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Discovery Communications Inc (DISCA) Q4 2018 Earnings Conference Call Transcript

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Discovery Communications Inc  (NASDAQ: DISCA)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Discovery Year-End and Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Andrew Slabin, Executive Vice President of Global Investor Strategy. Please go ahead.

Andrew T. Slabin -- Executive Vice President, Global Investor Strategy

Good morning, everyone. Thank you for joining us for Discovery's fourth quarter 2018 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; Gunnar Wiedenfels, our Chief Financial Officer; and JB Perrette, our President and CEO of International.

You should have received our earnings release, but if not, feel free to access it on our website at www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar and then we will open the call up for your questions. Please try to keep to one question, so we can accommodate as many people as possible.

Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events and they 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 Annual Report for the year ended December 31st, 2017 and our subsequent filings made with the US Securities and Exchange Commission.

And with that, I will turn the call over to David.

David M. Zaslav -- President and Chief Executive Officer

Good morning, everyone, and thank you all for joining us on today's call. Before we begin, I'd like to extend a warm welcome to JB Perrette. Our President and CEO of international. JB and I've been working together for almost 20 years and I'm pleased that he'll be joining us on this morning's earnings call.

With so much exciting activity taking place across our diversified international portfolio, JB can help provide some color and perspective on what's taking place in the many international markets in which we operate. I'm pleased to report that we delivered a strong set of operating results this morning capping off a transformative year for Discovery.

Coming up on a year since our merger with Scripps, I'm proud of the achievements and progress we've made in a short amount of time and even more excited about the opportunities ahead. Over the last year, we've reengineered our company creating a leaner, more efficient and more focused global operating structure, represented impressively in our expanding operating margins, which increased by 600 basis points this quarter and we expect to expand our margins further in 2019, as Gunnar will discuss.

Our better-than-expected free cash flow generation and our significantly reduced net leverage reduced by roughly a turn in just 10 months. We are free cash flow machine and we intend to drive it hard. We have also taken meaningful steps to strengthen and solidify our core businesses by adding exclusive new content and capitalizing on the uniqueness of our global loved brands and treasure trove of IP.

We are powering people's passion with immersive 360 degree media ecosystems in popular and valuable content categories, uniquely combining linear and direct to consumer experiences. And we continue to enhance our global suite of brands and IP that have real utility and function, helping to further differentiate us from our peers.

We have a growing opportunity to more effectively attract and engage viewers around the world and across all platforms. Against the backdrop of our position as the number two TV company in America, including broadcast and cable. Our leadership position in 200 countries and territories around the globe with multiple channels in every market making us the number one pay TV company in the world.

We cast the uniquely wide global net essentially unparalleled. Our existing reach allows us to drive awareness to our emerging set of consumer services. I've referred to this in the past as having a brick and mobile presence or the ability to drive awareness on the ground to our mobile and direct to consumer presence.

Our ubiquitous global brands and pay and free-to-air channels such as the Discovery Channel, Animal Planet, Food, HGTV, MotorTrend, Science, TLC, ID, Oprah and Eurosport and valuable strategic long-term partnerships like those with the Olympic Games and the PGA TOUR, the European Tour and Tiger Woods help to differentiate us on this front.

Our global IP which we own above the globe is also distinguished by the fact that it marries entertainment with function and utility. And in an environment where 5G and bigger, broader pipes create wider lanes into the home and directly to consumers wherever they are, the nature of what nourishes people can and will change.

We are extraordinarily well suited to capitalize on that. We view our passion verticals like Food, Home, Natural History, Science, Auto and Oprah as representing great examples of where our functional content can extend into new ecosystems.

With the conversation with viewers, fans and participants is elevated into an experience that brings watching and doing together. When it comes to traditional scripted content and movies, people watch that content. We have an opportunity to create content and experiences where people watch and do. Additionally, our strategy has been to own and control virtually all of our content rights, in every window in every market around the world.

We have purposely left meaningful revenue dollars on the table by playing the long game as compared to many of our peers that have for example hived off digital distribution to any number of streaming services or sold off international rights. As a result, we will not have to buyback content and give up revenue to drive our strategy forward.

It allows us to have great speed to market and accelerate our ability to scale as services gain consumer appeal. For example, let's look at the food and cooking category. A broad genre that represents a multiple hundred billion dollar addressable marketplace in which we have excelled as a perennial top cable network for decades.

We enjoy rich engagement with the strong and trusted brand that is loved by fans. The Food Network reaches over 115 million global fans per month on a digital properties alone. And they consume over 450 million monthly video views, enjoy a leading social footprint as 10 million monthly readers of our Food newsletter and over 8,000 recipes that are regularly assessed.

When fans think of food, our brands are well represented and our relationships run deep and wide and serve as a great backbone from which we can continue to pursue entirely new business models in our drive to build and own the global cycling ecosystem.

We acquired the global cycling network last month. It is a targeted and highly valuable global audience including a sizable group here in the US, and it follows on the heels of our multi-platform global alliance with the PGA TOUR, in which we are seeking to super serve communities of passionate sports fans.

We first invested in the global cycling network two years ago and recently took a larger majority ownership position. We are now the leader in serving passionate, highly participatory and high income cycling enthusiasts around the globe, a $50 billion plus market.

The business model has multiple revenue streams including advertising, subscription, commerce and events among others, and by complementing Eurosport's position as the home of cycling in Europe. We believe there is great upside to this combination and offering, and it's a terrific blueprint much like MotorTrend.

Another strong example of vertical where we have been able to drive an immersive 360 degree offering by leveraging our linear presence in-depth IP and brand recognition with fans. We've gotten off to a great start with Golf TV. Our long-term relationship with the PGA TOUR, and we are very pleased with the early product results while we are still in beta and really just getting started.

We're happy with the quality of the technological capabilities thus far and early engagement numbers are impressive after only a few events. We're super excited about our global relationship with Tiger Woods and the initial Tiger content is proving to be a great driver of interest. Tiger is having a lot of fun with the interface with fans and we've already produced over 30 original pieces that have been consumed by millions of fans over just the first three tournaments.

