Warner Bros. Discovery, Inc.

Ladies and gentlemen, thank you for standing by. Today's conference will begin in approximately two minutes to allow as many participants as possible to join. Until that time, your lines will again be placed on music hold. We thank you for your patience. Ladies and gentlemen, welcome to the Warner Brothers Discovery second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Additionally, please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may now begin.

morning, and welcome to Warner Brothers Discovery's Q2 earnings call. With me today is David Zasloff, President and CEO, Gunnar Ridenfels, our CFO, and J.B. Perret, CEO and President, Global Streaming and Games. 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. 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 affect these expectations, please see the company's filings with the U.S. Securities and Exchange Commission, including but not limited to the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q2 earnings release, trending schedule, and accompanying slide deck will be available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

Hello, everyone, and thank you for joining us. When we merged the two legacy companies and launched Warner Brothers Discovery 16 months ago, we did so with the ambition to be the greatest media and entertainment company in the world. And we continue to carry out our attack plan in all areas of the business. When you look back at what we said we would do, we're doing it. We said we were going to reimagine the company for the future and focus on free cash flow and delivering the balance sheet. And we are. This quarter alone, we generated over 1.7 billion in free cash flow. and we're anticipating about the same in Q3. This is the result of the hard work of our teams who have been bold, decisive, and disciplined. We've restructured our businesses for the future to position them to drive both profitability and long-term growth, and the results have been significant. And as a further sign of our confidence in our free cash flow capability, This morning, we announced a tender for up to 2.7 billion of our short-dated debt. We paid down 1.6 billion in debt in Q2, bringing our total debt retirement before today's tender to 9 billion since the merger. And as we've said, we expect to be comfortably below four times levered by the end of the year. firmly within the investment-grade rating by midpoint next year, and at our target of 2.5 to 3 times gross leverage by the close of 2024. With our free cash flow and leverage targets in sight, we are better positioned to lean into top-line growth opportunities across the company, and that's increasingly been our focus, starting with direct-to-consumer. We said we were going to build a strong, sustainable, direct-to-consumer strategy focused on profitable growth as opposed to chasing subs at any cost. And we are. In fact, we continue to track way ahead of our own financial projections. And as we told you last quarter, we expect our U.S. direct-to-consumer business to be profitable for the year 2023. this year, a year ahead of our prior guidance. In fact, our global direct-to-consumer business was roughly break-even in Q2 and modestly EBITDA positive for the first half of this year. And our U.S. direct-to-consumer business is generating healthy EBITDA, which is helping to offset international losses, even with the product development costs. and sizable marketing campaign associated with the launch of Max. The migration to Max has gone exceedingly well, with the overwhelming majority of subscribers in the U.S. successfully transferred. While we have seen some expected subscriber disruption, we have experienced lower than expected churn throughout this process. And by all measures and third-party metrics, the consumer experience is top notch. The most important metric at this stage, only two months into our launch, is the amount of time people are spending watching our content. And we're seeing early and encouraging signs of stronger engagement. And they're not only watching for longer, they're also exploring new genres, adventure and discovery, true crime, home improvement, and other nonfiction content. The mix of blockbuster originals from HBO, together with the nourishment and great personalities found on Discovery Plus content, makes for a very compelling content proposition, truly something for everyone. We're preparing to launch Max in markets around the globe over the next year plus. There is significant opportunity internationally in markets we have yet to attack, and importantly, The platform now has full capability to deliver live programming. We'll have more to say about that soon. While Max will be a cornerstone of our company's growth, we also see great potential across a number of our other businesses. One is gaming. We're the only company among our peers scaled in gaming. Next up is Mortal Kombat 1. the highly anticipated new title in the acclaimed 30-year franchise, set for release next month. This comes on the heels of the success of Hogwarts Legacy, which is still the biggest game of 2023. And there's more planned, including the launch of Hogwarts Legacy on the Nintendo Switch in November, just in time for the holidays. More broadly, we are positioning our gaming business to be a much more strategic piece of our IP and consumer engagement puzzle. And we're investing accordingly. At Warner Brothers Discovery, we're one of the largest makers and sellers of content in the world. And it's quality content people want to watch. We had an industry-leading 181 Emmy nominations, including 127 for HBO and Max. the most of any network or platform. As a critical