Q1 2020 Earnings Call
An all time highs.
We believe that some of these viewers who are reengaged discovered our networks for the first time.
We'll 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 nexgen initiatives.
Little 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.
The mats HGTV and food network.
The latter driven by impressive growth in Italy, and new network launches in Colombia, Peru, and Ontario.
In terms of our streaming portfolio did play motor trend Cbms player go and food network kitchen are all seeing strong upticks.
From food network Titian also took a meaningful step forward last week.
With a strong and expanded Amazon partnership.
Which is offering this first of its kind crude and cooking products.
To tens of millions of their prior TV users prefer a year.
Courtesy of Amazon, along with marketing by Amazon on fire TV.
And it's off to a great start.
Grunow will take you through the quarter and provide some color on the current state of play so I'd like to offer some high level thoughts on the industry on our place within.
Clearly these are challenging times and while there are significant uncertainty from a cyclical perspective.
I don't subscribe to the view that consumption and behavioral patterns being shaped by the Corona virus will be permanently disruptive.
The nearer term question is of course, what does the magnitude and duration of this corn team moment.
And what will and 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 wells with significantly more share and having had four weeks or months people spending a lot more time with our channels are 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.
Well, we are as well represented as anyone across the OATI and skinny bundle landscape.
In the U.S. and around the world.
And we continue to enhance our portfolio of global Eva and S. Vod content and lifestyle platforms.
We recently completed distribution renewals with some key partners in the us for carriage of all of our channels.
There was a time when many question whether in our renewals we will 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 a all the time to free cash flow and no. There remain a number of moving pieces. We would expect this to continue.
Given our and his team have been opportunistic and has done a great job managing our leverage portfolio and maturities, which she 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 will emerge a stronger and more focused company when we resumed business as usual.
Before I turn the call over to garner.
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 garner.
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 discoveries 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 begin to feel the impact from the covert 19 pandemic. We did note a very modest impact advertising specifically in Asia. When we spoke with you last on February 27.
This naturally evolve throughout the region and then to the Euro beginning in early March with Closeouts in many of our key markets such as Italy in Poland. Among others, followed by closures here in the us for a good portion of March.
Though even with that total revenues in Q1 were largely flat on a constant currency basis.
EBITDA declined 3% year over year ex FX as Weve continued with plans to invest and support our next generation initiatives.
As a reminder, in late March in conjunction with the move up the Olympic games from this summer to next you recalled our forward looking financial projections and outlook for both Q1 into here.
Let me review our key revenue drivers beginning with you as advertising, which was flat versus the prior year.
As noted we did see some impact from the markdowns in March with an uptick in cancellations and deferrals to some extent the rights and cancellations in March was offset by higher audience deliveries with people isolating at home delivery and the people 25 to 54 demo across our portfolio of networks increased by over 10% and total day.
First the pre stay at home period audience growth has been particularly strong for our food at home networks, which provide useful ideas comfort and inspiration for families who are hunkered down and more engaged with cooking at home project.
A number of discovery largest advertising categories are holding up nicely such as certain CPG verticals like food and cleaning products Pharmaceuticals insurance financial.
E Commerce companies, while travel movie studios, and some autos and retailers understandably cutback 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.
I'd be 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 for 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 the 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 us distribution revenues were down 4% year over year at the end of March.
While total portfolio subscribers were down 6% in line with our prior commentary of reverting back in line with a broader industry trends.
As a reminder, this is the first full quarter, having fully lapped who and slate.
We haven't seen any distinguishable cobot related impact on subscriber trends. So we don't necessarily have real time color as we receive remits 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 includes the previously noted deferrals in APAC.
As many of our key advertising markets in Europe began to shutdown, we saw a more pronounced impact with March down nearly 10% year over year.
Unlike the us which enjoyed 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 rolling up.
Based on preliminary results April is down about 40% in aggregate across all international regions.