And we are enthused by the positive perception we've seen to both the linear and OTT product within the initial countries where we've come to market. And we are hard at work building something truly unique in the years ahead. As we dig deeper and refine our strategy and direct to consumer under Peter Faricy and his team, we gain a great perspective on how best to pivot our resources financially, strategically, technologically and operationally with the consumer first mindset that engages fans across the breadth and depth of our functional content verticals.

And building upon the experiences we've gained from our initial forays into this ecosystem such as launching the Eurosport player and our D GO apps which are now a several hundred million dollar a year business and growing. We've gained some great insights into what works and what doesn't.

And you've heard me say repeatedly achieving success in the direct to consumer world will require a lot more than a simple shifting of content from one platform to another. We believe a successful offering requires an experience that is immersive, trusted, informative, educational, social, and community-driven and by a virtue of our many functional verticals we are well suited to successfully pivot our businesses forward. Gunnar will take you through the financials in detail in a few moments.

But I'd like to highlight just a few key items. Our brands continue to strongly resonate and feel differentiated within a content landscape that is increasingly cluttered and crowded whether marked by the continued momentum at TLC picking up even more momentum from where it finished 2018.

As the number one ranked channel in Prime in January for women 25 to 54 or the impressive resurgence in ratings at both Food and HGTV that began midway through 2018. With the continued success at ID which maintained its number one position in total day for women 25 to 54. Thus even with the noted rating challenges at the flagship Discovery, which are improving and Discovery is still the number one network for men in Prime at sports. Our portfolio still achieved domestic advertising revenue growth of 3%, despite not having news and sport which speaks to the power of our broad portfolio balance.

We launched additional legacy Discovery Networks late in the fourth quarter on Hulu and Sling solidifying our long-held view that our portfolio brands does indeed resonate in an OTT world, and we continue to strive to partner with every and all key OTT players in the marketplace.

Turning to international, while our results are somewhat skewed due to the tough comparisons against the China Mobile distribution deal and deconsolidation of our Eurosport Germany ProSieben venture. Our underlying international performance remained solid particularly in light of softness in certain international markets such as UK with Brexit, Italy and Mexico due to economic and political challenges.

We remain focused on continuing to integrate and take full advantage of Scripps content and brands internationally. It's still very early and will take time to see these benefits fully materialize, but less than a year into it, we're seeing positive signs on our three main objectives and benefits. One, driving meaningful cost savings by replacing acquired content. These content cost synergies are a meaningful contributor to yet another quarter of margin expansion that we have delivered in 4Q and anticipate more in 2019.

Two, leveraging the previously unexploited content and formats to strengthen our existing international networks. Scripps content is now making up from single-digit to low 20% of schedules in certain key markets such as Germany, Italy, Brazil and Mexico, and we are seeing continued improvements in performance as well.

And finally, three, launching new pay free-to-air and digital branded services focused primarily around Food and HGTV. We're in markets such as Europe and Latin America, we are securing commitments and getting off to a great start with new network launches.

Lastly, we believe that we have the right combination of linear and non-linear platforms. The strongest hand in global IP and some of the strongest brands and creative curators in the world. All supported by a strong and delevered balance sheet throwing off a ton of cash which provides us with great runway and optionality. We are confident in our ability to execute during this time of disruption and during this time of great opportunity.

With that, I'd like to turn the call over to Gunnar.

Gunnar Wiedenfels -- Chief Financial Officer

Thank you, David, and thank you, everyone for joining us today.

As David stated 2018 was a momentous transformational year for Discovery as we completed the acquisition and integration of Scripps. And I'm so proud of what we have accomplished operationally, strategically and financially. We remain well ahead of our original expectations and our synergy realization and overall company transformation and are very optimistic about Discovery's outlook.

Let me now walk through our fourth quarter and full-year financial results. My commentary today will again focus on our pro forma results, which include the operations of Scripps as well as OWN and MotorTrend, as if all had been owned since the beginning of 2017 and will be in constant currency terms for the international and total company commentary unless otherwise stated. Please refer to our earnings release filed earlier this morning for all of the detailed cuts of our fourth quarter and full year results.

For the full year 2018, Discovery achieved or exceeded all of our total company guidance metrics with 8% full year adjusted OIBDA growth helped by a decline in SG&A in total cost due primarily to strong synergies from the Scripps transaction.

Over $2.4 billion of reported free cash flow, as we benefited from strong operating performance and working capital timing and efficiencies partially offset by Scripps related acquisition and integration costs. And as David noted, we ended the year with net leverage of 3.7 times roughly a full turn lower than when we closed the transaction.

Looking at the rest of our full year results, total company revenues were up 3% with 2% domestic growth, which was driven by 3% advertising growth and 1% distribution growth and 8% international growth, which was driven by 3% ad growth, 5% distribution growth and almost 90% other revenue growth primarily from sub-licensing a portion of our Olympics rights in the first quarter.

This was partially offset by a 66% decline for education and other due to the April sale of our education division. Pro forma revenue growth excluding the impact of the sale of the education business was 4%. As I previously noted adjusted OIBDA grew 8% well above revenue growth as total company costs were down year-over-year despite having the first quarter winter Olympics in Europe and despite continued investments in digital initiatives as we realized significant synergies from the merger.

Full year net income increased to $594 million versus a net loss in the prior year, which was impacted by the non-cash European goodwill writedown. Our full year tax rate came in at 33% higher than our latest expectation of the high 20% range, due to higher-than-expected taxes in the fourth quarter primarily due to a book tax charge associated with net deferred tax assets as well as additional fourth quarter non-cash impairment and restructuring charges, which impacted net income before taxes with our international division.

Focusing now on our total company fourth quarter results. Total company revenues were down 1% with 2% domestic growth and flat international growth and a large decline in education and other due to the sale of the education business.

Adjusted OIBDA increased 16% and margins expanded a healthy 600 basis points helped by significant declines in costs both in the US and internationally in large part due to merger synergies which more than offset continued investments in our digital initiatives.

Now let's look at our individual operating units fourth quarter results starting with our US segment. Total US revenues grew 2%. We had another quarter of solid advertising growth of 3%, which was driven by strong pricing and continued modernization of our GO TV Everywhere platform partially offset by the impact of lower linear ratings particularly at the flagship Discovery Network.

