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 Slabin, 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 Perrette, President and CEO of Discovery Streaming 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 about 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 end in December 31, 2020 and our assessment 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 bringing together these complementary assets, talented creative leaders, and employees all around the globe. This morning, I will 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. Gunnar will then take you through additional details 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 OIBDA 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 after funding very significant investments in our Discovery+ 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 transactions, we now expect our net leverage at close to be at or below 4.5 times versus the 5 times that we noted in May. 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 and 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 planned 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 for our global go-to-market attack plan. First, it's all about the content. From the start, under one roof, there 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 this will provide 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 this will represent the most complete and balanced portfolio offered in one service in the world. Secondly, we view our ability and commitment to tactically invest in our content portfolio as a critical strategic driver, building upon our respective long tenor 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 complementary, such that our global total addressable market should be on par with the biggest streaming services. Assessing the overlap in respective subscriber bases, at least here in the U.S., we believe less than half of Discovery+ subscribers are also HBO Max subscribers, which, with the right packaging, provides a real opportunity to broaden the base of our combined offering. 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 U.S. and later in key international markets. A meaningful distinction from some competitors, where we see an opportunity to drive value. We gain confidence in the strategic direction from our experience with ad monetization on Discovery+ in the U.S. where advertisers covet the incremental reach, demographics, targetability, and product flexibility, and pay premium rates to address this audience, helping make this year our highest ARPU offering. The opportunity to scale and add a 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 complimentary 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. 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 demographics—the bedrock on which we launched Premier, our product that offers advertisers the unduplicated reach of broadcast networks across all our prime-time 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 male-oriented programming together with our existing core competencies. It's a true win-win, generating significant revenue upside for us with improved options, efficiency, and savings for 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. This is about 3 times our original synergy target. Before we stop 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 approached $3 billion in cost savings as a tangible and achievable goal, especially against the combined Company that should spend around $35 billion this year and grow from there. Stepping back for a moment to reflect on our direct-to-consumer pivot nearing a year since Discovery+ 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. As we've noted recently, we continue to refine our Discovery+ 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 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. 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. Our metrics look great. Roll-to-pay remains near 75% globally. Churn, particularly in the U.S., continues to look strong and approach 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+ 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. 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 cost 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. Afterwards, JB, Gunnar, and I will be happy to answer any of your questions.