Depending on the market the ranges anywhere from then on 32 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. So this is 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 R&D to see services like deeply 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, meaning that we have to push harder to get full value for our content portfolio as such we have continued to play more often.
Which infer that we may NR facing incremental topline 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 decline has near exclusivity on certain football rights.
Naturally with no sports being played anywhere in the world, both Eurosport player and Gulf TV.
And even turn premium tiers of the play has seen a pullback in activity, which has weighed on segment performance. So we expect momentum to continue whenever play reserves.
So even without sports at the moment, we're seeing nice momentum in display subscriber growth driven by our compelling entertainment offering.
Similar to the U.S., we have not seen any material change of net subscriber trends.
So where appropriate we may work with distributors in an effort to be good partners and helpful. As they seek to absorb near term term.
Even amid the uncertainty surrounding our revenue we feel very confident in our ability to flex our cost structure to mitigate as much of the topline shortfalls as we can.
As you know following the scripts 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 an exam in many of our practices and procedures. So today, 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 locked on period, we've been able to create nearly 350 hours of new premier content.
Furthermore, with traditional content production larger shutdown or cost, we expect to see content amortization savings versus or 2020 plan and less originals premier even as we continue to make certain content investments in our next generation initiatives.
With sports currently sideline, we're not expecting the rights costs, though these costs are only being deferred until they've later in the year, if and when sports return.
We're also refining all marketing personnel related expenses as we've implemented a hiring freeze and as you could imagine PND spend is minimal currently.
At this point, we currently expect total operating expense to be around flat with last year on a constant currency basis as we continued 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.
But outlook based on how quickly we can begin to ramp up production and see a recovery and 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 payments, while the rest was related to the increased level plan divestments 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 a little bit to free cash flow conversion rate, though there are a number of moving pieces on the working capital from 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 3.2 times on an LTM basis.
I am confident in our liquidity position, having finished the quarter with roughly $1.5 billion of cash and another $2 billion a bit of availability under our fully committed revolver.
We have $600 million of debt coming due in June and no additional maturities until June of next year when $640 million of notes mature.
The rating agencies and remain supportive of our business plan and capital structure and important signal during this moment.
We remain committed to our investment grade credit ratings as recently affirmed by the rating agencies.
You are longer term net leverage target of three to three and half times.
We filed a separate 8-K this morning outlining an amendment, we signed with our bank approval you can refer to the 8-K for additional details. This amendment reflects the gross leverage covenant in our revolver to 5.5 times beginning in Q3, returning to its original 4.5 times special by Q3 of 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 occur should be viewed as temporary and related only to impact of cold with 19, rather than a change in financial policy.
And with respect to this additional cushion reflecting on the points of 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 overtly long period of time, we would say are relatively well from a cash efficiency Pope.
Well that is to say, we will 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 million worth of shares reducing our share count by over 19 million shares.
We have largely been out of the market since we reported our 2019 results with the exception of a short period in late February early March, which we purchased around $200 million of our equity.
We have $1.8 billion next on our authorization.
And finally, FX was approximately a $30 million drag to revenues and $10 million back to aid in Q1 for the year based on current rates, we expect FX to have a negative 130 to 140 million dollar impact on revenues and a negative 30 million dollar impact on any other down.
With that I'd like to turn the call back to the operator to take your questions.
Thank you ladies and gentlemen, if he has a question at this time. Please press the star followed by the number one key on your Touchtone telephone.
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And our first question comes from Jessica Reif early from Bank of America Securities. Your line is open.
Thanks to the couple of questions on.
First on sports.
Good to have isn't clear I wasn't clear.
You know recognizing sports question on a cash basis.
Are you paying right now and if youre, 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 level largely the same a year from now that's a sports is one thing direct to consumer on food network kitchen. This like every day is like a Super Bowl. Unfortunately, I mean, it's good for you but.
Okay.
Can you can you give us an update on it.
