Q1 2020 Earnings Call
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Ladies and gentlemen, please standby your conference call will begin momentarily. Thank you for your patience and please standby.
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Ladies and gentlemen, thank you for standing by and welcome to the discovery Inc. first quarter 2020 earnings Conference call.
At this time opposite sounds like kind of listen only mode.
After the speakers presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your Speaker today, Mr., Andrew Slaven Executive Vice President Global Investor strategy, Sir you may begin.
Good morning, everyone and thank you for joining us for discoveries first quarter 2020 earnings call joining me today or David Jones, our President and Chief Executive Officer.
So our chief financial Officer universities, our earnings release, but do not feel free to access it on their website.
Today's call will begin with some opening comments from David Garner then we'll open the call for questions. We're starting I would like to remind you. The comments today regarding the company's future business plans prospect financial performance are forward looking statements, we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act, reaching 95. These savings are made based on managements.
Current knowledge and assumptions about future events, 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 intention or obligation to update them for additional information on important factors that could affect these expectations. We see our form 10-K for the year ended the sensor.
The first 2019 and our subsequent filings made with the U.S. Securities Exchange Commission and with that I'd like to turn the call over to David.
Good morning, and welcome everyone to our Q1 earnings conference call.
These are clearly unprecedented times as we can probably 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 it sounds.
Doctors nurses E.M. keys, and all of the first responders and on behalf of all of Us with discovery.
We thank you.
Hi, I'm enormously proud of how our leadership team and employees have stepped up and pulled together during this time.
They have done so with Brazilians heart and creativity.
[noise] their health and safety is everything to us it discovery and to me.
With meaningful populations across Asia Latin America in Europe, we've 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 miss a beat.
Our early and continued investment in technology and automation.
And moving up broadcast and global infrastructure into the cloud is serving us very well at this time.
We're extremely pleased with the level of productivity the morale of our employee base and how well we're able to serve viewers appetizers 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 in markets and the broader video ecosystem.
Oh, well founded and we're left with a number on knowns ourselves yet.
These uncertain times highlighted distinct characteristics of discoveries business.
And the strategic advantages that set us apart.
We have content leadership in core genres that are durable popular and differentiate.
We have an efficient low cost content production model with global appeal that offers viewers and partner safe and positive branded Myles.
We have short production cycles that provide us with the ability to refresh our deep library quickly and efficiently.
We have demonstrated this with more than 50 self shot shows turned around in weeks sometimes days.
Quoting the extension of our TLC drug or not.
90 day fiance self quarantined.
We have a deep and broad library that we can reach into to nourishment entertain a wide range of consumers globally.
And we have revenues that are 40% long cycle.
Your 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 like Dentek real life talent well for comfort.
Really I already and consistency to families and viewers around the world.
Something that is very relevant during this cultural moments.
Our talent, it's enthusiastically, creating new content at a time when most others can't.
They are probably taking us into their homes, there kitchens garage is gardens or baseband science lives.
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 Reed drama.
Pioneer woman from food network.
Along with her band of kids that are filming her and her home. She is producing fresh episodes that audience is 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 gains took viewers into their called kitchen with a special in the kitchen quarantine episode on food network.
Which was mostly films by the gains kids.
Close to 3 million viewers tuned it.
Networks highest rated in the kitchen ever.
And the little over a week ago.
We leveraged G.I. wise newly expanded reach for for our block to preview Magnolia presents look back and look ahead.
The special drew over two and a half million viewers DIY is highest ever.
But more tellingly 70 M. episode.
On D. I why.
With chip in Joanna was second only to CBS is 60 minutes in the time slot.
It also helped to drive a meaningful uptick on go for de Iwai.
We believe there was a huge and special appetite.
For chip in job.
Two strong and authentic voices.
And they are curators across television and stream.
Supported by their combined almost 20 million followers on Instagram alone.
They're inspiring focus on home family food safety and community has never been more resonant then now.
We're seeing that with everything that 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've already seen but 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 continues to outperform the marketplace with significant ratings growth.
Let in primetime in the U.S. by TLC, the number one cable network among women.
And the function and utility of networks like the food network HGTV VI white and the cooking channel has driven meaningful viewership gains.
We are proud to have supported the many global distribution partners that I've asked to include a number of our channels in there we reviews for broader availability to their viewers around the world. During this time.
Well this incremental distribution will mostly be temporary viewership across networks like d. I why are up over 100%.