Distribution revenues grew 1% driven by increases in affiliate rates and additional contributions due to new carriage on Sling and Hulu toward the end of the year for certain key legacy Discovery Net partially offset by a decline in linear subscribers across the full portfolio for the three months.

Delving further into the drivers of fourth quarter US affiliate growth, subscriber trends at our top fully distributed Nets like Discovery and TLC, which are driving the lion's share of our economics were flat at the end of December, a nice improvement versus down 2% in the prior quarter primarily due to the additional carriage on Hulu and Sling. While total portfolio subs declined 4% year-over-year as expected due to continued high-single to low double-digit losses at our smaller nets.

Total domestic costs were down 13% due to content synergies and lower personnel costs leading to 17% growth in the fourth quarter domestic adjusted OIBDA and very strong 56% domestic margins or 700 basis points of year-over-year margin expansion.

Turning now to our International segment. Fourth quarter advertising growth came in flat year-over-year, as increases in Europe primarily due to pricing were offset by declines in Asia and Latin America where double-digit growth in Brazil was more than offset by declines in Mexico and other markets.

Fourth quarter affiliate growth of 2% came in ahead of our guidance, as increases in Europe due primarily to higher pricing and increases in Latin America due to greater than expected increases in subscribers as well as pricing were partially offset by declines in Asia, our smallest market due to lower pricing as well as the tough comp versus contributions from our mobile licensing deal in China in the fourth quarter of last year and the continued impact from the ProSieben JV.

Turning to the cost side. Operating costs were down 6% in the fourth quarter with cost of revenues down 9% primarily due to content synergy and flat SG&A with personnel cost reductions from the integration of Scripps offsetting increased personnel hiring primarily related to the digital initiatives. This led to 15% adjusted OIBDA growth and 500 basis points of year-over-year margin expansion.

So, now that I have reviewed the highlights of our 2018 results, let me share some forward-looking commentary on 2019. From a total company perspective starting with free cash flow. We are very proud to have come in at over $2.4 billion of free cash flow in 2018 versus the target of around $2.3 billion that we set going into the year.

I think this is a great result given our priority of delevering the company as quickly as possible, taking net leverage down roughly a full turn and less than 10 months. This represents a free cash flow conversion of over 55% of adjusted OIBDA, which underscores the strong potential for cash generation at the new Discovery and nicely offset the significant step up in operating investments in our direct to consumer and overall global digital businesses.

Looking ahead in 2019, we expect another year of healthy free cash flow growth based on further adjusted OIBDA growth and continued margin expansion even after further $200 million to $300 million digital P&L investment. Lower cash restructuring costs to achieve, which we currently expect to be around $150 million versus $400 million in 2018 and further focus on working capital efficiency.

There will be some offsetting factors such as higher cash taxes and roughly $100 million step up in capital expenditures as part of our further transformation efforts, but we will continue to be laser focused on driving healthy free cash flow growth after also making the investments necessary to build out our direct to consumer portfolio.

We will continue to update you over the course of the year as we refine the timing and magnitude of our digital investments based on progress, acceptance and the ultimate success of our initiative. I also wanted to share some commentary around our synergy progress. In 2018, we grew adjusted OIBDA by 8% despite significant investments in digital initiatives primarily due to strong merger benefits across the full global portfolio.

While it will become increasingly difficult to identify synergy versus underlying business momentum. We continue to relentlessly drive our ongoing transformation and as we look ahead to 2019, we will strive toward further cost and revenue upside.

And while we expect to increase our investments in our strategic pivot, merger synergies will allow us to more than offset these investments, and even after realizing healthy margin expansion in 2018, we expect to see additional margin expansion in 2019.

On leverage, we remain well ahead of our schedule to get our net leverage within our target range of 3 times to 3.5 times, and we expect to be under 3.5 times in the first half of this year. We will discuss our capital allocation plans in more detail once we are within our target range, but for now our priorities have not changed. First, to reinvest in our businesses. Second, to pursue strategic and value accretive M&A investments and third, to return capital to shareholders through share buybacks.

With two-thirds of the first quarter now under our belt, I will also give some color around our four key revenue drivers on a pro forma constant currency basis for the first quarter of 2019. First, for US advertising, growth is expected to be up in the low single-digit range with similar dynamics as in the fourth quarter of last year.

Continued pricing increases and the continued monetization of our Digital and GO products partially offset by lower linear ratings on a year-over-year basis. Portfolio ratings overall are currently similar quarter-to-date. Our key networks like Discovery and TLC are slightly improved versus the fourth quarter supported by additional carriage on Sling and Hulu where our ratings end up for the quarter will help determine where we will fall within our guidance range.

We would note that we expect the positive impact from having additional nets on Sling and Hulu to continue to slightly pickup throughout the year. Second, US affiliate growth is expected to be up around 3% to 4% and should ramp over the course of the year to be up comfortably in the mid single-digit range on a full year basis, again given the expected tough growth at virtual MVPD.

Note, this guidance assumes no significant change in the industry's underlying subscriber trends. Third, international advertising growth is expected to be down high single-digits due to the tough comp versus the Olympics in Europe in the first quarter of last year as underlying trends remain relatively consistent with what we saw in the fourth quarter across our market.

And finally international affiliate growth will be around flat where again underlying trends remain relatively consistent with last quarter across our markets. So, in the first quarter, we face a much tougher comp versus our China Mobile licensing deal in Asia as we delivered more than double the content in the first quarter of 2018 versus the fourth quarter of 2017.

As well as some year-over-year impact from additional digital revenues associated with the Olympics on the Eurosport player in last year's first quarter. Before I close, let me quantify the expected foreign exchange impact on our 2019 results. At current spot rates, FX is now expected to negatively impact revenues by approximately $150 million to $160 million and adjusted OIBDA by $65 million to $75 million versus our 2018 reported result.

In closing, we remain extremely optimistic about the outlook for the new Discovery, which will allow us to accelerate the transformation of our business drive free cash flow and ultimately generate significant long-term value for our shareholders.

Thank you again for your time this morning and now David, JB, and I will be happy to answer any questions that you may have.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from the line of Jessica Reif Ehrlich with Bank of America Merrill Lynch. Your line is open.

