Warner Bros. Discovery, Inc. (NASDAQ:WBD) Citi’s 2023 Communications, Media & Entertainment Conference January 5, 2023 11:30 AM ET
Company Representatives
Gunnar Wiedenfels – Chief Financial Officer
Conference Call Participants
Jason Bazinet – Citi
Jason Bazinet
Very pleased to have a Gunnar Wiedenfels, CFO of Warner Bros. Discovery. Gunnar, how are you?
Gunnar Wiedenfels
Morning! Good! How are you?
Jason Bazinet
Doing great, doing great. If there are questions that you want to ask in the audience, just please be sure to hit the button just below the white arrow, just so we make sure that the question gets webcast for the broader audience. Did you have a good holiday?
Gunnar Wiedenfels
Very good.
Jason Bazinet
Nice.
Gunnar Wiedenfels
Much needed couple of days.
Jason Bazinet
Of course.
Gunnar Wiedenfels
Quiet and ready to go for this year.
Question-and-Answer Session
Q – Jason Bazinet
All right, all right. Well, we’re approaching I think one year following deal close and I asked – I suspect the strategic rationale for why you did the deal is still very much intact. But we’re even getting questions on that front from investors, right. People are so pessimistic about streaming, you know there’s just big questions that are out there.
So I’m just going to ask you to just sort of describe the strategic rational at the time of the deal. Has anything changed in terms of the strategic logic for the transaction? And then, things that you’ve learned over the last year that you think are most salient that maybe you didn’t know a priority.
Gunnar Wiedenfels
Yeah, we’ve learned a lot. Let me take a step back and set the table a little bit if you don’t mind. The conference here is really timely for us this year, because the beginning of 2023 really marks the beginning of a new chapter for us; we’re closing chapter one, we’re opening chapter two. You are 100% right, there was a lot of discussion last year around what was going on with Warner Bros. Discovery; what was going on in the industry?
Our team has worked really, really hard throughout the entire year, literally 24/7 in many parts of the company. We had to come in strong and make very swift decisions. David put a top leadership team in place and in a way we were able to take advantage of the fact that a new team was starting as a new combined management team for a new combined company, and we took advantage of that, and we took the courageous decisions that had to be made, and what’s interesting to me is that a lot of that was seen through the lens of synergy, integration, you know the debt, etcetera. The reality is it had very little to do with that.
The industry change that has been going on over the past 18, 24 months has been pretty dramatic and the new team that David put in place with CEO’s for each of the business units, they just did what had to be done, which is take a fresh look at what’s working, what’s not working, what parameters have changed? How are we going to look at content investments? Where are we going to spend? How are we going to collaborate across this integrated portfolio? And they quickly made the right decisions to set the company up. So 2022 was a year of restructuring. 2023 is going to be a year of free launching and building on the great foundation that was laid last year.
And to get to the point of the strategic thesis, I think it’s not only intact. I think the long term earnings potential of this combined company may actually be greater than what we thought we were going to find when we initially started debating this deal and put together our initial models.
And the way David had laid out the three strategic pillars, the unrivaled ability to generate world class content on the one hand, an unparalleled distribution footprint with access to all monetization windows and cash registers around the world on the other and then combining those two with a professional one company management approach. That’s intact, and we’re actually seeing a lot of great proof points that are starting to come through.
On the content side, we talked a lot last year about the enormous success that HBO has had with 37 Emmys and Warner Brothers TV as well with another 10 or 11 awards on top. We were going into 2023 with a much greater slate. We’re going to be ramping up production across large parts of the company. You’ll see twice as many theatrical releases. We’ve got some exciting games coming up. So on the content side, we’re in great shape.
On the distribution side, we’ve always been very clear that we’re viewing Warner Brothers Discovery as one portfolio, a balanced portfolio of media assets and media outlets if you wish, never sort of going all in on D2C, never going all in on linear or theatrical. It’s about the combination of all of these platforms and we’ve seen very positive signals. The theatrical world has obviously recovered, not you know to the pre pandemic levels, but a very solid year relative to the performance in ’20 and also ’21.
