line is open.

Speaker 6

Hi. This is Zilu Pan on for Alexia. Thanks for taking our question. Can we can you talk a little bit more about how your own streaming services has trended in The Nordics after the discontinuation of your carriage agreements? And then just on production, are there any countries where you still might be able to shoot normally then that you can take advantage of?

Thank you.

Speaker 2

Okay. Thank you so much. One point that I wanted to just add to the to the answer to John is, look. On golf, on the Eurosport player, on cycling, where we don't have sports, it's dropped off significantly, as you would expect. And, our free funnel is fine where people are coming in and they're reading from Golf Digest and they're seeing some short form content.

But, you know, the fact that we're we don't have live sports is having a meaningful impact on those businesses as you'd expect, and we think when they come back, it'll kick in. In terms of traditional production, you know, there's some there there's some that have come back a little bit in Asia, but can't it's it's mostly shut down. We do have, we have a lot of content that was shot that we're working on. We have content in our library. We're shooting new, but, you know, the ability to actually we're not pushing for anyone to get out.

We had this moment after we closed down where we had a number of cases as you know, we have over 10,000 employees. And it it was tough. Those were those were 14 of maybe the the toughest days for me, you know, in my life. Is everyone okay that has this? We had a numb you know, we did had a number of employees that were struggling.

And, you know, it it you feel it. You feel it because they got sick coming to work. And so, we're not in any rush to to push any because we're working remotely so effectively. We look good. We haven't missed a beat.

We've learned a ton, but we don't wanna push anybody into the field. We don't wanna have that feeling again. We had a call every morning on this virus. Who has it? Who's been tested?

What's going on? Who did they come in contact with? Really an extraordinary effort, led by Adriel Perrahm and David Levy, but with it was every day. And so, we're not in any rush to get back to those calls because we couldn't breathe. And thank god all of our employees are are are safe, and, they've gotten through it.

Not so for a lot of employees' families where there have been challenges, which everybody, is facing. But we're in no rush. I will say this, that it's bringing this company together. When I joined Discovery, for one year, we had a call every morning at 07:00. Every morning.

And it energized the company. We were all talking on one on on one page. And we have a call every day, every morning now, every single morning. And if we're all together, what are we doing today? It started out with what's going on with the virus, and now it's where are we winning?

How do we press on that? What how do we do this differently? How do we get less people in the office? And, you know, we've learned a lot. We used to have 14 people in a control room.

Now we're doing it with one. So there's gonna be very significant, change in business when we come out of this, I think, for the good in terms of what we've learned, including how we shoot content and how we pay for it.

Speaker 3

Thank you, Eric. And let let me maybe add, you know, to the, the Nordics question. We're seeing dynamic growth, on our dplay platform. Regarding the traditional affiliate deals, you mentioned sort of having lost deals. We've actually gone dark with one traditional affiliate in Denmark, and we're seeing very dynamic growth on our dPlay offering in that market, more so than in or above the already dynamic growth in other markets.

And beyond that, we're also very excited about sort of new types of partnership deals with the likes of Telia, Telenor, where we're engaging in broader partnership deals, both on the traditional side as well as, you know, in the wholesale b to b to c relationship, for for our direct to consumer products, which I think is is gonna be a very fruitful, partnership model. Thank you.

Speaker 0

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

Speaker 8

Thanks so much. A question for Gunnar, multipart, and then a question for David as well. Gunnar, OpEx coming in $100,000,000 or so lower year over year in 2020 is certainly interesting. When you look at the core decline of mid- to high single digits, how much of the costs that are coming out are temporary? How much is permanent?

And then you mentioned cost flex. To the extent that there's change in revenue versus expectations. Where does that flex come from? Will the next round of cost mitigation start to impact DTC efforts? Or is there still a material amount of flex in the traditional business?

And for David, in reference to Ben's question on streaming, before we start to run with the a la carte narrative for Discovery, do your existing deals with Pay TV distributors have any limitations on discovering going direct to consumer sort of a la carte? And I'm sure you would like to work with the cable guys on bundling with broadband, but do you have any concerns about putting satellite distribution at risk? And I guess for fun, how much do you think consumers would be willing to pay for a standalone discovery a la carte, streaming service? Thanks.

Speaker 2

Okay. Why don't I start, and then I'll pass it to Gunnar. We don't have limitations, but we also have a hell of a business with our existing distributors. And I've been in this business for thirty years, and a lot of those distributors are my best friends. And, we've done very well by supporting each other and working together.

That's what we're doing with Go, with our authenticated product. And there's 30,000,000 broadband only subscribers. And so whether it's Pat Esser at Cox or whether it's Dave Watson at Comcast or whether it's Tom Rutledge at Charter, they're in the broadband business. There's 30,000,000 people that that that, are broadband only. And so, we're we are in discussions with all of them about the fact that we have this great package of content.

If you take a look at the front screen for Disney, you know, you see Pixar and you you see Marvel and and you see Disney films, and people look at that and go, oh, I love that stuff. And then imagine they they open up and they see HG and food and and and Oprah and Discovery and and BBC Planet Earth. And then behind each of those circles is all the great talent that we have. And we've done a lot of research, and people look at that and they go, wow. That's all that's that's six those are my six favorite channels.