Thank you, David. Good morning, everyone, and thank you for joining us today. Reiterating David's comments, I'm pleased with what the Discovery team has achieved since the Discovery+ Analyst Day not even a year ago. Over that time, we have added 15 million paying direct-to-consumer subscribers globally, finishing the third quarter with 20 million paying subscribers. Since the start of our Discovery+ journey, we have launched in over 25 new markets, notably the U.S. and the UK, and most recently Canada and the Philippines, with Brazil to come over the next few weeks. At the same time, we have continued to drive growth in markets like Poland, the Nordics, Italy, and India, where we doubled down on our direct-to-consumer efforts with a renewed and expanded content offering. I know our next-generation revenues finished the third quarter with $425 million for the quarter, or a $1.7 billion annualized run rate, with global DTC ARPU of approximately $5 and $7 blended Discovery+ ARPU in the U.S., again supported by our over $10 ARPU for the Discovery+ Ad Lite product, which continues to monetize very well. Investment losses for the quarter were in the low $200 million range, slightly better than our guidance from last quarter, and we expect investment losses more or less in that range in the fourth quarter as well. As always, we maintained a disciplined approach with respect to investing in direct-to-consumer initiatives. As both David and I have noted over the last few months, it is through this lens that we view the opportunity ahead, both leading up to the marker and beyond. We are very focused on nourishing our existing subscriber base with an increasing content offering and new product features. At the same time, you should expect us to be guided by a rigorous analysis of customer lifetime value at subscriber acquisition costs to determine our marketing spend for new subscriber additions. And now I'd like to quickly review our reporting segments. Starting with the U.S., third quarter advertising revenues increased 5% year-over-year. Pricing was healthy versus last year driven by scatter pricing that was up 40% year-over-year. Additionally, we continue to see strong demand for our Discovery+ ad light product, which contributed to the growth in the quarter. This was partly offset by weaker audience delivery year-over-year, some of it attributable to the Nielsen panel issues, as well as the lapping of our very strong performance last year during the pandemic. Furthermore, some of our networks have lost share to the strong sports calendar this year. While scatter pricing is still very healthy in Q4, up 30% to 35% over both upfront and last year, the overall tone in the market is a bit more subdued than in the last few quarters as clients work through the constraints in the global supply chain. And though there is slightly less visibility as a result, we are very pleased with how our portfolio is positioned based on the strength from the upfront and contribution from direct-to-consumer. Distribution revenues increased 21% year-over-year, largely due to the continued growth of Discovery+ as well as linear affiliate rate increases, in part helped by successful renewals with DirecTV, Verizon, Hulu, and other distributors so far this year. As disclosed in our earnings release, Pay-TV subscribers to our fully distributed linear networks declined by 3% year-over-year, while total portfolio linear subscribers declined 4%, excluding the impact of the sale of our Great American Country network last quarter. Turning to international, which I will, as always, discuss on a constant currency basis. International advertising increased 26% versus last year as the global advertising marketplace continued to recover from the pandemic. We also benefited from the Olympics in Europe across our linear and digital platforms. Although, as we've noted in the past, advertising for the Olympic Games is less consequential in Europe compared to the U.S. All of our international regions, including many of our key markets like the UK, Germany, Sweden, Norway, Spain, Australia, New Zealand, and Mexico, were up meaningfully compared to last year, as well as compared to 2019. We see momentum continuing into Q4 even as, needless to say, the year-over-year comps get tougher from here on out. International distribution revenues grew 6% during the quarter, primarily due to the growth of direct-to-consumer subscribers, which have nearly tripled over the past year across our footprint outside the U.S., in part aided by Olympics sign-ups. Turning to operating expenses, total Company OpEx increased 50% during the quarter, or 17% excluding the Olympics, for which the overall EBITDA losses were in line with our guidance of around $200 million for the quarter. We continue to focus on driving efficiency in our core linear networks, and we remain on track to reduce core linear OpEx in the low to mid-single-digit percentage range for the year. Turning to some housekeeping items, net income for the quarter was $156 million or $0.24 per share on a diluted basis. A couple of items to note. First, we recognized a 12-cent per share, non-cash gain from the $15 billion of notional interest rate hedges that we recently implemented to mitigate interest rate risk for future debt issuances to finance the cash portion of the WarnerMedia transaction. The hedges provide additional security and visibility towards our overall cost of deal-related debt financing, which is now trending better than our initial expectations. A final note on this: as the derivatives do not qualify as hedges for accounting purposes, we are required to report the changes in fair market value on our income statement, which could result in some additional variability to our net income until the WarnerMedia transaction closes. We will, of course, call this impact out each quarter. Second, the impact of the purchase price allocation amortization during the third quarter was $0.30 per share. Adjusted for the above, EPS would have been $0.42 per diluted share. Our effective tax rate during the quarter was 15%, and we continue to expect the full-year effective book tax rate to be in the mid-teens range. For cash taxes, we continue to anticipate a rate in the high 20% range for the year, excluding PPA amortization; though this is subject to change as we are carefully monitoring ongoing tax legislation. We expect FX to have roughly a negative $15 million year-over-year impact on revenues and a negative $10 million impact on AOIBDA in the fourth quarter. Now, turning to free cash flow and our leverage. We generated $705 million of free cash flow in the quarter—obviously, a very strong conversion rate of AOIBDA, notwithstanding the continuing investments we're making, as well as the return to normalized content production levels. Year-to-date, our AOIBDA to free cash flow conversion rate is over 60%, and with a few months left in the quarter, we see free cash flow topping $2.1 billion for the full year, and clearly ahead of our 50% conversion guidance. To expand on a point that David made earlier, we now expect our net leverage to be at or below 4.5 times by the time we close the WarnerMedia merger. Over the past few months, having had the opportunity to dig further into WarnerMedia's draft carve-out financials and with better visibility on estimated working capital, in conjunction with our better P&L and free cash flow performance, we now believe that we will have a healthy amount less net debt at closing than originally anticipated. While naturally, these metrics are preliminary and a function of working capital at close, we now do expect to be in a position to reduce leverage to 3 times meaningfully sooner than what we stated in May. Our long-term target net leverage range for Warner Brothers Discovery remains at 2.5 times to 3 times. As we work towards closing the WarnerMedia transaction in mid-2022, we have re-erected our experience, integration, and transformation office to hit the ground running. As we refine our strategic review and integration plans, and as we develop our synergy capture plans further, we are as enthusiastic as ever about the prospects of combining these two world-class portfolios and franchises. With that, we look forward to sharing a lot more in due time. And for now, I would like to turn the call over to the Operator to start taking your questions.