How it's doing I know you moved out merely a timing that he can give us an update on direct to consumer and then finally, sorry for so much but cancellations or do last week for a third quarter can you give us some color on what you're seeing because you're right.
Advertising actually purchasing so far I think actually pretty good.
Sure.
I want to not get started and then I'll pass it over to a broader.
Having no sports is a challenge for all of us.
But 90% of our deals have either force majeure provisions or or provisions it specifically relate to us not paying for content that we don't yet and so I think what 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 the they don't we have a real opportunity.
With that on the Olympics.
We think it's going to probably be a little bit better for us because one of the issue 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 appetizers and ER to both of them together, where where we could straight together.
And we're hoping that yeah that so that when people get the Tokyo, what's going to be.
Real opportunity for people to get back together with lot of excitement I think what sports does come back it's going to come back very big people are really yearning for it I am excited and talking to Jay Monaghan Who's doing a terrific job. This commissioner of PJ and were as you know partners around the world.
Hoping to come back in June and as a great planned for and we're rooting for that I think that.
We really need we need we need sports, having said that you know that what we're experiencing is different than whats during the U.S. as I've said for very long time sports works differently outside the U.S. when people want.
Sports in most cases, it's on premium and then making the choice to pay for tier we Havent overstuffed bundled with sports has been stuff do and leveraged in which is one of the reasons why we see this though the the challenge that the U.S. marketplace has been seeing where subs are flat or slightly growing around the world and declining here.
It's because 2030.
Between 20, and $30, sometimes more of sports rights of being paid by consumers and they're not getting you know and so right now consumers in this difficult time. 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.
Creates I think even more of a challenge where people say why am I, saying and that may be one of the reasons why you're seeing some people.
Disconnect having said that.
I look at food and H., GE and cooking with a new sports.
Our channels are those sports the numbers are huge the engagement with our characters and with our talent is enormous.
Where the real time player right now on television whether its micro honest couch of Guy Fieri.
Or iconic garden or or or.
Yes.
We drama and were 350 hours of live content, that's really working with our characters and so.
Hi, we've we've skirting most of the sports issue, but I do think it's an overhang here in the U.S. and were 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 U.S. you have news networks and then you have TLC NH H HGTV as the big.
Networks so.
With that I'll, just say that Amazon just started a week ago, but whether they have 30 million or $40 million. They have tens of millions of subscribers to fire. They love food network kitchen, there, they're providing the opportunity for people to get that per year for free.
Which we think is fantastic the partnership is strong and their marketing it.
I agree with you that this is a moment, where we can we can really shine with that so garner.
Yes, so maybe just a couple of points to add I mean on the other other cash flow a question for wards you know, it's going to be a mix. So far most of the events have been postponed rather.
So you should expect.
Not only CNL, 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 positive. We also have a little more time to get to prepare and or the ad market.
To go to market with.
The bundled packages so those those would be a positive but.
Bottom line is it's a little early to start about Dave a specific guidance, but right now I wouldn't I wouldn't CMS will change was what we have guide for this year.
And then regarding the cancellations.
Youre right the upfront.
After cancellation period has started its 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 goals here.
And work through this together.
Thank you.
Thank you.
Our next question from Ben Swinburn from Morgan Stanley. Your line is open.
Good morning.
David I want to pick up on the comments, you're making before about the sort of sports subsidy in the U.S. and what's happening to the ecosystem and I think everything you're saying makes a lot a sense and all of these trends are probably accelerating because of this financial and health situation.
Going on as you as you pointed out you have been talking about a U.S. So T T offering of your sort of core content now for maybe a year wait a little less.
And I'm just wondering if what's happening in the marketplace with cable operators you know increasingly just passing on new sports cost to the consumer pushing people out of the bundle. It is accelerating your thought process are changing how you think about it in.
Your reaches falling in the U.S. really didnt.
No fault 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 have been having at least laid out to us or more thought you know although talked publicly more about how you plan to expand the head of the core IP.
No 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 really interesting opportunity for you guys.