Jessica Reif Ehrlich -- Bank of America Merrill Lynch -- Analyst

Thank you. I have a multi-part. First, JB, it's great to have you on the call, and would love to take advantage of that. When we last met in Warsaw in fall you gave a compelling view of TVN's growth. Can you give us -- can you talk about the importance -- or let me just put this way, given the importance of Poland in the international portfolio. Could you give us an update on the strength of that market is kind of the drivers of that market. And maybe on a less positive note, can you give us some color on what's going on in Latin America with ratings and then for Gunnar or David just to go back to the free cash flow comments on 2019. Can you give us a little clarity on with the building blocks are for free cash flow. You talked about -- it seems like it's a little more to go into synergy both on the cost and the operational side, but just a little bit of color on that would be great?

Gunnar Wiedenfels -- Chief Financial Officer

Yes, good morning, Jessica. This is Gunnar, let me start with some more background on my thinking around free cash flow, David and I have been speaking about free cash flow and the ability of this new combined company to generate cash quite a bit, and I'm actually very proud of the tremendous borrowers that we have made with the $2.4 billion number for 2018.

Again only 10 months into the combination and again keep in mind that includes about $400 million of restructuring cash-out and also we have made all the investments in our digital and direct to consumer portfolio this year that we felt necessary.

So I think that's a great result and we're still very excited and encouraged by the further potential, and that's why for 2019 as I said earlier, we're guiding to a healthy growth. There's going to be significant improvement in the cash generated by the underlying operation of this business, and as we go through the year, we will make the decisions of how much and at what times we reinvest part of that cash, and that's going to determine the reported free cash flow number in terms of the building blocks that you asked for.

Clearly, we're expecting further underlying OIBDA growth, and as I said I am expecting further margin expansion this year on top of the margin expansion that we saw in 2018. Also again cash restructuring costs of course are going to come down. We're currently expecting about $150 million in cash out in 2019 after $400 million in 2018. We will continue to focus on working capital efficiency. I still see a lot of potential there and that's going to be a focus area again in 2019 as it has been last year.

And then clearly as we delever and pay down debt, cash interest expense is going to come down over time. Now on the offsetting side, clearly there will be higher taxes as we grow our net income before tax. We're also planning for roughly a $100 million step up in CapEx that's essentially for two parts.

Number one is building out our global tech stack and number two is some transformational investments that we're making related to consolidating our real estate footprint systems integrations et cetera. And then of course the main factor this year is going to be further P&L investments that we're planning to make.

We've got, as you know, we've got a great portfolio, we've made some key decisions, but other decisions are yet to come and we want to maintain the flexibility and the number and the timing of those investments is ultimately going to determine how much we dropped to reported free cash flow. That's why I didn't give a specific number, but as you can see, we continue to be super excited and confident about the cash generation potential outcome.

David M. Zaslav -- President and Chief Executive Officer

What's critical here is when we closed on Scripps. I laid out a little less than a year ago that we saw this company is being really unique and that we could generate huge free cash flow, which we are doing, and we'll continue to do, and we see it accelerating, but the most important element here is the uniqueness of this company today. The idea that we can generate this kind of free cash flow.

And as I said at the time we can become a free cash flow machine. And would that really does for us in an environment of where there's challenges in the overall ecosystem. It gives us a mode and that mode is all this free cash flow and as we look at Golf, Cycling, Natural History. We look at Chip and Joanna Gaines and the power of their brands and their ability to reach. We look at those different initiatives and we could say this is really working well, we can deploy more capital here.

This isn't accelerating, let's deploy less capital. But we have full flexibility and I think that makes us, that gives us a really unique advantage. JB?

Jean-Briac Perrette -- President and Chief Executive Officer, Discovery Networks International

Yes. Hi, Jessica. Thanks for the welcome, and it's great to have you and so many of our investors over in Warsaw last fall. So, on the two questions, first on Poland, we really see the Polish and the TVN asset as a big game changer for us and really the focus on three things.

Number one, their strong number one position in TV. We had -- we closed 2018 with record audience share of 27%, our full season reached an even higher percentage of 29% share with great fall season launches starting in September. And so we couldn't be more excited about the momentum on the TV side.

Second, we have the leading local OTT business in with all the content that TVN produces in that market, and we continue to see strong double-digit growth across the Board in our digital business in Poland. And third, it's given us a major hub to produce both on the back-end side of our business as well as on the production side at very low cost great shows.

And so we've done some great production so far at 30% to 40% discounts as what we can do either in the US or internationally with things like House Hunters International and some other shows. And then we're moving more of our back office activities in some areas to a very low cost and very competitive and high skilled environment.

So, those three areas have frankly outperformed even what we thought. And so we couldn't be more excited about the momentum of the Polish business at the moment. On LatAm it's frankly a little less. It's not much a ratings issue, ratings actually continue to perform well.

We're getting, as David alluded to in his comments earlier, great commitments from distributors to launch Food and HGTV. Millions of new subs in that region that the momentum on the operating side both audience and distribution wise remains strong. The challenge really is frankly a lot about Mexico and volume challenges, given the political instabilities in that market right now. And Brazil is doing well much better than we did, as David mentioned, we had double-digit growth in the fourth quarter, and we continue to see strong improvements in the ad sales market in Brazil.

So, it seems like it's more of a cyclical issue for us in LatAm, and we're hopeful that Mexico will over the course of the year begin to stabilize, and if Brazil continues on the progress that's made in fourth and first that we should have a better story as we get into the back half of the year.

Jessica Reif Ehrlich -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Thank you. Our next question is from Alexia Quadrani with JPMorgan. Your line is open.

Alexia Quadrani -- JPMorgan -- Analyst

Thank you very much. Just a question really following up on your international commentary, but more generally though. In terms of how we should think about international advertising, obviously, there's some weakness in Brexit you guys highlighted. Does that, in UK, does that get worse before it gets better. And, I guess, when do you think the Scripps content in general make a difference to the international advertising story. And then just a follow-up for David, if I may, about your commentary on how you see Netflix. Is it a bigger competitor now on the unscripted content space both in terms of tracking the right content of resources for your networks or viewership. Just curious to hear your comment?