Thank you, sir. And we will now begin the question-and-answer session. Your first question is from the line of Doug Mitchelson from Credit Suisse. Your line is now open.

Doug?

Mr. Doug Mitchelson, your line is open.

A hundred times I still can't figure out the mute button. Look, David, I appreciate the update on the merger and the lower debt leverage. Can you talk about the content vision for the combined Company and how that's evolving? I guess it’s a three-part question, David. The first is Warner Brothers investing enough now in content under AT&T while they're focused on the merger. How are you thinking about how much content spend should be to women in global streaming versus how much the companies are spending today? And do you have visibility on what Warner's making that's going to be coming out in late '22 and '23 and '24 since movies, in particular, are a 2 or 3-year cycle? Any thoughts on that would be helpful. Thank you.

Thanks, Doug. First, this is something John Stankey and I talked about us. We created this vision together of this Company being what we believe is the best media Company with the greatest and most comprehensive content offering. As part of that, we're spending more money on content and leaning in. WarnerMedia is spending more money on content and leaning in. We both committed to do that to keep both of our ecosystems nourished and strong and growing. So, when the deal gets approved and we come together, we'll come together with strength. You see that from the Warner side where we're cheering them on with the success of Dune around the world with Ann and Toby and Casey Bloys having an incredible run at HBO with Succession, White Lotus, Hacks, Mare of Easttown. If you look at the culture and the impact of that content together with the extraordinary library they have, us leaning in on our side with more original content. For us, we're also spending a lot more on the international side to get ready. We think that's a strategic advantage. When you look at the content, we think in terms of the demographics that we will appeal broadly to every demo. I mentioned this, but it's very strong with women. That's a particular strength of Discovery, where we're during many quarters with a leading media Company in America for women. Combined with the length of view of women watching our channels, whether it's Food, HG, Oprah, ID, or TLC, and that’s continuing. We also look around the world; it's not just local content, but we're the leader in sports in Europe. They have sports in Latin America. CNN is the leader in news with the most compelling news brand around the world and one of the few global, arguably the only global news service that has the kind of resources around the world in news gathering. As we go out and build this service and make this offering, I do think the best content wins. There's a great product in Netflix, in entertainment; there's a great product with Disney, with Chapek (ph) building. We believe we have a comparable product, maybe even more diversely attractive in entertainment. But on top of that, we also have sports, which we're using in Europe and learning a lot from. In markets like Poland, where we're doing news and sports together with broad entertainment and nonfiction, we're finding real meaningful traction and a real reduction in churn. I think we have a lot to learn, but we have a terrific product. We're working on our go-to-market. We have brought on an old friend of mine, who I've known for 15 years, one of the most talented people in the business. He's busy with several other things, but we do have a commitment now that Kevin Mayer, who built Disney+, will be in the car with us as a consultant with JB and me and Bruce and Gunnar and the whole team. As we've already built, as we talked about a go-to-market strategy. We're going to be honing that. We're eager to get in a room with Anne and the team at Warner. I was there last week meeting for the first time with Anne's whole team, and they're super smart. I think we have the best menu.