And many of our networks are reaching all time highs.
We believe that some of these viewers who are reengaged discovered on networks for the first time.
Well continue to make us apart from 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.
Q1, we delivered the highest ever average audience for our total international portfolio.
It 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 Arnold.
In terms of our screening portfolio deep play motor trend Cdns player go and food network kitchen, or all seeing strong upticks.
Food Network Christian also took a meaningful step forward last week.
With a strong an expanded Amazon partnership.
Which is offering this first of its kind food and cooking products.
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.
Got it 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 were significant uncertainty from a cyclical perspective.
Don't subscribe to the Buda consumption of behavioral patterns being shaped by the Corona virus will be permanently disruptive.
The nearest term question is of course, what does the magnitude and duration of this quarantined 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 market place 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 what 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.
So we are as well represented as anyone across the OTI t. and skinny bundle landscape.
In the U.S. and around the world.
We continue to enhance our portfolio of global Avon and that's fun content and lifestyle platforms.
We recently completed distribution renewals with some key partners in the U.S. for carriage up all the hard channels.
It was a time when many question 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 ovaone EBITDA to free cash flow no. There remain a number of moving pieces. We would expect this to continue.
Good our and his team have been opportunistic and has done a great job managing leverage portfolio and maturities, which she will touch on shortly.
Lastly.
We've adopted and evolve 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 the border.
I'd like to once again, thank all 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 provide a critical services and a big Thank you for 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 was closer to many of our key markets such as Italy in Poland. Among others all of my closures here in the U.S. for a good portion of March.
So even with that total revenues in Q1 were largely flat on a constant currency basis, what a little bit 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 Mexico, you recalled our forward looking financial projections in Alphaville for both Q1 thing 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 by National.
E Commerce companies, well 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 to quarter. Both may and June are looking so.
Be better than April no. We remind you that this is a very fluid marketplace at the moment with a lot of cancellations rolling amongst them up and where appropriate for accommodative as best as we can to our partners needs.
Use 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% inline with our prior commentary of reverting back in line with a broader industry trends.
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 because we receive remits one to two pumps in the rears.
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 and they back.
As many of our key advertising markets in Europe again to shut down we saw a more pronounced impact with March down nearly 10% year over year.
Unlike the U.S., 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 were viewing shares both down as well enough.
Based on preliminary results April is down about 40% in aggregate across all international regions.
Depending on the market the ranges anywhere from down 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 a relatively small portion of our mix.
[noise] International distribution was up 1% year over year ex FX in Q1.
As we've mentioned before we are accelerating the rollout or a D to C services like deeply in some cases coming at the expense or a linear business, which is a response to market behaviors in countries like denmar.
Hospitalization among distributors that we have to push harder to get full value for our company portfolio as such we have continued to play more often.
Which in first that we may NR facing incremental topline headwinds. This is even more pronounced at a time when there are no sport as our value proposition in key markets in Europe is predicated on local sports for example, in Denmark, and Sweden, We're deploying has near exclusivity on certain football rights.
Naturally with no sports being played anywhere in the world hold Eurosport player and Gulf TV.
And even turn premium appears to be play has seen a pullback in activity, which has weighed on segment performance, though we expect momentum to continue whenever play reserves.
So even without sports at the moment, we're seeing nice momentum in the play subscriber growth driven by our compelling entertainment offering.
Similar to the U.S., we have not seen any material changes net subscriber counts.
Where appropriate we may work with distributors in an effort to be good partners and helpful. As they seek zohr near term chart.
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 and many of our practices and procedures. So today, we believe well this moment.
And you should expect us to be appropriately focused here as well.
We are learning valuable lessons during this walked out period casing 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 walk down period, we've been able to create the only 350 hours with new premier content.
Furthermore, with traditional content production larger shutdown or costs, we expect to see Calcutta organization savings versus or 2020 plan and less originals premiere.
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 a bit later in the year, if and when sports return.
We're also refining oil marketing personnel related expenses as we've implemented a hiring freeze and as you could imagine you and do you 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 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 on beyond the end of the year. We would expect total expenses to fluctuate a few percentage points above or below our current.
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 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 up 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 and 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 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 have remain supportive of our business plan and capital structure and important signal during this month.
We remain committed to our investment grade credit ratings, and recently affirmed by the rating agencies and to our 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 group 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 especial 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 leverage should it occur should be viewed as temporary and related only to effect of cold and 19, rather than a change in financial policy.