On a linear side, our affiliate teams have worked 24/7 throughout the fourth quarter. We renewed deals worth more than 30% of our U.S. affiliate revenue in the fourth quarter, across the affiliate landscape, bringing the entire value of this portfolio to the table. Got these deals coterminous and it’s just a great proof point for the value that our linear portfolio is bringing to affiliates and to our consumers, our viewers and that gives me a ton of confidence. We got a lot of questions about what’s going on in the linear world. Sure, there’s a lot of longevity in that business and I think the deals that we’ve been able to strike are a wonderful testament to the value of that business.
But also on the D2C distribution side, the teams are really working hard at getting that combined product launch in the spring and they are on track. That’s going to be very exciting to finally bring together our Discovery+ and HBO Max. But we’ve also made significant progress within the existing technology footprint. We’ve seen continued subscriber momentum through the fourth quarter and that is despite a certain amount of pullback on the branding and marketing side, obviously in an anticipation of the new product launch, so that’s very pleasing.
We’ve launched the Amazon deal in the fourth quarter, but across the board, we’ve seen better engagement, better churn than we had originally modeled. So net-net we put out this long term vision for the D2C business as one additional element of an integrated media portfolio with a U.S. breakeven in 2024 and then a billion of global profits in 2025. If anything, I mean, we’re doing a little better than what we had modeled out, than when we put that together and so great progress on that front as well.
And then maybe most importantly, I can’t emphasize enough the idea of managing this company professionally as one company. That’s been the most fascinating part of the journey that we’ve been on for the past eight, nine months. The top team that David has put in place, you know some of the greatest creators in the industry, running their own business units, but with the greater benefit for Warner Brothers Discovery in mind, there is so much data that historically hasn’t really been used in the decision making and the team is collaborating really well when we discuss winnowing, when we discuss allocations. We’re in the second or third inning when it comes to setting up the tools and processes.
But the team is collaborating really well. And importantly, from my perspective, we really have command and control over the business now. There were some surprises in the first months of the combination as you know, but you know we put out the guidance for this year in the summer and I’ve been very, very pleased with all of our operating trends over the second half of the year.
And as such, I feel confident that we’ll get to those improvements that we’ve been talking about, much better cash flow generation, growing the process, flowing through the value capture from our transformation activities and I think we’re really on track for a lot of asset value creation and free cash flow generation.
So, with that in mind and with the scale that we have, with the creative talent that we have, the global distribution footprint, if anything, as I said at the very beginning. I think the thesis is stronger today than it was 18 months ago.
Jason Bazinet
Super interesting. This – you know this – listening to investors is interesting. I’m just going to sort of tell you, sort of a quick narrative, but when interest rates were very low, of course, everyone just wanted growth and then interest rates went higher and everyone wanted profits. And, what’s been interesting is we started to get questions from investors where they are saying people shouldn’t do DTC. We should just have a bunch of media companies to become wholesalers, right. They should just feed their content to others, right, and that’s what I meant by people sort of challenging the strategic rationale of the deal. But what I’m hearing from you is it’s, no change in message, no change in strategy. We’re just executing and willing to you know reiterate all of those long term targets.
Gunnar Wiedenfels
And look, but as I said Jason, the truth is in the middle, right? I mean, we’ve been very, very clear. I mean David said in the very beginning of this journey, something like, we’re not in it to – or we’re not trying to win the spelling war.
Jason Bazinet
It’s balanced.
Gunnar Wiedenfels
About how good the content is, not how much and there’s no doubt to me. Look, we got a lot of public noise about some of the content write-offs that we took, which is a reflection of an industry that went overboard and that went on a spending frenzy. There was a lot of thinking of, let’s do more and more and more, not necessarily let’s do the exact right things. Let’s do what works.
We’ve said before, we have the ability, the benefit to be Monday morning quarterbacks here and Mike and Pam on the film side and Channing and Casey and Kathleen, they are all going in and taking stock. It’s a new day. They are looking at what works, what doesn’t work. They made these decisions. We took a little bit of time to make sure that we do it properly. For some of the titles we found new homes elsewhere, etcetera, that’s why this took six, seven months. But I think we’ve come to great solutions and most importantly, we’re done with that chapter.
That was very important to all of us to really use 2022, you know leave the purchase accounting behind us, leave those initial strategy changes behind us, get it all out there in terms of our restructuring estimates and then be able to turn the page and move forward. And again, I think the team has laid a great foundation and really excited about the growth from here.