Sure well look I think the the advantage to US right. Now is that people are spending a lot more time with our channels or share is up really significantly everywhere in the world and it's it's two months here, it's longer than that a number of areas in Europe, and Asia and behaviorally people are spending a lot what time with our care.
Actors and our and our channels and we think that Thats, a huge benefit to us on a trip on this existing platform because there's a real habit here and is and as well we're seeing it in a meaningful way on go.
We're not able to fully monetize all the share obviously.
Domestically and around the world, but its a.
We view this really is an important moment for us because as a company our focus is to entertain and what 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 come to us and sector, 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 year. Hispanic channels can we add them. This is going on in Latin America in in Europe in the us.
And they're getting very good feedback on the viewership is increasing significantly and so I think it the viewership we're getting in the in the average age on go 26 viewership, we're getting all of these channels at all of our characters around the world reinforces how valuable what we have is.
And it also as as these distributors take a look in the U.S., there's going to be I believe more and more pressure on on them.
Because it's just becoming abundantly clear for some of our now for two months people have been enjoying cable for two months. So raises two questions. One of my paying all that money sports for but also is a great product I'm spending a lot more time and I'm really really enjoying so what what we should have in the U.S.
Is what everyone else asked which is a bundle of content that doesn't have sports that would be very affordable and we would likely see a very quick turnaround in in that in this issue of of subscriber loss, because we're saying take it for 80 take it for 100 or don't take it at all and.
Even services like file, our seeing which were and invest where the seeing.
Big Big uptake in this idea and then even up the broadcasters and so I'm, hoping that you follow the behavior you follow the need in the marketplace and you follow whats equitable unfair and ultimately it might might put pressure on some of these big sports players that are bundling and forcing and less.
Virginian 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 stop sports right.
And just back.
We are we have been building we have a very strong theme, we have over 150 people and engineers working.
We're slowed down a little bit because we can't hire new but we're all we're on track with our platforms. All the problems we have outside the U.S., so working exceptionally well there 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 look stronger.
And more and more a lot of these other platforms that don't have a lot of content.
We're seeing how much people are spending time with us and they're talking to us about whether 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 right. That's really helpful. Just one quick follow up on food network kitchen of the Amazon announced it was quite interesting I know, you're probably not willing to share specifics.
I'm just curious if you're getting wholesale revenue or anything can tell us about sort of the financial impact or even the kind of marketing push that's going to be.
Fitted with that Amazon offer to their fire subs fire users.
Yeah, I would just recommend that you all go to bumped fire, where 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 there are great partner they loved the product.
And.
We're rolling together.
Thanks, a lot.
Thank you.
Our next question comes from Michael Nathanson from Moffettnathanson. Your line is open.
Great. Thanks, so much.
David.
A couple of club couple of questions for you.
On the European side, where you had this fortunate.
Are there any minimum number of hours you need to deliver.
To maintaining type of license fees et cetera. So that's one.
And truly given how clean your company as in cash flow and the balance sheet.
Talking about maybe leaning into M&A and how you would think about M&A, given how dislocated from the valuations around the world.
Okay.
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 two customers is is meaningfully higher than it was before.
Ratings are down significantly on Eurosport and.
Where we'll be very excited with the sports comes back but no there's nothing in those existing agreements.
But again the some fee for whatever it's worth is is relatively small it's very different than here in the us 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 that we're one of the we're worried that the top performer of one of the top performers in every market in terms of what we're delivering on a multichannel basis on M&A. Okay. Well you know all I would say is that we.
Took us.
Very short time to absorb scripts.
Ken Lowe built a great great company with a great culture and we've integrated fully were really this is everything is the best of what 10 built in the best of what.
What what we built we have great leadership team is fully integrated we view it as as really the best of both companies and it's presented that way we are grateful for the for the great comfort channels that we that are now part of our portfolio here and around the world when a huge helped to US. We're so proud of those those brands and all that great.
Talent that was added and where we that deal worked out really well as you know we.