And with respect to this additional cushion 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.
No our traditional production chain, we impaired for an overtly long period of time, we wouldn't say are 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 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 nestling authorization.
And finally, FX was approximately a $30 million drag to revenue 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 the negative 30 million dollar impact on the other though.
With that I'd like to turn the call back to the operator to take your questions.
Thank you.
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And our first question comes from Jessica Reif fairly from Bank of America Securities. Your line is open.
Oh thanks.
A couple of question.
On sports.
No it wasn't clear I wasn't clear.
And you know recognizing sports card spend on a cash basis.
Are you paying right now and if youre, what flexibility will you get kind of in the backend and are you changing your approach to the Olympics now that they moved is there anything different level like be 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.
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 like you're seeing because you're right.
Advertising actually purchasing so far I think actually pretty good.
Sure I'm wondering I get started and then I'll pass it over to a border.
Having no sports is a challenge for all of us.
But 90% of our deals have either a force majeure provisions or or provisions that specifically relate to us not paying for content that we don't get and so I think what we did a particularly good job in a 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 a 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 went there were only a few months apart the fact that.
We can get appetizers and ER to both of them together, where where we could screen. It together and we're hoping that yeah that is that when people get the Tokyo, what's gonna be.
A real opportunity for people to get back together with a 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'm 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 plan 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 what's you're in the U.S. as I've said for very long time sports works differently outside the U.S. when people want.
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 you know I looked at food and H. GE and cooking with a new sports.
Our channels our than sports the numbers are huge 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 you know or or or Oh, we.
Drama and were 350 hours of live content, that's really working with our characters and so I. We've we've started in most of the sports issue, but I do think it's an overhang here in the U.S. 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 U.S. you have news networks and then you have TLC, an H H a HGTV as the big networks. So we.
With that I'll, just say that Amazon. It 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 it's fantastic. The partnership is strong and they were.
Marketing it.
And I agree with you that this is a moment, where we can we can really shine with that so garner.
Yeah, So maybe just a couple of points to add.
And on the on the 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 council. 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 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 a specific guidance, but right now I wouldn't you know I wouldn't see him.
Change was what we had guided for this year.
And 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 homes here.
And work through this.
Together.
Thank you.
Thank you.
We'll take our next question from Ben Swinburn from Morgan Stanley. Your line is open.
Good morning.
David I sort of 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 yeah, I think everything you're saying makes a lot a sense and all of these trends.
Our probably accelerating because of the 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 from 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, you're changing how you think about it in.
You know your reaches falling in the U.S. really didnt.
No fall to you guys, it's really a an industry issue.
And you've got obviously massive consumption through streaming including on a lot of your products, but you still have they haven't looked 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.
Well 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 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 our shares up really significantly everywhere in the world and it's you know its two months here, it's longer than that a number of areas in Europe, and Asia and behavior really people are spending a lot what time with our key.
Characters, and our and our channels and we think that that's 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 you know we view this really as an important moment for us because as a company our focus is to entertain and where 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 its resonating with distributors they come to us and say could we add DIY why.
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 U.S.
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 I can go 26 viewership of getting all of these channels and all of our character.
Enforces 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.
Some of peak for now for two months people have been enjoying cable for two months. So raises two questions. One of my paying all that money the sports for but also it's a great product I'm spending a lot what time and I'm really really enjoying so what what we should have in the U.S.
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 turn around 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 bylaw, we're seeing which were and invest where the seeing.
Big Big uptake in this idea and then are you going 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.
Leveraging in 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 stuff sports right, but well just back you know we we are we have been building we.
We have a very strong team we have over 150 people in engineers working.
Where slowed down a little bit because we can't hire new but where we're on track with our platforms. All the problems we have outside the U.S. are working exceptionally well there ours.
And the platform that we have that we're working on here in the U.S. 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 or are you 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 you know the specifics.
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.
Associated with that Amazon offer to their fire subs fire users.
Yeah, I would just recommend that you all go to fire, where on the front page, we're getting equal billing with with Hulu and some of the other big great platforms and there were 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 across a couple of questions for you.
On the European side, where you have your sportsmen.
Are there any minimum number of hours you need to deliver a to maintaining type of license fees et cetera. So that's one.
And two is given how clean your company isn't cash flow and the balance sheet.
Talking about maybe leaning into M&A and how you would think about M&A given.
Dislocated from the valuations around the world.
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 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.
When the sports comes back but no there's nothing in those.
Limits.