Jason Bazinet
Okay, so with that behind us, there’s also the macro environment and of course everyone has been on pins and needles since March I would say of last year about this broader economic slowdown. And I think even you have sort of – your firm has made some comments about maybe less visibility into the ad market in the past. So can you just talk about your view of the broader sort of ad market and as you sort of talk about those long term targets that you talked about on the DTC side or overall leverage. What sort of macro environment are you contemplating?
Gunnar Wiedenfels
Well, so I mean, let’s start by acknowledging that it’s a pretty unusual set of geopolitical and macroeconomic parameters.
Jason Bazinet
Sure.
Gunnar Wiedenfels
And against that backdrop, we had actually been pretty clear since as early as last summer about the ad market being a risk factor and we spoke about it. The good news is that, you know when we put together our guidance for this year, you know that was a scenario that was in mind and we you know actively managed the company from as early as August, September with these environments in mind. So that’s back to the command and control point, you know no big surprises here.
That said, in the meantime, you’ve heard from others as well that the trends have just not been great and I think it’s fair to say that trends have also not gotten better. If anything, gotten worse through the course of the fourth quarter from a U.S. ad market perspective. And while we’re seeing some small green shoots for Q1, I wouldn’t want to call the turn here yet.
It’s a little more mixed, good and bad internationally with some – we’ve got some markets that are equally negative, such as the U.K., Germany, but we have other markets like Poland, Italy, Latin America for a wide part of the of the footprint there that are actually doing fairly well. But again, what matters to me is this is short term noise.
Yes, it’s obviously high margin flow through of these revenues, but I have no doubt it’s going to come back. And again if anything, the most recent experience with you know our affiliates and the deal renewals shows that there is an enormous value in that ecosystem and we’ve always seen it come back, and I have no doubt that when it comes back – and I’m not going to make a prediction, you know if that’s going to be in Q1, Q2 whatever, we’ll find out.
I don’t know that any better than anyone else, but I have no doubt that when it comes back, we’re going to be participating disproportionately just because of this enormous reach of our portfolio. The ability to optimize content spend across this this broader network portfolio. And frankly the fact that we’re still in the ad market monetization, that we still have catch up potential that we’ve been able to chip away again and again for the past couple of years.
Jason Bazinet
That’s great. On synergies, you recently raised the long term synergy target from three to $3 billion to $3.5 billion and said $2 billion of that will come this year. Based on the work that’s underway, I assume nothing’s changed on the synergy front. You still feel good about that?
Gunnar Wiedenfels
Yeah. Look, this is actually one of the most inspiring parts of this combination for me. We’re essentially doing the same thing again that we’ve gone through with Scripps and Discovery. We’ve got a proven methodology. We’ve got an experienced team that’s done this before and I was just exchanging emails over the holidays with a number of the individual initiative owners. And it’s just, it’s so great to see what you can unlock with a delayer organization with people feeling that they actually have the ability to make a real impact. To come up with an idea, put a price tag on it and then and then grab the ball and run.
It’s absolutely amazing, it’s contagious and it’s spreading through the organization. And as I said earlier, you know we set this original $3 billion target. Obviously the pipeline is much, much fuller than that and that’s why you know raise the expectation to $3.5 billion in terms of delivery. We’re still adding ideas to that funnel and I have full confidence in what we said earlier that we’re going to see at least $2 billion of additional value capture flow through.
But I also want to reiterate that was – this started as a synergy program. It’s really a continuous improvement program. We are just consistently and continuously looking at how we’re running the business, how we’re running the company? What makes sense? What doesn’t make sense and we’re setting up the company for you know future growth and value creation, regardless of you know the integration or the transaction in and of itself. But there’s a lot of opportunity and as I said before, part of the upside here is that we’re really integrating five or six companies given the very divisional set up and frankly, you know suboptimal system and process set up for large parts of legacy Warner Media.
So very, very exciting. You know everything we’ve learned over the past months since we last spoke has been positive.
Jason Bazinet
So, in terms of the $12 billion adjusted EBITDA guide for this year, you I think recently sort of – relatively recently added a caveat of assuming a normal ad environment and I was just wondering if the sort of slight erosion in ad market that you’ve talked about that’s sort of happening now, if we end up in just a sort of a plain vanilla recession, you know not a COVID recession, not a great financial crisis recession, just a plain vanilla recession, how would you help investors sort of frame? How they should think about the downside of that $12 billion dollar number. If it’s not a normal ad environment, it’s just a normal recession.