We added over a $1 billion and free cash flow and we did it in 18 months, but we went from 4.8 times two to three times levered to below three and a half times Levered and so I think what we show to our board into 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 IP.
And we bought something that that with great characters that added to our overall, okay. 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 design. So we are looking at everything we're going to be but we have a great hand, right now, but I do think depending on how this goes over the new.
Several months there will be some companies that have great IP or great assets.
Our that that are in the they're facing some difficulty and many of them some of them.
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 to 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 or promotion in every case.
And so we're going to be very careful and deliberate we've got a great Board thats. Good at this you know.
We have Bob Myron and the new house family that focused on quality and spending money on content and owning content globally and we have John Malone has fully engaged in in looking at our balance sheet and looking at our overall strategic assets around the world and seeing what would make a stronger and so I think this is really a unique.
Moment, where we could lean into we've got a great board with that 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 will be because we think it's going to help us grow faster in this new and changing world.
Okay. Okay actually one last one on the upfront given the strength your verticals given that you can actually have fresh content in the fall, how you think about going to market and the upfront where others maybe can't sell anything right now so what's your strategy there.
Well, yes, there is a a divide in the market and you'd expect that is such an unusual disrupted moment, but there's a number of that they were talking to all of.
All of the big players and.
They're gonna will ultimately make the decision for there 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 going to go we're going to do a regular upfront.
And a number of missing maybe we shouldn't do a regular 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 engage viewership on our channels have never been higher and when people when the advertisers are putting on content in the moment that.
Recognizes what's going on in the world.
So the viewership of those commercials are up.
Dramatically people are watching the commercials when they're talking about.
This is a tough moment in America and here's what we're doing people are watching it and so we're open for business those that want to move in the traditional window will move with them those that want to move later, we'll move with them and it's not for us to decide who is going to do better. It may be that the ones that moved early do a lot better and maybe the one that moved later do better but we're open for business.
Yes.
In the meantime, we're reducing our no to extend that were not sold were reducing the amount of inventory that was selling and we're finding that that also is helping our ratings and that's something we need to do as an industry anyway.
Okay.
Thank you.
Our next question comes from John totally from media. Your line is open.
Okay. Thank you two questions first David anything you could tell us about the pricing you saw on those recent renewals you mentioned.
And then a follow up to Michael's question.
Obviously, a billion five and cash flow to liquidity you bought back more stock than we expected before the outbreak can you talk about what you need to see going forward.
To term out stabilization of AD market or what it would take for you guys have to restart the buyback. Thanks.
Okay, good or well I'll have going to answer.
Wanted to start off go into with with answering that the second part yeah.
So, yes, I mean, yes as you.
He read this morning, we.
Did buy back from stock.
Right after our full year earnings call as you would expect US we've been a little more careful.
You know since the beginning of the full outbreak here and as you would expect as well we have.
Taken precautionary measures.
To make sure our capital structure is in good shape.
And again from 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 an April et cetera, but as you would expect no. 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 would be looking at a signal of pickup and 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 the April numbers and from booking perspective.
Slightly better.
In May and June, but as I also said.
I'm, just giving that you guys and full transparency here, we're seeing a lot of rolling cancellations etcetera, so taken with a grain of salt but.
So thats really.
Thats really to the point on capital allocation and buybacks and then the 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 with those deals as we said many times before.
We do believe that we have amazing content provides making value to our affiliates and im not surprised that again, we were able to strike deals that are mutually beneficial additional value on both sides.
And we.
So.
The size of the portfolio.
Peering et cetera, et cetera, so top to bottom deals that are in line with what we what we have been seeing in the past David anyway.
The only other thing I'd say is that.
The there was a lot of talk we even we haven't 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.
I am cases meaningful additional charge and.
We we after Fox news launch the next channel that launched was Oh.
Which 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 I'd, which which became the number one show a number two channel for women and all day, which was our second asset it and we think now looking at DIY why in the ratings and.