Jean-Briac Perrette -- President and Chief Executive Officer, Discovery Networks International

So, on international look, obviously, it's one word as you guys know that's very complicated to paint with one brush given the number of markets, but I would say, it's -- we really see a bit of a mix. We've seen some markets that are particularly strong frankly for us. We talked about Poland markets, some of the Nordic markets, which have historically been more challenging, we are seeing great actually growth in markets like Sweden.

So, there are some markets where the volume in the markets continue to be strong. And we have seen that in some other markets which are softer the David alluded to. Brexit specifically, frankly, I wish I could tell you, I think, we're all sort of waiting as to what the outcome will be.

It's hard to say where that will be a -- I don't think it's a short-term fix, but if ultimately there is an extension granted in some capacity could be the market improve in the back half of the year possibly, it's just very hard to predict at this point.

On the Scripps content, look, I think again in a market in a marketplace where we saw stronger markets and some of the biggest markets we have the audience performance is actually trending very positively. So, the good news is, audiences and ratings are strong as the year progresses, and if we see some of these bigger markets stabilize, we talked about the UK, we talked about Mexico earlier then, I think, the monetization will come in toward the back half of the year and over time as we go into 2020.

David M. Zaslav -- President and Chief Executive Officer

On the Netflix, Prime, Amazon Prime and HBO showtime that, let me answer it in two ways. One is Food, Travel ID with Crime, Home all those are growing, people are spending more time with us, they're watching more of our content, it's growing.

This is difficult stuff and this is what we do for a living. We have a team that does only Food and we work with production companies that deal almost primarily with us. And we figured out how to create shows and build characters in that genre.

In the Home genre the same, in the Crime, there's loads of people doing crime, but Henry Schleiff and his team know how to do it and work with production companies in a collaborative way that, I think, give us a really unique advantage. So, we're seeing growth in those areas and it's what we do.

When people go to HBO and they go to Showtime and they go to Amazon Prime and Netflix they're really going for something else, they're paying $10 to $15 for scripted series and scripted movies that's what the brand is. And look on a broader basis, as we get further and further into our mission of powering people's passions, people spend about 50% of their time on scripted series and scripted movies, and they spent about 50% of their time on everything else.

And we picked out these passionate brands and categories that we think that have the -- that are the most compelling in this everything else area. And the big opportunity here is that the right side, this scripted series and scripted movies, people watch that stuff, that's all they do is they watch it. They watch a great scripted series and they watch movies.

On our side, we are focusing on this idea that they watch and they do, and that's a huge opportunity, they watch golf, but they also buy golf equipment, they also -- they'll go to Tiger for instruction. They want to see where to take a vacation with golf. They watch cycling, but they buy equipment with cycling and they want to find out where to go to get the best clothing and what's the most -- what's the best coaching.

When it comes to food, people watch our content, but they also want recipes, they want to talk to experts about how to make -- how to engage in, in that category long-form and short-form. And so we think between Home, Cycling, PGA, Natural History, Travel Oprah we're in these categories where people will watch and do.

And that's why we bought this cycling business, that's why we got into the PGA. And even in categories like Natural History, where we are the leader globally, people may watch a particular piece of content, but then they can take a deep dive into our science or space category.

So, we think, we don't have a -- we're in a environment where we're a real market leader, we differentiated and we have this opportunity in this watch and do that could create real opportunity, build businesses in these funnels.

Alexia Quadrani -- JPMorgan -- Analyst

Thank you very much.

Operator

Thank you. Our next question is from Doug Mitchelson with Credit Suisse. Your line is open.

Douglas Mitchelson -- Credit Suisse -- Analyst

Thanks so much. I guess two question. JB, I'm curious regarding your sports strategy internationally in Latin America and Asia with Fox Sports in Brazil and Mexico be a natural fit if Disney has to sell them for a deal approval purposes. And if you end up not wanted to touch that one just more broadly, given the viewing declines mentioned and the pricing declines in Asia where sports in those markets be something that might make sense to pursue with some points similar to what you've done in Europe. And David, on your end, I think a lot of investors look at the stock valuation and while they want you to invest in growth, I think, they also (Technical Difficulty) you should be buying back stock hand or fist and I think what's been outlined on the call so far as has been investing in lots of interesting niche opportunities rather than large scale acquisitions suggesting a lot of balance sheet flexibility should be remain as you go through the year. And I was just curious if you had any comment on that and whether I was missing anything there? Thank you.

David M. Zaslav -- President and Chief Executive Officer

On the sports piece, we look at everything. We are -- we own with Liberty the Formula E. We own the league and our partnership with Jay Monahan and the PGA. We have global rights everywhere in the world except for here. Our deal with Tiger its rights that include the US everywhere in the world. Cycling, we just bought a business that's fully global.

And so we are opportunistic in terms of looking at sport as a passionate brand where we can super serve people's interest across the Board. But we're also there's a lot of stuff that we look at that we don't think fits our metric of being able to provide long-term growth.

In most of those cases we bought sports assets that have very long tail with, in the case of the PGA, it's through the end of 2030. In the case of the Olympics, we did it for a decade. In the case of cycling, we own the business. And so most of our rights on Eurosport we paid low single-digit increases and we got -- we would try to get six-year deals. We don't like doing business with these three-year type soccer deals, which we are getting out of.

And so I think we're going to be opportunistic. We're in the sports business, we may even be the leader in sports around the world with the aggregate all of our IP. So, we look at everything, and we will look at everything, but we'll look at it in terms of what kind of a sustainable asset it is and JB?

Jean-Briac Perrette -- President and Chief Executive Officer, Discovery Networks International

Yeah, I think, that's right. And on the Asia piece of it, the reality is a) the golf deal has put us in business in Asia in a major way. The two of the biggest markets in Asia for golf are Japan and Korea.

And so that has significantly changed the game. We announced, obviously, last quarter our expansion of our relationship with JCOM, our distributor there with now also our goal partner. And in Korea will be coming up next and then China as well. So, we are in sports business through golf, which I think is a meaningful step for us.

And then the other thing that in terms of more things in Asia and the sports a lot of it becomes much more localized, which I think is a bit of a challenge the rights that are big in terms of Australian rules football, Rugby in Australia versus what works in Malaysia, what works in Japan is oftentimes very different, and so it's hard to get the same scalable play, but as David said, we'll look at everything. But I think for now we're going to take the golf product for a real right here, and we think that has great opportunity.