Gunnar Wiedenfels
Well, what is a normal recession? So, we’re still working through the various scenarios and haven’t finalized a budget, so I want to be careful here with sort of giving out any new numbers. But a couple of things I think that are worth considering to your point from the perspective of how should investors think about it. You know the ad market environment clearly is the number one swing factor, you know positive and negative, and as I said, I’m not calling the turn here for Q1 and we’ll wait and see.
The things that we’re focusing on is what we control and there’s a lot of very positive building blocks that are going to come through. We’ve already covered the incremental $2 billion in value capture for next year. There is going to be as we indicated before, significant improvement in the profitability of the of the D2C business, and again, just taking a step back, we’ve got this amazing combination. We’re making the tech investments that are necessary, but that’s essentially just one time, you know resetting it to a new technology backbone and then obviously you got to keep maintaining that, but it’s an investment that we’re making right now and then you know we very soon should have a state of the art set up there.
On the content side, I have no doubt that we’ll always be more efficient than anyone else, because we have that great access to talent, to creativity. We have a massive IP library that we can exploit. We have the data to inform decision making here, and frankly we have this global footprint that we’re utilizing our content on, not on one single platform. So I think we’re going to – we’re always going to have a competitive advantage here.
And then frankly one thing that we have started leveraging much more and that we’re going to see more of next year as well is this enormous marketing power that the company has. We’re reaching you know tens of millions of people every day in the U.S. alone, and we’re harnessing that to get behind our key content priorities, etcetera. So that’s going to be a significant positive driver for next year as well.
You know on the revenue side as I said before, you’re going to see a very significant increase in film output, content in general, games as well. So there are a lot of positive building blocks that we at least to a large extent control. The big negatives or question marks are what the environment is going to be like? I’m not going to lay out any sort of you know base case, upside/downside case scenarios. You guys all know that as well or better than I could model it, but that’s really the question mark right now.
Jason Bazinet
Okay. So I don’t feel like you gave yourself enough credit early on in the conversation, and that when investors were clamoring for growth, you guys always focused sort of on this DTC business, you know being from profits and for being more balanced. But I want to ask you a question about content spending. You said theatrical releases will go out, but what do you think is going to happen to aggregate contentment spinning across the whole industry? Do you feel like we will look back on 2021, 2022 and say, wow, that’s the high watermark and everyone will begin to get a bit more disciplined and content spending will go down in the aggregate, not just on DTC, but just in the aggregate?
Gunnar Wiedenfels
Well, I wouldn’t go so far to call it a high watermark, but what I will say is, you know as you all saw very publicly, we shaved off a lot of the excess last year, and I think that’s something that everyone else in the industry is going to go through. We’re coming from an irrational time of overspending with very limited focus on return on investment and I think others are going to have to make some adjustments that we frankly you know have behind us now, but I think that is going to be a factor.
For us though, you know we’ve right sized the content spend again. I think we have a huge advantage in the enormous amount of data from all the different consumer touch points that we have. I think we’re going to get a lot better in allocating capital and we have every intention to continue spending. Content is the life blood of this company. We are a content company.
Jason Bazinet
Sure.
Gunnar Wiedenfels
Again, we’ve got the ingredients in place. It’s obviously a hit driven business, you win some, you lose some. But if you look at the creative lineup that David has been able to assemble. This is a first flight lineup of creative talent and I got so much positive feedback on some of the announcements.
James Gunn and Peter Safran are working on a DC lineup and are you know getting close to being able to communicate with the plan. We got Channing, we got Casey Bloys with his winning team in place, so we’ve got that. Some of these changes might take some time, obviously given the lead times for content, but we’ve got the team in place, we’ve got the most iconic IP and brand portfolio that I could think of. We’ve got a global footprint, we’ve got the data and we’re putting in place the management system to bring this all together. So from the perspective of the ingredients being in place, I don’t think we could be in a better position and now we got to execute.
Jason Bazinet
How much on content spending, since we don’t really know how the linear business will fare, right? And we don’t really know exactly how the DTC business will fare for the industry. How much fungability would you say that there is across those two buckets? I mean clearly sports is sort of a contractual piece that’ll just push to the side, but as investors sort of think about how much flexibility you have in terms of where you direct the funds for new content, how would you characterize that?