The fact that it's in more homes, and what and what the chip in Joanna gains have been able to do and the reception for the great content that they created not even just what there what they're doing themselves, but the exploration and taste and we have a chance to.
Launch another good asset really good asset that advertisers love, both on cable and ER and and in digital so.
Yes, we're very pleased with.
The the negative is that look where 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 arc Archie networks, but on the other here so that we're very inexpensive.
And I think the power of our channels is much more now as they take a look as operators take a look distributors how much time of people spending with food and HG that watching it all the length of view is higher than almost any challenge on cable and so I.
I think the good news is that 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 David Let me, let me add one more point, reflecting on Michael on your question and John Your question as well, both both for M&A and buybacks.
You heard me say earlier that we're in a very constructive dialogue with rating agencies.
You should know that we were continuing continuing to our investment grade rating to big priority for us and that's that's the backdrop against what you should take all these answers regarding whatever M&A buybacks et cetera.
Great. Thanks, guys.
Thank you.
And our next question comes from John Tandon from Wolfe Research. Your line is open.
Thank you.
David you guys talked about pushing euro two teams solutions more aggressively in Europe.
I'm wondering does the cobot impact.
The rollout and.
Can you give us an update on the do you play Sachin 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 it's a 21 relative to normal and to what extent non scripted programming is better positioned.
Well to the script, where production comes back on line.
Sure.
Look.
Kathleen Finch.
Is that is just a great creative executive Nancy Daniels, we have we have creative leaders on each of Edick at each of our channels and we have go to talent that that better authentic. They love. The Cook you know they might grow up I've been on the call within three times in the last week with ideas.
What do you could do in the excitement of shooting before the catch from his couch.
So we have a fully engaged.
Creative team and as good or said over 50 projects 350 hours I wanted to things that were this idea of where best when the closest to real Nokia scripted the talent on their they can come out and people know them, but the idea that that we could get guy Fieri you know.
Even 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 in some cases, they love. It I'll look at that look at Guy I. His son is shooting it I wonder what are some looks like look it is living room look at us kitchen Sky, What's that book behind you. There did you get any recipes from that and so we're seeing big social energy around.
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 any audience loves it and so we're just leaning into it Kathleen and Nancy and oil and ER and the whole team.
The white and Jane Latman, Jane Ron Ha and Courtney runs food you know there were on the phone with them everyday there your super excited and so is the whole creative team that they could do this and so I think youre going to see a robust slate of content from us.
That will continue and there'll be others that will be.
Idle, we won't be idle our issue is going to be where's the advertising market.
I think 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 were dramatically under monetizing it right now which is okay.
But we're also learning that would less commercials were actually finding better so.
I I think the slate is going to be a huge advantage for us and our characters.
Their engagement is is a huge advantage on D. play we I think we have the right strategy local sports local entertainment.
And large library local entertainment 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 or very little amount of local whereas where local local and people get it and it's growing and we're leaning into it in some cases, we've decided to lean hotter and that's what you are.
With that we did in Denmark, because it's a it's a market that has been accelerating with direct to consumer they have.
A huge penetration of a broadband high speed and so.
We're leaning into it and JV and his team are doing a great job with it and I and we think the strategy is starting to break through its going to take more time, but this moment is putting a lot more attention on all the direct to consumer.
Products and a good way.
Thank you.
Thank you and we'll take our next question from Alexia Quadrani from JP Morgan Your line is open.
Hi, this is the loop pan or like set things sort of taking our question can we can you talk a little bit more about how your own streaming service. If that's trended in the nordics. After the discontinuation of VR carriage agreements and then just on production are there any countries where use there might be able to.
Assuming normal way then that you can take advantage of thank you.
Okay. Thank you so much one point that I wanted to just add to the two you 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 that reading from golf Digest and you're seeing some short form content, but.
The fact that where we don't have live sports is having a meaningful impact on on those businesses as you'd expect thing we think when they come back or it will kick in in terms of traditional production.