David M. Zaslav -- President and Chief Executive Officer

And look, I think, that we are building a platform that's unique. If we're successful with golf and cycling, we're also doing MotorTrend. In addition to that we have global rights to Natural History and these other brands. But if we're able to build we're the only company that's doing business in over 48 languages.

And as we build this platform for which we brought Peter over to build and we brought over one of the most senior technology leader from Amazon. If we build that and we're in multiple languages like we did the Olympics in 22 languages. We're going to do the PGA in over 40 languages.

And so there is very few companies that can promote from the ground and convert into multiple languages and have a platform that's above the globe, and once that's done, we think the opportunity could be significant. There's a lot of sports where the federations are going to want to try and reach above the globe.

But they're not going to have the scale to build the platform. Our platform is built. They're not going to have the scale to market in every country. We have multiple channels in every country, and we have an online digital business in every country.

And so we think once we build and we can prove out these ecosystems that we could be a platform that people come to where instead of paying for those rights that we can represent those rights and get a split.

Gunnar Wiedenfels -- Chief Financial Officer

Okay. And then, Doug, on your buyback question. Look, I mean the way I look at this is, I'm really proud of how the leverage number has come down. I mean again almost a full turn in only 10 months. The free cash flow number at '18 has been better than what we planned, honestly, and also what we guided to and this isn't going to stop.

We're, as I said, we're planning to get back into our target range of 3 times to 3.5 times within the first half of this year. It's a great flexibility, as David said, that's very important in this environment. And we see a lot of potential of underlying additional growth in our cash generation and all those investments that we are discussing about again those are investments that we can fund out of our free cash flow growth. I think that's a very unique situation.

I don't think we need any sort of major transactions, but you've seen some of the partnerships we've been able to strike over the past 12 months. Those are great investments into our future growth and doesn't change our financial profile.

We've got a very strong balance sheet. Regarding buybacks, we're going to come back where first priority has always been to delever down to 3 times to 3.5 times when we get there, we'll come back and update you on what the capital allocation is going to look like. But again priorities are delever first invest in the business and then return capital through buybacks.

Douglas Mitchelson -- Credit Suisse -- Analyst

All right. Thank you very much.

Operator

Thank you. Our next question is from Drew Borst with Goldman Sachs. Your line is open.

Drew Borst -- Goldman Sachs -- Analyst

Hi. Thanks for taking the questions. I wanted to ask about the costs, in particular, the cost of revenues, which in the fourth quarter took a noticable step down relative to what you had been doing in the prior couple of quarters. So, I guess, as we look into '19 should we think about what we saw in the fourth quarter is kind of the run rate for '19?

Gunnar Wiedenfels -- Chief Financial Officer

Thanks, Drew. So, well, I mean the step down in Q4, actually has two components. Number one, as JB laid out earlier, we've really taken a new strategic look at the programming grids literally across the entire global footprint, and we've made more use of the SNI content, replacing acquisition content, so that obviously has a pretty significant impact on our cost of revenues.

In the fourth quarter there was another US component that was supportive on a year-over-year basis because in the prior year fourth quarter Scripps had taken some significant writedowns on content. So, that has been helping us on a year-over-year basis as well.

So, it's probably a little more pronounced, but as we've said before this content synergy is one of the key elements of the merger thesis. We'll continue to see improvements over the year. Keep in mind that the full first quarter is essentially excluding any synergy impact in 2018. So, we'll see a step-up in '19 and we'll continue to be very, very focused on costs, as I said, and as a consequence of that we will see further margin expansion in 2019.

Drew Borst -- Goldman Sachs -- Analyst

Okay, thank you for that. And if I could one more on the digital investments that you mentioned. I just want make sure I understand it, I think, you mentioned $200 million to $300 million for 2019. Is that an incremental step up beyond what you had been doing in '18 or is that kind of an absolute number. I think the last time you gave us an update you guys talked about sort of spending about $50 million per quarter so-called $400 million per annum. Maybe you could just describe that in a little more detail?

Gunnar Wiedenfels -- Chief Financial Officer

Yes, so the $50 million per quarter indeed has been the run rate at which we have been investing since we closed the transaction. And so that would add up to $200 million a year, I guided to $200 million to $300 million because again there is, keep in mind, there is some, there will be some flexibility.

This is not one fixed number. This is not a business where we put together a plan in the fall for the next year and then this is exactly what we're executing where we've got a lot of very promising initiatives on the table. We've seen some first successes and we need to have the flexibility to double down on anything that's really getting traction.

And on the other hand, we will not make certain investments if we -- if the first feedback from the market doesn't look like we're on to something that's why it's a bit of a broader range, but the way to look at this is, as previously that $50 million run rate now sort of a full year range of $200 million to $300 million in incremental P&L investments.

Drew Borst -- Goldman Sachs -- Analyst

Okay, thanks. And just real quickly, restructuring charges, I assume, are we done now like in 2019 we won't see any more restructuring charges related to the deal?

Gunnar Wiedenfels -- Chief Financial Officer

We're mostly done as you can see we are expecting to pay out some of the 2018 accruals in 2019. That's why we still have about a $150 million cash out in the numbers that I just discussed. And we probably will see roundabout $50 million of additional P&L charges, but I would expect that's it then.

Drew Borst -- Goldman Sachs -- Analyst

Okay, great. Thanks for all the questions. I appreciate it.

Operator

Thank you. Our next question is from Todd Juenger with Bernstein. Your line is open.

Todd Juenger -- Bernstein -- Analyst

Thanks. I appreciate it. It will be somewhat mundane today don't mind, but I hope I can ask. So Gunnar just I was hoping on the. Thank you for the 2019 guidance on the affiliate fees. Consistent with what we heard before. Just wondering if you could help us understand, if there's any licensing components in there SVOD licensing sort of what an underlying organic rate for pure affiliate fees versus other stuff? And then my other question for either you Gunnar or David, just thinking about the portfolio of networks in the States. And your comments about the fully distributed networks and their distribution stability and then some of the digital tier networks losing distribution faster. If you think about -- is that -- what is the right number of networks for you guys. At some point, does it make some sense to think to rethink some of the digital networks and either reexpress them somehow in a different way than a linear full network? What is the trade-off there? What's the incremental margin from those. Any thoughts on that would be great? Thank you.

