Discovery, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all lines are in a listen-only mode. After the conclusion of the speaker's presentation, there will be a question-and-answer session. Also, please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Andrew Slavin. Executive Vice President, Global Investor Strategy. Sir, you may begin.

Good morning, everyone, and welcome to Discovery's Q3 earnings call. With me today is David Zaslav, our President and Chief Executive Officer, Gunnar Wiedenfels, our CFO, and JB Perret, President and CEO of Discovery Streaming and International. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects, and financial performance, as well as statements concerning the expected timing, completion, and effects of the previously announced transaction between the company and AT&T relating to the WarnerMedia business. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2020, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Good morning, everyone, and thank you all for joining us. This continues to be an exciting and busy time here at Discovery across a range of business initiatives and strategic planning for the next year and the years ahead. I'm very pleased with our focus, performance, and strong operating discipline as we simultaneously ramp up our integration planning, strategic reviews, and approach ahead of the WarnerMedia merger. We are increasingly enthused about the transformative opportunity ahead for our bringing together these complimentary assets, talented creative leaders, and employees all around the globe. This morning, I'll provide some brief commentary on Q3 operating performance and update you on the progress we are making as we work toward the close of our transaction and integration of the businesses. Guna will then take you through additional puts and takes on the quarter. Very briefly on Q3, It was a solid quarter all around. Subscriber growth for our direct-to-consumer platforms picked up nicely post-summer, and we added a healthy 3 million paying subscribers around the globe, reaching a total of 20 million subscribers. And we've seen continued growth thus far in Q4. We were able to deliver this growth as well as driving double-digit growth in both advertising and distribution revenues while converting a healthy amount of EBITDA to free cash flow. This positions us nicely above our guidance of at least 50% conversion this year. And we see free cash flow is tracking to exceed 2.1 billion for the full year. And that's after funding very significant investments in our Discovery Plus rollout. Additionally, and importantly, We have had the opportunity to refine some of our transaction leverage assumptions after examining WarnerMedia's draft carve-out financials. Though we took a conservative approach initially while modeling the pro forma transaction, we now expect our net leverage at close to be at or below 4.5 times versus the five times that we noted in May. And we are currently tracking below the 4.5. This is predominantly based on estimated contractual adjustments to working capital, and to a lesser extent, an improved outlook in our operating performance. Accordingly, we now see a path to reducing leverage to around three times, meaningfully sooner than what we articulated in May. More on this shortly from Gunnar. But this points to a stronger financial footing than we had anticipated as we stand up the merged company and accelerate the pace to de-lever, supporting our ability to make focused investments in growth initiatives even without any asset sales. On the regulatory front, echoing John Stankey's comments on the AT&T call, we are well on track for a mid-2022 close and are engaged in the typical regulatory filing process in jurisdictions around the globe, including our plan filing with the SEC of a preliminary draft of our merger proxy expected out in late November. The transformative upside from the merger is, of course, the global direct-to-consumer opportunity. And while we appreciate some of the questions that a number of you have asked regarding clarity and specifics regarding the product, investment and go-to-market roadmap it is still premature for us to provide details given where we are in the ongoing regulatory review process that said having conducted further operational and strategic diligence i can share with you some broad strokes around what underpins our confidence and enthusiasm in our global go-to-market attack plan first It's all about the content. From the start, under one roof will be a combination of two companies whose common culture of creative excellence, iconic characters, and franchises will result in a differentiated competitive offering. I believe the biggest and most compelling menu of IP for consumers in the world. Spanning comedy to true crime, kids and family, lifestyle to adventure, drama to documentaries, news and sports, and of course, sci-fi and superheroes. I believe the most complete and balanced portfolio offered in one service in the world. And secondly, we view our ability and commitment to tactically invest in our content portfolio as a critical strategic driver building upon our respective long-tenured track records of producing relevant and complementary programming around the globe. This should help to make our service uniquely global and local at the same time. Third, given the breadth of our content offering, we expect the combined service will appeal broadly to all demographics, young and old, with strong male and female genres, Again, very complimentary, such that our global total adjustable market should be on par with the biggest streaming service. Assessing the overlap in respective subscriber bases, at least here in the U.S., we believe less than half of Discovery Plus subscribers are also HBO Max subscribers, which with the right packaging provides a real opportunity to broaden the base of our combined offerings. And with our global appeal, infrastructure, and local market capabilities, our international roadmap is very much still untapped and provides meaningful upside over the coming years. Lastly, our ability to drive revenue and ARPU positions us well for long-term growth, particularly given our plans to market with a lower priced ad light