Yes, there is some there's some that have come back a little bit in Asia, but can't it's mostly shutdown.
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 are we had this moment. After we close down where we had a number of cases that we have over 10000 employees and it was tough those with those were.
14 of maybe that the toughest days for me.
In my life is everyone. Okay that has this had a number we did add a number of employees that were struggling and you know 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 want to push anybody into the field. We don't want to 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 do they come in contact with.
Really an extraordinary effort led by Adriana Robin David Levy, but it was every day.
And so we're not in any rush to get back to those costs, because we couldn't read and thank God. All of our employees are are are safe and they've gotten through it or not so for a lot of employees families, where there have been challenges which everybody.
Is facing but.
Were 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 seven o'clock every morning.
And the energize the company, we we're all talking on one on and on one page and we have a call every day every morning now every single pointing and it were altogether what are we doing today. It started out with what's going on with the virus and now it's where 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 use that 14 people want to control room now we're doing it would want so there's going to be very significant.
Changing 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.
Thanks.
Let me, let me maybe add.
The the Nordics question.
What we're seeing dynamic growth on R&D play platform.
Regarding the traditional affiliate deals.
You mentioned.
Having lost deals, we've actually gone dark and one with one traditional affiliate in Denmark, and we're seeing very dynamic growth.
Or do you play offering in that market more so than and or above the already dynamic growth in other markets at beyond that we're also very excited about sort of new touched a partnership deals with the likes of Paleo, telling more where we're engaging in.
Broader partnership deals both on the traditional.
Side as well as.
The wholesale b to B to C relationship.
For our direct to consumer products, which I think is going to be a very fruitful.
Partnership bar.
Thank you.
Great.
Thank you. Our next question comes from Doug Mitchelson from Credit Suisse. Your line is open.
Thanks, So much a question for a good or multi part and then a question for David as well going or Opex coming in a 100 million or so lower year over year. In 2020 is certainly interesting. When you look at the core decline of mid high single digits, how much of the costs that are coming out or temporary how much is permanent and then you mentioned.
Cost flux or to the extent that theres no change and revenue.
Versus expectations, where does the flex come from with the next round of cost mitigation start to impact DTC efforts or is there still a material amount of flux nutritional business and upper David.
It represents question on streaming before we start to run with the all the cart narrative for discovery.
To your existing deals with pay TV distribution.
Amateurs have any limitations on discovering going direct to consumer sort of all the card 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 I wish you think consumers.
Well be willing to pay for Standalone discovery, our cards streaming service. Thanks.
Okay, why don't I start and then I'll pass it to boot or.
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 30 years and a lot of those distributors are my best friends and that we've done very well by supporting each other and working together and that's what we're doing with go with our dedicated product and there's 30 million broadband only subscribers and so whether its a.
Whether it's Pat answer a top so whether its if it stayed watson that comcast or whether its.
Rutledge, Tom Rutledge charter.
They were in the broadband business. This 30 million people that that a broadband only and so where 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 see Pixar and yes, 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 open up and they see HGTV and food and and and O'brien discovery and and BBC planted area and then behind each of those circles is all the great talent.
That we App 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 favour channels. That's five before my favorite channels and those are my favorite characters. So we all agree and talking to this everyone agrees, there's a lot of value there and so I think you'll you'll see over the next year or so our goal is going to be.
To do something with the dish with the distributors because they have direct access to those 30 million and they have enormously help netflix by by promoting Netflix and by billing for Netflix and the churn for Netflix and any product goes down went into 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 start it'll 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 that what a number of the distributors that we're talking to feel good about encouraged that instead of just do on our own thing we're in talking to them about doing some things together.
Okay, Doug on the Opex side I want to answer there's going to on a couple of levels number. One is we're still enjoying significant impact from the transformation of our company we had a.