Doug, just one point I would add; obviously, we scrutinize each other's investment plans as part of the deal discussions. And as we said before, all the financial guidance we have given around the deal is always assuming a pretty significant step-up in content investments over the coming years.

Your next question is from the line of John Hodulik from UBS, your line is now open.

Hey, guys. Thanks. A couple of quick questions on advertising. Obviously, a lot of sort of trend going into the fourth quarter, you got the step-up from the upfront, but potentially some slowdowns in supply chain issues. Dave, is there any way that you guys could sort of characterize what you see going forward on that side and maybe break out what you're seeing in terms of the linear business versus the DTC business? Thanks.

Sure will. I will just start with this; this is the most successful upfront that I've seen in my career. I think from an industry perspective, it's up 20. It was a very materially bigger upfront for us because of Premier and because of the length of view and certain advertisers wanting to be aligned with the brands that we have and the characters that we have. I think it's a big, big helper to us that we had a very strong upfront. There are supply chain issues. There are putt level issues, but we're still seeing that there will be material growth in advertising. We can't predict what's going to happen in the future, but as I've said before, I saw a lot of people in the mid-90s saying that it's the end of broadcast television. It may be a transition away from a lot of the younger demographic being on there. But we see huge numbers and we're not getting credit for it. I think one of the reasons why the ad market was up so much for us is the advertisers know there's a massive audience over 55 watching food, watching HG, watching Discovery, watching ID. They get those. Right now, they get them for free. We talked about in the upfront number of us in the industry independently; we're out there trying to get credit for that. I think the linear platform is here for quite a long time. There will be ups and downs on advertising. But advertisers, they find it very effective to be in linear video, much more effective than others. We have the complemented Discovery+, which is just a huge driver for us in terms of demographic complement and attractiveness.

It's fine. I don't really have a lot to add to that, David. We're feeling very, very good about our position, the upfront, and the continued contributions from D2C. But I did want to point out a little less visibility and for known regions. But we'll be growing very healthily in the fourth quarter, I believe, from today's perspective.

Your next question is from the line of Jessica Reif Ehrlich from Bank of America. Your line is now open.

Hi. Thanks. I have two questions. On the integration, I appreciate all the comments you did make. What is the most challenging area and one area of opportunity? You've gone through it at Discovery already in waves. But on your technology stack, can you talk about how you transitioned off of the Major League Baseball — Stemtech, off of Stemtech, created your own. So as you look at combining with HBO Max, what are the challenges and what are the ultimate benefits and cost savings? Second question, David, you said in your prepared remarks that you can make acquisitions without asset sales. I'm just wondering what pieces you think you're missing in the combined Company?

Okay. Let me start by saying, look, I don't think we're missing anything. The first thing we're going to do is look to drive all the tremendous assets and the differentiated IP and the great library and local content that we have. Pull it all together and go to market. We think we have something quite strong. I'm just making the point that there will—given that we are going to be delivering quicker, given the fact that we will be much lower leveraged than expected. There will be an opportunity for us to look at IP and to see where we need more help if we need more help. On the integration side, we're really lucky. We got two big tentpoles here: 1. Gunnar will be the CFO of this Company. He did an exceptional job. He led the initiative with Scripps, where we said we'd be less than 3.5 times leveraged two years later and we did it in less than a year. We said we delivered $350 million and we delivered over a billion. All of that was just cost, not revenue synergy. He came up with these targets and is quite confident in those targets. Gunnar will be kind of the lead horse here. He'll talk to it. We have a very experienced team here. Bruce Campbell, JB, Adrian, and I have been together for 25 years. We're looking forward to bringing in some incredibly talented people at Warner. When we acquired Universal, JB was the one for Bob Wright and Jeff Immelt that ran the integration of that entire transaction, which was cable, movies, and theme parks with over 146 work teams and workgroups and did a magnificent job on that. We're fully deployed. There's a lot that we can't do now, but Gunnar, why don't I pass it off to you?