Gunnar Wiedenfels -- Chief Financial Officer

Todd, so indeed the guidance that we're giving for affiliate revenues both for Q1 and for the full year is a very clean number if you want to call it that, as a matter of fact, Q1 is actually slightly a tougher comp versus last year regarding some Ava components that were in there -- here, but it's a very clean number, it's driven by our pricing step ups in new and existing deals and the additional carriage on virtual MVPDs and the expected growth on those platforms.

David M. Zaslav -- President and Chief Executive Officer

On the channels, we've said before that about 85% of our fees goes against our top six or eight channels. We have focused on the idea that if we grow our core eight that we really have an opportunity. We've been very successful now in getting our channels carried on the smaller bundles which exist everywhere in the world and not here, and we're hoping that this year as those grow, we think will benefit more than anybody else from those.

We also have Chip and Joanna who we are hard at work and have been down to Waco. We think that is a very unique opportunity to enhance the channel and grow a channel. No other media company in the last couple of years has been able to go on offense and grow as many channels. In fact most media companies haven't launched any new channels, and we have ID that didn't exist.

It's the number one cable channel for women in total day. We have the Oprah Winfrey network number one for African-American women. We launched Velocity and we now have an opportunity with Chip and Jo to take a network that is doing OK and take it to the next level, but to your point, we also have a real vision for that in terms of going direct to consumer.

And when you think about this idea of watch and do, there's probably no better example of watch and do than Chip and Jo. They created a great show called Fixer Upper and then they created a whole -- a multi-billion dollar business called Magnolia based on the quality of their ability to design and build product.

And so there is an example where they built an entire ecosystem. And we are reconnecting with them and excited about what we can do together. They're in Magnolia on their own, but we think there's a lot that we can do together to build our channel.

So, net-net, I think over time you'll see some fewer channels, but we think we have at least one or two more that we can build strong here in the US with big characters and big personalities that people love and want to spend time with.

And that's what we're about, that's why we did the Tiger deal, that's why we did the PGA, that's why we're in cycling, that's why we're with Oprah and Chip and Jo. In the end we have great brands, but we have great characters that people love and that's what this business is about, spending time with people that you love and finding out what their stories are and what their challenges are, and the things that they love.

Todd Juenger -- Bernstein -- Analyst

Thanks a lot.

Operator

Thank you. Our next question is from Vijay Jayant with Evercore ISI. Your line is open.

Vijay Jayant -- Evercore ISI -- Analyst

Thanks. So, one for Gunnar and one for David. Gunnar, you talked about the underlying trends and subscribers that are holding to what it was in '18. Obviously, there's been a lot of movements in the virtual MVPD space. You guys are one of the few companies on AT&T Watch. Can you sort of talk about how you sort of think the virtual MVPD contribution as part of that will broadly be in 2019, given your position. And for you, David, obviously you've talked about the passion of your verticals and food and home and new ecosystems and you gave a whole bunch of numbers about the TAM. You've also talked about in the past of strategic partnerships possibly with Samsung and Amazon. Can you just give us some insight on if those do happen, what is the monetization model there?

David M. Zaslav -- President and Chief Executive Officer

Great. Let me just start with this whole idea of 5G is a part of the whole narrative of who's going to own the home. And within the home, the place that people spend the most time is the kitchen. And, as I've said, it is a question that everybody in the world asked every day is what's for dinner, what's for breakfast.

And the challenge of who's going to own the kitchen. I think we have a real opportunity. We have the greatest chefs. We are the leader in recipes. We are the leader in short-form. We are leader in brand and credibility. We are leader in content.

And so we're very active in aggressively pushing that ourselves and having discussions with everybody that's in the kitchen about how do we own the kitchen, whether it's distributors with 5G or whether it's players that want to, I mean, with voice activation in the kitchen or with screens in the kitchen.

And so we're actively driving that, in addition, we think that do-it-yourself at home design is another area where we have a lot of experts, a lot of content, and a lot to offer. And so we're pushing that hard, and that's not in our current plan, but we do think there's a real opportunity there, because as we have something that is real functional and something that could provide real value to customers aside from just watching entertaining content.

Gunnar Wiedenfels -- Chief Financial Officer

And on your distribution questions. I don't want to break out individual contributions of individual deals, but as we've said before that mid-single digit guidance for the US affiliate growth is a combination obviously of the inclusion Hulu and Sling and then price increases on our traditional deals.

And, I mean, in terms of the mix in the market, we've always been the firm believer in the value of our content. And, I think, our ability to close those deals last year underpin that quality, and we've also been the firm believer in the value of smaller bundles in the market, and I think we're seeing some confirmation there as well.

Vijay Jayant -- Evercore ISI -- Analyst

Great. Thanks so much.

Operator

Thank you. Our next question is from Michael Nathanson with Nathanson. Your line is open.

Michael Nathanson -- MoffettNathanson -- Analyst

Thanks. I just have one simple one for you guys. On international M&A with David and JB. For a couple of years back, we've seen cable network start buying broadcast assets abroad. You did at SPS, Viacom did at Telefe Channel 5. I wonder going forward, do you think that's still a winning strategy to go into local markets by broadcast assets. And do you see any -- with your own financials any benefit of basically being able to broadcast a cable network based on your ability to drive returns, higher growth anything. So, I love to hear about that.

David M. Zaslav -- President and Chief Executive Officer

I would say, directionally we're much more focused on owning IP. We have a lot of free-to-air channels. We have cable channels. We're really focused on taking that IP to other platforms and maximizing the efficiency and free cash flow of our existing platforms. We will look at everything, but it wouldn't be the first place we go.

And the overall idea of owning broadcast assets really would make more sense in a market like Poland where it's protected because it's a unique language. They have a very strong portfolio in this strong GDP growth. But in general, it's not at the top of the list of what Bruce Campbell, JB and I are looking at right now.

Jean-Briac Perrette -- President and Chief Executive Officer, Discovery Networks International

And ultimately markets that have other ancillary, as we talked about in terms of Poland, their market position and strength and ability to pivot to digital and ability to provide us other benefits in terms of lower cost of production and back office services as well.