Gunnar Wiedenfels
Well, to your point about sports, there is some flexibility there as well that we can talk about, but look, I think that’s one of the great strengths of what we’re putting together here. We’ve got this massive library and we’ve got all these platforms and one area where you know if you look at what we did last year, we made a lot of you know small steps into experimentation. There was a Thanksgiving West Wing Marathon on HLN. You know those are the kinds of things that’s small individually, but you got to try these things.
We’ve got this massive library; we’ve got this portfolio of networks. That was one of the big drivers for the success of the scripts discovery merger that we were able to play with programming strategies a little bit. Kathleen has perfected this and what’s exciting right now is that the new team’s willingness and ability to cooperate and talk about, you know you got that in your library, can I try this here and to talk about the windowing and to for the first time ironically, to bring together all the data that we have and all the knowledge that we have about you know what works, what demos were sort of over indexing, etcetera.
We can bring that all together and so as such, I think there is going to be an enormous amount of flexibility and you’ve seen in some of our decision making already that we’re willing to take that perspective and make rational decisions and we don’t have to have everything, every last title fully exclusive. There may be other ways to monetize internally and you know at times externally as well and we’re willing to you know run the numbers and form a strategy and make those decisions.
Jason Bazinet
And come to the right answer. You want to touch on the sports point? You brought up sports where you said there was some flexibility.
Gunnar Wiedenfels
Look, I mean yeah, we do have flexibility in most of the deals, at least from a simulcast perspective. Again, I think what’s important for the sports discussion is that linear is still by far the most important platform for our sports monetization by a wide margin, right. So you know some of these discussions about the transition seem a little premature, because the linear reached to us, even the most successful streaming case studies.
But it’s important to have that flexibility. It’s important to be able to experiment, to dip a toe in the water and you know we’ve seen some real success in the streaming space for sports in Europe, where with our Eurosport asset, the Olympics deal, we found a way, you know not as a fully integrated bundle, but as a sell through tier to generate some value. So it’s important to have that flexibility there as well.
But again, the other point is, you know for a decade or so, especially in the U.S., you know the big rights are going to be locked up on linear, so there’s a lot of longevity there as well.
Jason Bazinet
Okay. When you bring Discovery and HBO sort of under a single app this year, what is it – are there any sort of – it feels like something that sounds easy to do, but actually seems pretty complicated when you think about it. So can you spend a second and just talk about some of the things investors should think about and some of the tactics you’re pursuing to sort of minimize the disruption as that occurs?
Gunnar Wiedenfels
Well, the most important point is the decision that we’ve already made a while back, which is to rebuild the whole thing. I mean and that was a little frustrating, because we all wanted to get out and you know get the new – get the products combined, but the reality is you only get one chance for a first impression with the consumer and we’re not going to launch something that’s not adequate and I have great confidence in the team. They are moving this project along. We’re going to come out with a great product from a consumer experience perspective and that’s frankly the biggest holdback for HBO Max right now, that the experience is not where it needs to be. We have made…
Jason Bazinet
Sorry, when you say the experience is not where it needs to be, is that just in terms of the user interface, is it in terms of sort of software flexibility that the consumer has within the… ?
Gunnar Wiedenfels
I don’t want to go too deeply into the sausage making, but it’s both sides. It’s also I think the product team as well. Let’s just say it’s not – it’s not manageable as efficiently as you would like a modern day technology product to work. But more importantly from a consumer perspective, and we’ve made great progress but you know given this example before of the end card where you did not – you know after finishing a season did not get the recommendation for what’s next. So we’ve got this bifurcation of the greatest content in the world, not getting Five Star ratings for content, but then a subpar consumer experience.
The team has made some improvement and the exciting thing is that even without relaunching the full technology stack, we’re seeing improvements in our metrics. Engagement is coming up, churn is better. As I said, through the fourth quarter, you know we’ve retained more with the House of the Dragon gross ads than we had originally modeled. So there’s a lot of positive, green shoots, but definitely more to do.
Then the second point is again, the fundamental thesis of this combination is the synergy between the event driven HBO Max, HBO content on the one hand, and then the daily engagement. Hours and hours of daily engagement from, Discovery+ and again, we’ve done some content ingest experiments here and are pleased with the early results.