That's five or four of my favorite channels, and those are my favorite characters. So we all agree in talking to this everyone agrees there's a lot of value there. And so I think, you know, you'll you'll see over the next year or so, our our goal is gonna be to do something with the with the distributors because they have direct access to those 30,000,000. And they have enormously helped Netflix by by promoting Netflix and by billing for Netflix. And the churn for Netflix and any product goes down when an existing distributor, that's billing bills for it.

And they have a good relationship with all those broadband subscribers because they're providing an incredible service. And so I think it'll start with that, and it has started with that. And so I think when you see us move, you'll probably see us move broadly, but also in tandem in a way that creates value for both of us, which is what we've been talking about. And I think what, what a number of the distributors that we're talking to feel good about and encouraged that instead of just doing our own thing, we're in talking to them about doing some things together.

Speaker 3

Okay. Doug, on the OpEx side, yes, want to answer this on couple of levels. Number one is we're still enjoying significant impact from the transformation of our company. We had a full toolbox here of initiatives that were still in full swing as we came into the year, and we continue to deliver those. And some of the longer cycle cost improvements where we had to put systems in place, etcetera, were also enjoying the fact that some of those investments are coming down, but we're reaping the benefits now.

So a lot of this is going to be lasting impacts. Now obviously, there is timing stuff. If you look at T and E, for example, you wouldn't expect us to spend a lot here. So obviously, that is going to be fired up again once the global economy opens again, and that's explaining some of the variability. There's also variability, obviously, as previously pointed out, in the direct to consumer space, where we have a lot of subscriber acquisition costs that are variable, but also the pace at which we're hiring.

As you would imagine, we're going a little slower on hiring right now. So all those expense buckets are going to start to ramp up. And then finally, there's content, where, obviously, it's a function of the ecosystem's ability to produce and deliver content the mix of sort of the in home content that we talked about versus, let's call it, traditional production. So it's going to be a mix, and that's why we gave that range. Some of the expenses are going to come up when the company opens again, others are not.

But I just want to reiterate the point. We had a large range of transformation initiatives going into this year. And as you would expect, we're also learning right now. And there's additional ideas coming through and and going through the the pipe here right now. You know, honestly, this company is is is functioning very well in in in this environment, and there are lot of learnings for sort of future process setup.

Speaker 6

Thank you both.

Speaker 0

Thank you. And we'll take our last question from Rich Greenfield from LightShed Partners. Your line is open.

Speaker 7

Hi. Thanks for taking the question. I just love, David, kind of from a high level. When you think about the virtual MVPDs, you know, I think you all did a great job of getting onto these platforms and sort of using the crowbar of the Scripps acquisition to kind of push your way into a lot of these packages. We saw Hulu last night on the live side.

Their growth has really slowed dramatically. I think they added like 100,000 subscribers in the first quarter. Is the vMVPD like what do you think is going on there? Like you would

Speaker 2

have thought with the click of

Speaker 7

a button, you could add TV during the pandemic while everyone's stuck at home, and you certainly didn't see that in Hulu Live. What's going on with that part of the business? And is there anything that they can do in your minds to reaccelerate growth?

Speaker 2

I think it's simple. They're charging an awful lot of money. And, you know, you can get you can you can get a a package of multichannel television for $10 or $20, sometimes less than $10 everywhere in the world. And if you took sports out, we could do that very easily. And so I think, you know, they're they're saddled with regional sports networks, saddled with, you know, overstuffed retrans and, and and sports channels.

And that's a that's an issue in general. You know? And I think that it's you know, the when you look at that price now and you're not getting any sports, I'm not I'm not surprised. We're not we're not seeing that outside The US. The puck levels are up around the world, so people are spending more time.

They're obviously spending a lot more time with our content. I think there should be a rationalization of the market. You know? And and some of this stuff should just get puked out, you know, and up. And I think, you know, particularly in a moment where we're in a recession and people are really watching every dollar, you know, you put up a TV set and people are waiting in lines to get things.

And yet, you know, how add up what they're paying for sports that they're not getting. And then you wonder why aren't more people waiting in line for that. It it there it it it makes no sense. You gotta puke out that stuff. And you gotta go to the, you know, the players in the marketplace that are all that are stuffing that in and saying, you know, not now.

Back off. Not now. But the the the thing that's good for us is we're in every single packages, all of them. And, you know, one of the things that I think will help us is these things are gonna fluctuate. Everyone hasn't reported yet.

We'll see how Charlie does. I think in the long run, we don't know how long this is gonna last. There are some we're seeing real growth with some of the smaller package players, as I mentioned. So we'll

Speaker 7

see I've just been surprised how much they're push I'm just surprised how much they've been pushing price rather than rethinking packaging.

Speaker 2

Well, look, ultimately, the distributors are are very, very smart, and their job is to serve their existing, customers and to keep the customers happy. So event I've always said eventually, this will get rationalized. But, ultimately, it's it's way too soon to draw a conclusion. There have been there have been quarters where it looks like, oh, we're not losing subs anymore in The US. Then there's quarters where it looks like, oh, no.

We're losing a lot of subs. And in the end, we'll see where we'll see where it ends up. I I believe that if we could if we could, offer some cheaper packages, we'll do extremely well. But I don't see anything in the marketplace that makes me feel like, woah. We'll see what happens.

Speaker 0

Thank you.

Speaker 2

Thanks, everyone.

Speaker 0

And that does conclude our question and answer session for today's conference. Ladies and gentlemen, this does You conclude are muted. Today's You can mute or unmute yourself. Thank for participating. Stop by You may now disconnect.

Everyone, have a great day.