There are other benefits to them purely the broadcast assets. So, that asset actually is fairly unique, and we are seeing even in the Nordics, as you mentioned, as we're finally getting more traction and pushing more aggressively into the OTT space, a stronger growth on the OTT.

So, pivoting those businesses to be much more OTT and direct to consumer driven, leveraging the local content and IP as David said that they have in their portfolio is really the focus for us.

Michael Nathanson -- MoffettNathanson -- Analyst

Thanks guys.

Operator

Thank you. Our next question is from Steven Cahall with Royal Bank of Canada. Your line is open.

Steven Cahall -- Royal Bank of Canada -- Analyst

Yeah, thanks. Maybe first, Gunnar, I was hoping I could at least try to pin you down a little bit on adjusted OIBDA growth for 2019. Just some of the trends that we've been seeing is a big pickup in US OIBDA growth driven by, I think, the cost synergy. And then you've got a pretty easy comp in international in Q1, just because of the Olympics headwind that you had in 2018. So, can you just help us maybe put in context. Should we see an acceleration in adjusted OIBDA growth in '19 versus '18 or anything there would be helpful. And then maybe just pick up a little bit on Vijay's question you basically said your distribution guidance accounts for not a lot of change in the subscriber trends that we've seen. Q4 was maybe a little bit out of trend in terms of both linear and MVPD. So, if we see a little more of Q4, is that kind of baked into your guidance, do you have some buffer there. How should we just think about what we're seeing on the sub decline and what's baked into that guidance? Thank you.

Gunnar Wiedenfels -- Chief Financial Officer

All right. Well, so I mean, let me start with your OIBDA question, and I'm not going to give a specific guidance, but a couple of building blocks. You're 100% right that Q1 is obviously going to be an easy comp because we have that special impact of the Olympics, which for the quarter had a negative profit impact last year.

We also look at the last quarter before closing the transaction. So there is literally zero synergy impact in the Q1 '18 numbers. So, we should be seeing a nice step-up. As for the full year, let me reiterate what I said before. I do plan for and expect margin expansion. On top of the margin expansion that we have seen in 2018. So that's number one. On an underlying basis, clearly, there is going to be significant OIBDA growth, but then as I said before, we will continue to make P&L investments.

And let me just clarify that based on what we have in the plan for 2019 that would add up with the investment that we've made last year to about $300 million maybe $400 million negative impact from those direct to consumer investment.

Again keep in mind, we're building out a portfolio for -- to drive our future growth. And as I said before after that investment, I am targeting margin expansion for the full year, and clearly a OIBDA growth to some extent that's going to obviously depend on the timing of the magnitude of the investments we're making.

On your sub number question, you're right. Q4 is obviously a very healthy step up because for the first time we're looking at the additional subscribers from Hulu and Sling. Again, I mean, I don't want to give any specific guidance what we have baked into the financial guidance of mid single-digits for 2019 as assuming stable underlying trends as we see them today with of no sort of acceleration or deceleration.

Steven Cahall -- Royal Bank of Canada -- Analyst

Thank you.

Operator

Thank you. Our last question is from Ben Swinburne with Morgan Stanley. Your line is open.

Benjamin Swinburne -- Morgan Stanley -- Analyst

Thank you. Good morning. David, I think, you closed the Scripps deal a few months before last year's upfront. I'm just curious now that you've had the acquisition done for a bit. How are you thinking if at all about changing how you approach this year's upfront, obviously, a huge audience share particularly with female viewers. Any changes we should expect in terms of how you go to market and packaging inventory. How Discovery GO might factor and any details there would be interesting. And then for Gunnar I apologize I know you've talked about it a couple of times, but maybe I'm the only one is confused. Could you just go back to the 2018 digital spend and then the 2019 just to clearly understand what is incremental versus the total because there's been a bunch of numbers thrown around that are different? Thank you.

David M. Zaslav -- President and Chief Executive Officer

Thanks, Ben. We had a good upfront and we had a good calendar. We've said that we think this quarter we'll look a lot like four and candidly I'm on my way down to Florida now. I think that we probably left some points on the table for this quarter and we could do better. I'm not satisfied at all. We spent a lot of the last two weeks looking at our efficiency rate. Looking at our sell out rates how we sell and go.

The reason I say that is TLC was the number one network in America for women in January number one. And we have ID, very strong. We have Food strong, HG strong and Discovery improved and GO is accelerating. And so I think that our creative team is doing a good job and I think we have a very strong ad sales team, but we got to get more focused, the way that we drilled down and had real work streams on cost.

We now have developed co-work streams on our revenue on sales, and I am not satisfied at all. I think we should have a bigger number this quarter. We're going to continue to drive to it, but if we do our job right, I think, you're going to see better numbers in the quarters ahead.

Gunnar Wiedenfels -- Chief Financial Officer

Okay, and let me clarify the digital investments commentary. So, as we said previously, we have been investing on a run rate of about $50 million in the quarter since closing the transaction that is against our 2017 baseline. We're going to slightly accelerate that pace and I'm targeting $200 million to $300 million additional investments in 2019. And as obviously some of those investments start to pay off. The total dollar amount in absolute terms in our 2019 profits and cash flow will be between $300 million to $400 million total impact from investments on the digital side.

Benjamin Swinburne -- Morgan Stanley -- Analyst

That's helpful. Thank you, Gunnar.

Operator

Thank you. And ladies and gentlemen thank you for your participation in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.

Duration: 68 minutes

Call participants:

Andrew T. Slabin -- Executive Vice President, Global Investor Strategy

David M. Zaslav -- President and Chief Executive Officer

Gunnar Wiedenfels -- Chief Financial Officer

Jessica Reif Ehrlich -- Bank of America Merrill Lynch -- Analyst

Jean-Briac Perrette -- President and Chief Executive Officer, Discovery Networks International

Alexia Quadrani -- JPMorgan -- Analyst

Douglas Mitchelson -- Credit Suisse -- Analyst

Drew Borst -- Goldman Sachs -- Analyst

Todd Juenger -- Bernstein -- Analyst

Vijay Jayant -- Evercore ISI -- Analyst

Michael Nathanson -- MoffettNathanson -- Analyst

Steven Cahall -- Royal Bank of Canada -- Analyst

Benjamin Swinburne -- Morgan Stanley -- Analyst

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