Yeah, and I'll let JB comment on the tech part of your question, Jessica. But again, from the perspective of challenges, as I've been saying from the very beginning, we've taken a conservative approach to this and we're very well aware of the size of the checks that we're riding here for and this combination. We have been careful with our assumptions. All the work that we've done since gives me more confidence in our ability to deliver or against this. As David said, and as I said earlier in the prepared remarks, doing more work now, having transparency into, albeit draft carve-out financials for the WarnerMedia carve-out group. The cash payment is going to be a significantly lower one from today's perspective, that gives us a better starting point from a leverage perspective. We are well aware that we cannot do more than one of the leading carriers as smoothly. We have already positioned ourselves favorably for the near term.

Yes, it's a significant opportunity for us. We are currently conducting an audit of both platforms. The decision is not straightforward; we see it as multiple different modules that comprise the various components of both tech platforms. We have considerable experience, as you pointed out, regarding the effort and discipline needed for re-platforming in either direction. We haven't made that decision yet, but we are in the midst of an extensive diligence process to determine which is best in class for both. It might be a combination of those depending on specific modules in the platform that we may utilize. We view it as a great opportunity because Rich, Jason, and their team have dedicated a lot of time and are actively investing in upgrading their tech platform. We have also invested significantly in our own upgrades over the past year and a half. As the two teams converge, we will essentially have the option to choose what we believe will be a highly appealing tech buffet, allowing us to optimize the best elements of both as we move towards a unified platform going forward.

And Jessica, maybe just one — I want to clarify one thing because if I understand your question correctly, you were referring to acquisitions. That's nothing that we said in our prepared remarks. Just to clarify, we're not anticipating or planning for any acquisitions at this point.

Thank you so much.

Your next question is from the line of Alexia Quadrani from JPMorgan. Your line is now open.

Just a couple of questions if I can. How do you think about growing local content following the success you've seen by others with that strategy? And then secondly, really on the news side, is it better to have a standalone new streaming service, in your opinion, or combine it with entertainment streaming?

Thanks, Alexia. One of the real advantages of Discovery is for 20 years, we've been in-market with local teams selling locally, producing local content throughout Latin America, throughout Europe. In Europe, we expanded into free-to-air in a number of markets where we're the equivalent of NBC or CBS. In some markets, we're the equivalent of NBC and CBS combined. In Northern Europe and Poland, we're quite big with a number of free-to-air channels in Italy and Germany. We have a library that's meaningful in each of those markets. We have a lot of data on what people are watching. We also have sports in Europe. We've tried a lot of things; some haven't worked out as well as we'd expect. That’s a good thing because we've learned that sometimes packaging the sports independently doesn't work as well as packaging it more broadly. A number of sports together reduces churn significantly and makes the appeal higher. When you put sports together with entertainment and nonfiction, we came out with the Olympics. We had a million-plus sign-ups for the Olympics. We continue to learn. That's a good thing. We're continuing to invest, learn, and grow. What John, Jason, Anne, and the team are continuing to do on a parallel basis independently. As we come together, we'll all be smarter. You look at what people thought about windowing as a student of this and the meetings I'm having, what's the right windowing strategy? What works best for direct-to-consumer product? Is it better to build up a movie in the theater and then bring it? Is it stronger on the platform if it goes day-and-date? Is it stronger if it goes day-and-date at $30 versus free? There's a lot we are learning just as observers. There's a tremendous amount Jason has learned, and Anne and Disney have learned, and what the industry has learned. The great benefit for me is I have this ability to listen. This has been a great experiment in how people are consuming content. When people come on for a movie or series, what's the reaction? A lot of what's on the Warner side, I haven't seen because, at this point, we can't see it. The general industry knowledge and trends are things that we're noting aggressively, and we're continuing to experiment in Europe. On the news side, we've been experimenting ourselves. In Poland, we went independent. Now we're packaging it together. I think it's probably going to depend on the market and depend on the offering. We have a very strong service in Poland, and it's been very helpful to us. We're one of the leading voices in the market, and we have a 24-hour news channel there that's quite compelling. We don't know what's the right answer yet. But having news and sports – news is some – the more people go to a direct-to-consumer product, the lower the churn. The more time they spend, the lower the churn. It's why we're so excited about how much time people are spending with Discovery+, which has a library that's being broadly viewed. The idea that people are spending hours on that product and the churn is low is encouraging for what bodes for the combination of the two. But if you could put news or sports in, people also go regularly for that. It's another reason to have the service. It's another reason to value the service. Another reason not to churn out of the service. Disney has been very effective in doing packaging services. We're not putting them together, bundling. The current plan right now for CNN, as we've read about it is exciting, and we'll look and see.