service, starting off in the US and later in key international markets. a meaningful distinction from some competitors, where we see an opportunity to drive value. We gain confidence in this strategic direction from our experience with ad monetization on Discovery Plus in the U.S., where advertisers covet the incremental reach, demos, targetability, and product flexibility, and pay premium rates to address this audience, helping make this tier our highest ARPU offering. The opportunity to scale an ad light offering represents one of the most significant upside drivers for the company long term. While offering a compelling value to more price sensitive consumers and will benefit from Discovery's depth in local ad sales infrastructure and teams around the world to help monetize. It's quite clear that the winners in streaming are and will be Those companies that can provide consumers with the best quality stories, the most appealing content choices, personalized and simple products, and all at a great value. We expect our highly complementary combination will drive such a winning value proposition and will be reflected across key operating metrics over time. A few words on the linear side of the house before turning over to Gunnar. As we think about what can be achieved in terms of bringing great networks and brands together under one roof, the analog to Scripps is a valuable benchmark. And we believe the opportunity is far greater here, both on costs and advertising revenue potential. Ultimately, to better support our core linear business and more broadly, the entire traditional ecosystem. This, I believe, is one of the least appreciated elements of this transaction. Consider with Scripps the platform we created in aggregating female demos, the bedrock on which we launched Premier, our product that offers advertisers the unduplicated reach of a broadcast network across all of our primetime originals at significantly more efficient CPMs than broadcast. We can take that advertising platform to the next level by weaving in sports, scripted news, and mail-oriented programming together with our existing core competencies. It's a true win-win, generating significant revenue upside to us with improved options, efficiency, and savings to our advertising partners by replicating the reach of a broadcast network at better value. Cost synergy opportunities are significant. We draw upon the expertise of our transformation office, which since our merger with Scripps Networks in 2018, continuously challenges our management team and me to refine and transform how we conduct and manage our organization from top to bottom around the globe. Nothing is sacred and no stone is unturned. With Scripps, we ultimately captured more than $1 billion in cost savings. representing about 35% of all non-content expenses and about three times our original synergy target before we stopped attributing incremental savings to the merger. A large chunk of the cost synergy opportunity that we have already conveyed speaks to the best practices and tailwind in place from the integration of Scripps. It's a great starting point. As we refine and integrate global ops, enterprise tech, corporate functions, real estate, direct-to-consumer infrastructure and tech, and streamline efforts across duplicative functions like SG&A and marketing spend, a process that we see broken down into three distinct waves over the next few years. We approach $3 billion in cost saves as a tangible and achievable goal, especially against the combined company that should spend around $35 billion this year and growing from there. Stepping back for a moment to reflect on our direct-to-consumer pivot, nearing a year since Discovery Plus launched, I'm proud of what we have accomplished under the leadership of JB and the world-class team we have assembled over the last few years. We continue to learn a great deal, challenge ourselves, sharpening our focus and gaining perspective for the next leg of our direct-to-consumer journey with WarnerMedia and HBO. And as we've noted recently, we continue to refine our Discovery Plus plans, taking a more thoughtful and tactical approach to investing in the product, and doing so in ways that also support our plans for the combined company after we close the transaction. For example, we are moving forward in priority markets, such as Canada, Italy, Brazil, and the UK, some of which are where HBO Max hasn't announced plans, or in some cases has indicated that they cannot launch in the near to medium term for contractual reasons. As you heard from John, Jason, and the team on their earnings call, HBO Max continues to aggressively move forward with their global expansion plans, most recently in LATAM and last week in Europe. And we look forward to closing the transaction so that we can coordinate and maximize our marketing, technology, and content spend for the enhancement of the combined effort. Until such time, we continue to roll out new and exciting content to entertain and sustain our subscribers around the globe. And our metrics look great. Role to pay remains near 75% globally. Churn, particularly in the U.S., to continues to look strong and approaching peer group lows, while App Store ratings are firmly at the top, while monetization and engagement continue to exceed our expectations, all of which helps to solidify our Discovery Plus base as we endeavor to roll into and formulate a more comprehensive and broader offering with HBO Max. In closing, This is an exciting and dynamic time for us as we plan our next steps. And we are as eager to share them as we know you are to hear them. And we expect that will be in short order. While the opportunity for course capture and enhanced efficiency is both tangible and material, our North Star, our right to play, will be in achieving long-term, sustainable financial growth resulting from the combination of these two great content companies, helping to nurture our important linear presence while driving global scale across our direct-to-consumer platform, anchored by as rich and relevant a portfolio of creative franchises anywhere in the world. I'd now like to turn it over to Gunnar, after which JB, Gunnar, and I will be happy to answer any of your questions.