And again, to your point, we’re going to we’re going to make it as seamless as possible. There’s a whole team that’s focused on how to manage the transition for the existing different types of HBO Max subscribers, different types of Discovery+ subscribers, and I’m confident that we’ll manage that appropriately, take the time.
Jason Bazinet
But the key thing is to sort of – you’re focused on is sort of trying to minimize the churn as this transition occurs. Is that the right way to think about it? Okay, all right.
So we talked a little bit earlier about the street being very focused on profits and one of the things that I was struck by is just the enormous disparity and the profitability. And I’m just going to pick two companies of Netflix’s DTC business versus Disney’s. And as I’ve gone through the numbers as carefully as I can, I talk to the byside, everyone sort of agrees that that disparity is really mostly an ARPU issue that seems to be the consensus. And it just raises the question of, are the new DTC apps that are launching? Do they have sort of the right pricing or do you think they are sort of priced too low because everyone was in this sort of catch up phase to try and get sufficient scale, whereas Netflix did this over a 12 year period or something.
Gunnar Wiedenfels
It was land grab. I want to – before I answer the ARPU part of that question, I want to go back to profitability overall. I mean as – I want to be absolutely clear, we put out this trajectory that we’re working towards and everything I’ve seen since we put that out has been in line, if not better with what we put in the plan.
You know we are more efficient on the marketing side than we modeled. Again, we’ve rectified a lot of that content exuberance as I would call it. I think we’re going to get you know a great technology platform going and we’re seeing the most important point starting to happen, which is getting that churn rate down you know.
So I feel very, very good about the – let’s call it the infrastructure and cost side of the business, but to get to the core of your question, there’s no doubt that these products are priced way too low.
I think JB or David maybe on one of our earnings calls. When they do the detail here saying, look, the idea of collapsing seven windows into one and selling it at the lowest possible price doesn’t sound like a very smart strategy, and I think you know there was this partly capital market fuel phase of land grabbing. You couldn’t lose enough money and couldn’t grow subscribers fast enough. I think that’s behind us.
And if you look at trend lines over the past 24, 36 months a number of the players have started gradually bringing up prices. So I think there is a there is a there is a building consensus that you know this phase of dumping pricing is over. And again, I think we’re bringing something to the market. We will with the combined product bring something to the market that I have no doubt is going to be the best streaming product in the marketplace and we’re not priced at that level right now in the U.S. more so internationally.
Again, a lot of the initial push when HBO Max was rolled out internationally was strive for the largest number of subscribers, not necessarily value. So there’s a lot of, opportunity, I think, as deals come up to adjust pricing on the positive side. And then as you know ARPU is more than just pricing. The ad monetization for the ad like tier I think is a major factor with a number of elements. We’ll get more engagement, more subscribers, but then importantly pricing power, CPM upside from better reach, better scale, better data, better targeting. So I think there’s a lot of upside opportunity from an ARPU perspective in the industry.
Jason Bazinet
Seems like that’s one thing the industry has done really well in terms of for you guys and everyone else. Just sort of setting the difference between the ad tier and the ad free tier such that the economics or your neutral to positive right in terms of the… [Cross Talk]
Gunnar Wiedenfels
It’s classic segmentation and that’s why David has been talking a lot about a fast segment in the market that historically we haven’t served very well yet, but that we’re going to do more for. But there’s the premium segment that there’s the ad light, a little more price focused and tolerant for advertising and then there is a segment of people that are not going to be willing to pay. And like no one else, we have the ability to cater to all of those audiences with a very well segmented product and content offering.
Jason Bazinet
So can I ask you a philosophical question on sports on the DTC side of the business?
Gunnar Wiedenfels
You can ask.
Jason Bazinet
Okay. I think there’s a growing hypothesis on the buy side that after we saw Thursday Night Football go to Amazon and Sunday ticket go to Alphabet. Then more and more sports are going to go you know over the internet as opposed to linear. And then the question becomes, if sports are going to be consumed over the internet as opposed to a linear package, some sort of streaming service, should it be bundled inside the DTC offer and people say, oh – some people say, oh, that would be great. It keeps engagement up and it lowers churn.
And another investor says no, no, no, you’re just going to go down the same sort of path that we went on the linear side, where the non-sports fan is going to be subsidizing a sports fan, because the sports costs are going to be so expensive inside this app. And so there’s a fillet – it seems like a once in a lifetime opportunity to sort of correct past sins or adjust the business. But at the other time I could see it being quite enticing to say, well we’re just going to layer in sports and we have to get the churn down.