Your next question is from the line of Kutgun Maral from RBC Capital Markets. Your line is now open.

Good morning and thanks for taking my questions. I wanted to ask about DTC investments for standalone Discovery and then drill in a bit on the deleveraging comments. So first, given the deal, it clearly makes sense to take a more disciplined approach to your DTC strategy. I assume this will drive some near-term financial benefits. Can you provide a bit more color on the DTC investment levels going ahead? I know you called out the low $200 million range for Q3 and Q4. Where are you seeing some opportunities here? Is that a good quarterly run rate through deal close, or can the losses continue to narrow given the strong top-line trends? And then just second, accelerated path to deleveraging post-deal close is very encouraging. Is there any more color you can provide on the drivers for both Discovery standalone where you continue to deliver robust free cash flow and then on the pro forma outlook? Just Gunnar, it's fantastic to hear about your continued role here, and I know you provided a lot of details already. Any more specifics on the improved pro forma leverage targets, particularly if there's an updated view on pro forma EBITDA, given maybe some minor asset sales from the WarnerMedia side? Thanks.

Great. Thank you, Kutgun. Let me start with the delivering piece here and give a little more color. Again, there are two things that we have updated. One is our model of how we look at pro forma combined financials for the Company, and number two is just flowing through our current performance, and that’s linked to your first question as well because we're just doing a lot better, generating a lot more free cash flow than we anticipated half a year ago. You take a step back; the challenge here is that WarnerMedia is not a standalone Company but is a carve-out group. We made certain assumptions about what the balance sheet of that Company and carve-out group would look like, but had to wait for some still draft carve-out financials to get full confidence in the financial setup of that combined entity. Accordingly, what we put into our model and what I presented to rating agencies for the rating discussion was a conservative model not fully flowing through certain adjustments. The most important, one of which is the working capital adjustment. We have always talked about the $43 billion as subject to adjustments. From today's perspective, the working capital adjustment looks like it's going to be $4 billion to $5 billion lower in terms of what the net payment is. This will have an impact on the net debt balance we’re going to start this Company with. That has a very significant impact on leverage. About 25% or 30% of this improvement is driven by our better operating performance. Obviously, better OIBDA improves the denominator of that leverage equation, and that’s developed very nicely as well. I do want to caveat; as we said right now, it looks low at 4.5 times. This number is going to move around with working capital. What’s not going to change is the very significantly increased confidence I have in our ability to reduce leverage below the 3 times and very quickly get us into the long-term comfortable leverage target range. I want to point out we have already dissipated very significant reinvestments in our business case. To your first question about the D2C investment, I’ll let JB talk about some of the opportunities a little more because we do have the Olympics coming up and market launches kicking in here. But you’re right; we’ve always looked at capital allocation through the lens of risk and return. The return side is almost fairly easy in this space because it’s just the relationship between customer lifetime value and subscriber acquisition costs. It’s fair to say that we ask the marketing teams to give us a bit more cushion between the two to manage some of the uncertainties going into scenarios for next year. We should see lower investment losses, especially if you keep in mind that the beginning of next year we’re starting to comp against various significant investments we made in the first quarter of 2020 as we launched the U.S. product. At the same time, I want to point out we’re continuing and as David said, we’re continuing to nourish the existing subscriber base we have. We’re continuing to invest in content in a significant way, so keep that in mind over the next few quarters.