supplier of some of the most highly resonant television series, we are adding incremental asset value to our world-class portfolio. And as we window that content around the globe, we expect to continue to see a tailwind of growth in our production business. Likewise, we have real ambition for the future of our motion picture business the wake of the creative tour de force and global cultural phenomenon that is barbie while the studio's performance has been challenged in recent years and they've clearly under earned their potential we are taking meaningful steps with respect to the creative direction of both warner brothers pictures group and dc and a key facet of this strategy will be to lean into some of our great underutilized storytelling ip it's been 10 years since we made a standalone superman movie and nine years since the last lord of the rings feature for example for many years the secret to warner brothers profitability was tentpole films they'd make two to three of them together with a slate of new original content and that was the winning formula we too believe in the power of tent pulse featuring great IP recognized by people everywhere in the world, our core strength, and we intend to get back to doing what we know works. While we've still got lots to do, we're very optimistic about the growth potential of this business. The culmination of what we're doing at both our film and television studios is further bolstering what is already among the industry's biggest film and TV libraries. And this asset offers a wealth of opportunity in terms of feeding our own platforms as well as others. It's a mainstay of our business to create great content and window it through, creating value in each window. And as you would expect, a lot of analysis and strategic discussion goes into these decisions. In some cases, we'll want to keep premium content exclusively on our platform for a very long time. In other cases, we may sell it to third parties and we don't lose anything by growing the pie. The fact is licensing some library content to other SVOD platforms like Netflix or Amazon as part of a co-exclusive agreement is just smart business. We're expanding our audience while maximizing the value of the asset and providing more revenue streams. And that is our job. to optimize the windowing to get the best possible return on investment. We're also a global leader in sports, including great sports rights from many of the top leagues in the U.S. that in many cases run through 2028 and beyond. We have the best digital and social sports platform for younger fans in Bleacher Report. And we have significant digital rights in the U.S. that we're not currently deploying, but plan to in the future. And that has a real chance to create meaningful strategic values. We've had some good success in Europe and Latin America with layering sports into streaming with various business models. And this experience is informing our view on how to best deploy these sports rights here in the US. Our recent venture with BT in the UK is a great example, having merged BT Sport with Eurosport UK. What is now called TNT Sports is available on both linear and streaming and bundled with Discovery Plus, our current streaming entertainment product in that market. We believe there's significant opportunity in the streaming space for sports, and we look forward to leaning into this incremental growth avenue. Underpinning all of the work we are doing is our strong commitment to operating Warner Brothers Discovery as one company. Consider Barbie. Early this year, we created an attack plan for the summer of Barbie in anticipation of the launch of the movie, which broke records and is now approaching 1 billion in global box office. Over the last six months, every area of the company has played a part in promoting this great film. From the four-part series Barbie Dreamhouse Challenge on HGTV, which premiered in the U.S. to 4 million viewers, and was then broadcast across 146 countries, to Food Network's Barbie-themed Summer Baking Championship, to Turner Sports' sneak peek of the film during the NBA Eastern Conference Finals. It has truly been a one company effort. This is one of the big differentiators and super strengths of Warner Brothers Discovery, where a property or title can benefit from eventizing it across our global platforms, we're able to put the full weight and power of all of our diverse media assets, domestically and globally, behind it to drive awareness and excitement. And the result is truly unmatched. Of course, in light of the cyclical and secular headwinds facing the industry, we are working through some challenges. With respect to Linear, The fact is we have a uniquely different hand, one that we believe makes us more resilient. On any given night, we reach an average of one-third of all cable viewers, and it's a great platform for driving our brands and products, as we saw with promotions for Max, Barbie, and Shark Week. Our ability to make unscripted content quickly, inexpensively, and tailored to viewers' preferences is also a key differentiator. And we believe this optionality provides us with greater longevity and sustainability. At the same time, we've worked really hard on driving efficiency and productivity, enhancing our margins, recognizing that we need to do that because the overall business is facing secular decline. That said, it's still generating real meaningful free cash flow that we are able to use to fund growth. While the linear business is being further challenged by the soft ad sales market, we do see cause for optimism. We've nearly completed the U.S. upfront, and our volume is up, and our price levels are consistent with prior year.