But again the some fee for whatever it's worth is is relatively small it's very different than here in the U.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 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 a very short time to absorb scripts catalog 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 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.
We added over a billion dollars of free cash flow and we did it in 18 months. 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 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 as us. So we are looking at everything we're going to be but we have a great hand, right now, but I do think you know depending on how this goes over the new.
Next several months there will be some companies that have great IP or great assets.
Are there that are in the they're 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 would you you're well that free cash flow instead of having to cut all this and tried 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 country and so.
We're going to be very careful and deliberate we've got a great Board thats. Good at this you know Oh, we have Bob Myron and the new house family 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 over.
Real strategic assets around the world and seeing what would make a stronger and so I think this is a 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 well 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.
Okay. I guess you one last one on the upfront given the strength your verticals given that you could actually have fresh content in the fall how are you thinking about going to market any upfront where others maybe can't sell anything right now so what's your strategy there.
Well, yes, there is a divided in the market and you'd expect that is such an unusual disrupted moment, but there's a number that we're talking to all of a all of the big players and.
They're going to ultimately make the decision for their or 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 <unk>, 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 liveengage 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.
The viewership of those commercials are up.
Dramatically people 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 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.
Surely do a lot better and maybe the one that moved later do better but we're open for business.
In the meantime were reduced our took to extend that went out 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.
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 in those recent renewals you mentioned.
And then a follow up to Michael's question.
Obviously a billion five in 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.
It's about stabilization of the AD market or what it would take for you guys have to restart the buyback. Thanks.
Okay, good or well I'll have gone or answer.
Why don't you start off go into with with answering that the second part yeah.
So yeah, I mean, United as as you.
He read this morning, we.
Good buyback some 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, though a 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 a year.
And so from the perspective of what I would have to see.
Jamie 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.
It was.
Which is the April.
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 et cetera, so taken with a grain of salt but.
So thats really.
That's really the deployment of capital allocation 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 provided 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 them.
And we.
So.
The size of the portfolio.
No retiring 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.
In some cases meaningful additional charge and.
We we after Fox news launch the next channel that launched was Oh.
Which you know became the number one channel for African American women that was us launching new assets with new IP that we can take around the world then I'd.
Which which became the number one channel and number two channel for women and all day, which was our second asset. It so 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 and Joanna gains have been able to do and the reception for the great content that they created not even Jeff.
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 appetizers love, both on cable and ER and and a in digital so.
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 of these characters and we are we are the new sports arc Archie networks, but on the other half 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, they're watching it all the let the view is higher than almost any challenge on cable and so.
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.
And you should know that we will continue on continuing to honor 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.
Your next question comes from John Tandon from Wolfe Research. Your line is open.
Thank you.
David you guys talked about pushing euro two tiered solutions more aggressively in Europe.
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 a non scripted programming is better positioned.
Relative to script, where production comes back online.
Sure.
Look <unk> Kathleen Finch.
He is or is it just a great creative executive Nancy Daniels, we have we have creative leaders on each of Medicaid each of our channels and we have go to talent that that better authentic they love. The Cook you know they there is a micro I've been on the phone 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 Ah Ah creative team and as good or said over 50 projects 350 hours and one of the 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.
No them, but you know the idea that that we could get Guy fieri, you know or 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 his son looks like look it is living room look at as 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.
Courtney White and Jane Latman Jane on page, Jay and coordinate runs food you know there were on the phone with them every day there just super excited and so is the whole creative team that they can 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 it with with our portfolio.
And they're enjoying anymore 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 we better so.
I I think the slate is going to be a huge advantage for us and our characters.
And 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 at the payment 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 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.
He will then 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 in 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 in 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 hand off or Alexia. Thanks for 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 your carriage agreements and then just found her docs and are there any countries, where you've failed might be able to.
You know arm away then that you can take advantage of thank you.
Okay. Thank you so much one point that I wanted to just add to the to the 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.
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 than we think when they come back or it will kick in in terms of traditional production.
There's some there's some that have come back a little bit in Asia, but can't it's mostly shutdown.
We do have Ah, 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 chases as you know we have over 10000 employees and it was talk.
Those with those were 14 of maybe that the toughest days for me.
In my life is everyone. Okay that has this number when we did I had a number of employees that were struggling and you know if you feel like 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 the be 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 did they come in contact with.
Really an extraordinary effort led by Adriatic Robin David Levy, but it was every day.