For a tool box here of initiatives that we're still in full swing as we came into the year at we continue to deliver those and some of the longer cycle, a cost improvements, where we had to put systems in place. Instead of were also enjoying the fact that some of those investments are coming down, but we're reaping the benefits now.
Ill.
So a lot of this is going to be lasting impacts now obviously there is timing timing stuff. If you look at TNT. For example, you wouldn't expect us to go to the spend.
A lot here. So obviously that is going to be fired up again once once the global economy opens again, that's 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.
The acquisition costs that are that are variable.
But also the pace at which were hiring you as you would imagine we're.
Going a little slower on hiring right now so all of those expense buckets are going to start to ramp up and then finally theres content, where obviously, it's a function of.
The ecosystems ability to produce and deliver content and the mix of sort of be.
Content that we talked about versus let's call traditional production. So it's going to be a mix and thats why we divest that range.
Some of the some of the expenses are going to come up when the on the opens again, others are not but I just want to reiterate the point, we had a large ranger calculation to digital initiatives going into this year and as you would expect were also learning right now and there is additional.
Yes.
Coming through and going through the use of the pipe here right now.
Honestly this company is functioning very well in this environment and there are a lot of learnings for us at a future process set up.
Thank you both.
Thank you.
And we'll take our last question from Rich Greenfield from My Chair Partners. Your line is open.
Hi, Thanks for taking the question.
Just loves David kind of from a high level. When you think about the virtual Mbps I think you all did a great job of getting onto these platforms and sort of using the crowbar of the scripts acquisition to kind of push your way into a lot of these packages. We saw Kulu last night on the lives side their growth has really slowed dramatically it.
They added like 100000 subscribers in the first quarter.
It is the VM VPT like what do you think is going on there like you would have thought with the click of a button you could add TV during the pandemic, while everyone stuck at home and you certainly didn't see that in who live what's going on with that part of the business and is there anything that they can do in your mind to reaccelerate growth.
I think it's simple if they're charging an awful lot of money.
You can get you can get a a package of multichannel television for 10 or $20.
Sometimes less than $10 everywhere in the world and its took sports out we could do that very easily and so I think there they're saddled with regional sports networks saddled with.
Overstuffed, Retrans, and ER and and sports channels.
And that's a that's an issue in general.
I think that it's you know the when you look at that price now you're not getting any sports I'm not I'm not surprised we're not we're not seeing that outside the U.S. deposit levels are up around the world. So people spending more time.
They are obviously spending a lot more time with our content I think there should be a rationalization to the market.
And as some of this stuff you just get Pute out you know enough and I think particularly in a moment, where we're in a recession and people are really watching every dollar you like you put up a TV set people are waiting in line to get things and yet.
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 makes no sense you got a few gap that stuff and you got to go to the increase you know the players in the marketplace. There all that are stuff and that in saying you know not now.
Backlog not now.
But the the thing that's good for US is where it every single packages all of them and you know what are the things that I think will help US is these things are going to fluctuate everyone hasn't reported yet we'll see how Charlie does.
In the long long, we don't know how long this is going to last.
There are some.
We're seeing real growth with some of the smaller package players as I mentioned, so well I've just been surprised how much they're push I'm just surprised how much they have been pushing price rather than rethinking packaging.
Well look ultimately the distributors or are very very smart and their job is to serve their existing customers and to keep the customers happy. So I've always said eventually this will get rationalized, but ultimately its which way too soon to draw conclusion, there have been there have been quarters, where it looks like old.
We're not losing subs anymore in the U.S., then there's quarters, where it looks like all know what losing a lot of subs and in the end.
We'll see where we'll see where it ends up.
I believe that if we could if we could offer some cheaper packages will do extremely well, but I don't see anything in the marketplace that makes me feel like well.
Okay. So.
What happens.
Okay. Thank you thanks, everyone.
And that does conclude our question and answer session for today's conference.
Ladies and gentlemen, thank you.
Commute pardon me thanks.
I think still allowing enact.
Everyone have a great day.
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