And the only other thing I’d add, Gunnar, is obviously, as we approach the deal term, not surprisingly, many of the partners that we work with internationally that have been a great part of our success—heard us talk about this also asking the fair questions about how much money and how much effort they should put behind launching a new market as we go into 2022, given questions about the future brand and the future product offering. We’re getting the same questions from partners, which is totally legitimate. In some cases, pushing off marketing and, in some cases, content expense to later when we have a better view of what the combined product will look like. We can come back to our partners with a more definitive sense of when and what we will be launching together.

Your next question is from the line of Rich Greenfield from LightShed Partners. Your line is now open.

Thanks for taking the question. A few months ago, WarnerMedia left behind its own channel platform. I think they've joined Disney, Netflix, Hulu, even Apple TV Plus. We're just looking at— So they were just looking at the DTC subscriber business and wanting to be in a fully direct relationship versus sort of a whole down relationship with Amazon. I think that's sort of puts Discovery by common stars as sort of the 3 largest players on Amazon channels. Again, sort of David, your perspective big picture hasn’t been about the puts and takes of Amazon, whether going fully independent is something you can see Discovery’s future, or whether you think companies like WarnerMedia had been in the state not working with Amazon channels, and just be curious about how you think about that. Lastly, including calendar on VARICK, are you planning on keeping more HBO Max and Discovery+ separate with the bundling comments you were making, or is that decision of integration still not made?

Thanks, Rich. We have a go-to-market strategy that we feel we’ve built. I think having Kevin Mayer in the passenger seat with JB and Bruce and I, and eventually with the Warner team, with all of his knowledge and expertise, having built and driven Disney+ globally, I think will help to finalize and fully inform our strategy. Given where we are on the regulatory process, we're just not ready at this point to share all that with you. We expect to and we will soon.

I mean, Rich, on the channel store question, the reality is they’ve obviously been a very good partner of ours on the Discovery side. We’re well aware that, as you said, HBO is taking a different position. I think the three questions that we’d have that we are waiting to engage further with the HBO side are: 1. We have found that hit—there is a—the question about these channel stores bringing in a different customer base than what we might be able to address directly is an ongoing question. We’ve certainly seen some good incremental subscriber growth coming from that channel store ecosystem. How much of that is cannibalistic versus what we could do direct or not is an ongoing set of analysis we have going. We want to compare notes with the HBO team at the right time. The second is the data element and the customer relationship, which I think is a little less known. I think as some of the Amazon executives have talked about publicly now, we do have access to customer information as part of our relationship, which is an important differentiator that doesn’t make this just a traditional anonymized channel store relationship but where we actually have customer information on the channel store consumer. That makes the equation a little bit different. You overlay those two things, and we say, the third thing is we want to have more engaged conversations with the Warner team and look and see whether the strategy that they’re following today or the strategy that we’re following today makes sense for the combined. The North Star will be two things: ultimately, how do we get the product in front of more consumers in aggregate? How do we do it in a financially strong way? If we think we can deliver a—still get the customer relationship, but get in front of more people with the right economics, it’s one that we will certainly remain very open to. We haven’t made a decision definitively, but we are remaining very open and we’ll certainly this will be part of the story when we come back to you, Rich, and the team. We’ll tell you more about it at the right time.

Your next question is from the line of Steven Cahall from Wells Fargo. Your line is now open.

Thanks. Maybe – Gunnar, thanks for that color on the lower leverage and the expectation for the merger. You also mentioned that you're having some pretty encouraging conversations about raising the debt. I’m just wondering if that’s going to come in a little cheaper. I think you gave some steady-state guidance of around 3 times for the combined Company initially and getting there in about two years. Should we assume that you get there a little more quickly just because you're going to be starting from a lower base? Or is it more that you’ll just have a bit more flexibility starting from that 4.5 times or below? And then maybe one for JB on Discovery+ and NextGen. Is it logical for us to assume maybe just a little bit slower pace of net adds going forward as you take a more focused approach and avoid stepping into places where HBO is strong and be a bit more selective? If that is the case, I’m wondering if there’s some free cash flow benefit that near-term strategy just because SAC expense runs a little bit lower. Thank you.