And so we're not in any rush to get back to those calls because we couldn't read and thank God. All of our employees 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.
It is facing but where 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 morning, and it were all together 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 used that 14 people want to 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.
Thank you.
Let me, let me maybe add.
To the of the Nordics question, what we're seeing dynamic growth on R&D play platform.
Regarding at the traditional affiliate deals.
You mentioned.
Having lost deals, we've actually gone dark and one with one traditional affiliate and Denmark, and we're seeing very dynamic growth or do you play offering in that market.
And or above the already dynamic growth in other markets and beyond that we're also very excited about the new touch a partnership deals with the likes of Paleo telling more we're we're engaging in you know broader partnership deals both under traditional.
Side as well as.
Wholesale b to B to C relationship for for our direct to consumer products, which I think is going to be a very fruitful a partnership arm.
Thank you.
Right.
Thank you Sir our next question comes from Doug Mitchelson from Credit Suisse. Your line is open.
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 you know costs.
Flux.
To the extent that there's no change in in revenue.
His expectations, where does the flex come from other next round of cost mitigation start to impact DTC efforts or is there still a material amount of flux nutritional business and upper David you know in reference Ben's question on streaming of before we start to run with the all the cart narrative for discovery.
To your existing deals with pay TV distribution distributors 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 or do you have any.
Concerns are pretty steadily distribution at risk and I guess for fun I wish you think consumers.
We'll be willing to pay for Standalone discovery, all a carton 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 of my best friends and that we've done very well by supporting each other and working together a that's what we're doing with go with our authenticated product and there's 30 million broadband only subscribers and so whether its.
Uh huh.
Whether it's Pat answer it talks so whether it's it it's Dave Watson that Comcast or whether it's a rutledge Tom Rutledge charter they're in the broadband business. This 30 million people that 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 know you see Pixar and yes, you see Marvel and and you see Disney films and people look at that can go Oh, I love that stuff and then imagine they open up and they see h., GE and food and and.
And O'brien 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 before my favorite channels and those are my favorite characters. So we all agree and talking to the every.
And if we use 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 that flips and by billing for Netflix.
And the churn for Netflix and any product goes down went into existing distributor.
Thats 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 up 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 be distributors that we're talking to feel good about encouraged that instead of just doing our own thing we're in talking to them about doing some things together.
Okay.
The opex side and I want to answer there is only 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 toolbox year of initiatives that we're still in full swing as we came into the year and 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.
So a lot of this is going to be lasting impacts.
Now obviously, there is timing a 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.
He opens again, that's that's expanding some of the variability.
There's also variability obviously as previously pointed out in the direct to consumer space, but we have a lot of.
By requisition confidence that our variable.
But also the pace at which were 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 contest, where obviously and so it's a function of the.
The ecosystems ability to produce and deliver content and the mix of sort of fee.
Content that we talked about versus let's call traditional production. So it's going to be a mix and that's why we gave that 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 range of calculation to digital initiatives going into this year and as.
You would expect were also learning right now and there is additional ideas.
Coming through and going through the just the pipe here right now.
Honestly this company is functioning very well and this environment and there are a lot of learnings for us and future process setup.
People.
Thank you.
We'll take our last question from Rich Greenfield from My Chair Partners. Your line is open.
Hi, Thanks for taking the question I, just love David kind of from a high level. When you think about the virtual envy Pts 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 I think 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 lives 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.
Took sports out we can do that very easily and so I think there they're saddled with regional sports networks saddled with you know overstuffed, retrans, and ER and and sports channels.
And that's a that's an issue in general.
What 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 U.S. deposit levels are up around the world. So people are spending more time.
The obviously spending a lot more time with our content I think there should be a rationalization of the market.
And as some of this stuff you just get Pute out you know and up and I think particularly in a moment, where we're in a recession and people are really watching every dollar.
TV set people are waiting in line to get things and yet you know how quickly 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 if there if it makes no sense you got a few gap that stuff. When you got to go to the increase you know the players in the marketplace. There all that are stuff in that in saying.
You know not now.
Back off not now.
Yes.
But the the thing that's good for US is where it every single packages all of them and you know one of the things that I think will help US is these things are going to fluctuate airborne hasn't reported yet we'll see how Charlie does I think 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 in 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 been quarters, where it looks like.
We're not losing subs anymore in the U.S., then this 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 I'm, saying, Oh, you can mute or I mean, thank you know just like I think sticking around any of that.
Everyone have a great day.
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