So can you can you just – do you agree with that sort of construct first of all, and then do you have any emerging hypotheses in terms of what the right answer is.
Gunnar Wiedenfels
I generally do agree, frankly because we’ve seen some success with that tiered approach and in our own European operation. And then also if you look at just generally TV markets that are – they are better or worse, the markets that are a little more a-la-cart in Europe, yes, they’ve – well, we’ve never gotten to that level of monetization, but they are also holding that value much better today than the markets were – you know it was an absolutely stuffed turkey with everything and everybody had to take it all, and so…
Jason Bazinet
Well said.
Gunnar Wiedenfels
But for us importantly, a couple of points I want to make. Number one, sports is a key part of our strategy. We’ve got this great global footprint with a strong presence in the U.S., but also Latin America, Europe, so it’s a natural place for us to play. But number two, we’re always going to be super disciplined. It’s easy to overspend on trophy assets. We’ve got a great sports rights portfolio and we’ll look at everything, whatever comes up and we’ll look at it, through the lens of financial discipline and strategic discipline. And again as I said, I think we’re bringing a lot to the table given the capabilities that we have and given the reach we can create across platforms and across the globe and so I feel very good about our position in that business.
Jason Bazinet
Okay, that’s great. Any questions from the audience? Happy to take them.
I want to ask one last question on EBITDA to free cash conversion.
Gunnar Wiedenfels
Yes.
Jason Bazinet
So you’ve talked about 30%, I think 35% to 50% of EBITDA converting to free cash. Can you just talk a little bit about the swing factors that cause that number to be lower or higher? Is it just a simply function of we spend more on content than we amortize or is it more nuanced than that?
Gunnar Wiedenfels
No, it’s more nuanced. That is part of it, frankly. The single biggest factor is to just generate more profit, you know because with a higher EBITDA number you know cash conversion automatically comes up and that’s the core part of our plan. And as I said, we’ve got a lot of initiatives lined up, that’s a super important point.
You mentioned another one, the balance between content amortization and content cash then, which is something that is well and this, let’s call it in this industry. You know there was a lot of focus on the P&L, not so much on the balance sheet and cash flow and I think we can rectify that, and as a matter of fact we have taken some measures to bring those two a little closer together, which is healthier for the business in the long run. But there is a lot of other below the line opportunity as well, but over time from delevering from finishing up our restructuring. Those are important factors that are going to go away; lower interest expense, lower restructuring cash out.
But I also see an opportunity in working capital. Again, it’s something that hasn’t been a huge theme in the industry. We’re putting in place the instrumentation to properly manage for free cash flow, which hasn’t been in the place in the past and there is enormous opportunity there, you know once we get all that in place and as I said, I mean very, very pleased with the command and control that we’ve been able to implement already.
I’m seeing great improvement in this company’s cash generation against that target for next year with 33% to 50%, but remember we’ve also said, long term I think the cash generation capacity of the company is even greater than this and we’re chipping away at that opportunity.
Jason Bazinet
All right, so general upward bias as the EBITDA gets larger, the interest costs drop.
Gunnar Wiedenfels
Right.
Jason Bazinet
There’s some undulations along the way based on the content spend and the working capital, okay.
Gunnar Wiedenfels
Then you know obviously there’s a lot of focus on leverage and some of our discussions as I said before, I’m very, very happy with the capital structure that we put in place. Long dated, cheap debt, we don’t have a lot of maturities coming up. We don’t have a lot of variable interests, so I feel great about that, coupled with the cash generation potential of the combined company.
And we’ve also started a review. As David has said several times, we’re not looking at any strategic asset sales, but beyond that there is opportunity. There is – there’s a real estate portfolio where there may be, better structures for us to just generate some liquidity and we’re in the process of analyzing a lot of the – call it, you know less visible noncore, parts of the portfolio.
Jason Bazinet
That’s fantastic. Well Gunnar, thank you so much for the time. Super informative.
Gunnar Wiedenfels
Thank you.
Jason Bazinet
And quite optimistic. So we’re rooting for you.
Gunnar Wiedenfels
Thank you.
Jason Bazinet
Absolutely! Thank you.
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