Great. Yes, I’ll start with the flexibility. As I said in my prepared remarks, I am very convinced from today’s perspective, that we’re going to hit that upper end of our target range of three times earlier than we originally mentioned. It’s 2.5 to 3 times that I want to see going forward. Regarding raising debt, as we’ve mentioned the $15 billion hedge we have put on, we’ve locked in very attractive rates with this $50 billion hedge program. I don’t want to make promises; it will still take time before we implement financing. I believe we’re in a comfortable position relative to what we put out in the original statement and in our deal models. I do want to provide some clarity on the leverage targets. What's not going to change is that I expect to see an acceleration closely below the 3 times target sooner than originally communicated. In both cases, we should be achieving or exceeding expectations here. So, I expect a very strong free cash flow performance as we move forward. I do want to have the balance sheet in the best possible shape as we come up and closing the deal. I've explicitly guided to at least $2.1 billion of free cash flow, a significantly higher conversion than what we went into the year with.

Yes. Consistent with what Gunnar just said, we should assume we are continuing to push and see good growth in the markets where we are in. We’re launching our newest market in Brazil here over the course of the next two weeks. We’re excited about that and still see healthy growth out of those markets. We're spending at levels to Gunnar’s point that we think are reasonable; however, there is a slightly more conservative SAC to LTV ratio we’re spending at, plus the slowdown in some of the new market launches as we go into the end of the year and into 2022. It doesn’t mean that the net add numbers will be a little bit slower than they might have been in the past.

This will be our last question from the line of Ben Swinburne from Morgan Stanley. Your line is open.

Thanks. Good morning. I think the release noted renewals with DirecTV and Verizon during the quarter. I'm just wondering if you guys could give us a little bit of color on the key takes there and whether you see healthy affiliate fee growth coming out of that or any changes in packaging. If the merger impacted how you approach those deals, given, David, you’ve made that point that bringing the Turner networks in as a real underappreciated asset and part of this transaction. That's my first one. And then I just wanted to come back, David; there is obviously a lot of focus on the merger and including your management team that you're putting together. Congratulations on bringing Kevin on board. Is that — I don’t know how much you can say, but is there hope that that converts from consultancy to an employee? I’m curious if you still going to remain Chairman of Dezelem, which I think is, at least in some regard, a competitor to you guys in Europe.

Thanks. Len Blavatnik is a very old friend. He worked with me, Kevin, and providing the opportunity for us to get a good amount of Kevin's time. He is contracted to LAN and doing some other things as well. He’s a great entrepreneur and he’s doing some exciting things. This is one of them. It’s going to be really helpful to JB and me and Bruce. He is having a great time doing what he’s doing, but he’s super excited about getting in and giving us the full scope of his experience and brain on everything he’s seen and learned. The team at Warner and the way they're growing, the knowledge and capability there, the attack plan they have is really impressive, and the resources are very strong. If you look at the strength of that product, you look at the strength of our product. I think we have a lot of good people. You’ve seen through the hits for our history with Scripps that we're about who are the best people. I think we're going to build a really strong team and bring in some outside experience. It’s encouraging how well they’re doing and what we are learning along the way, and that’s a big helper. On the affiliate side, Gunnar, you could fill in more. But I think we reached deals that were very favorable for us on the carriage side, very strong. It’s a win-win. They want to commit to carry all our channels. This whole idea that a bunch of our channels are going to get dropped never happened. They’re good value. I don’t say that with glee, but when you look at the overall package on viewership, we’re a great value. They’re making money selling our advertising on our services. It went well for us with meaningful increases and real security, which is a good sign for us as we make this transition together. Gunnar, anything to add?

Just obviously, the caveat that we don't call the support or we don't control the subscriber trends. That's always the—and we have as much visibility into that as many of you on the call here, but I'm very pleased with distribution team's successes. This year we’ve gotten done so many questions about the outlook. We continue to go through deal after deal after deal with very encouraging results.

Thank you for joining us today. And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.