Warner Bros. Discovery, Inc. (WBD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Annual Meeting. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Robert Miron. You may begin.

Thank you. Will the meeting please come to order? Good morning, ladies and gentlemen. Sorry, we're a little bit late, but I think with all technical difficulties cleared, on behalf of the Board of Directors, I would like to welcome you to the 2020 Annual Meeting of Stockholders of Discovery, Inc. I'm Robert Miron, Chairman of the Board of Directors. Due to the COVID-19 public health crisis, we are holding the 2020 Annual Meeting solely by means of virtual communications. The health and wellbeing of our stockholders, employees and directors is of paramount importance to us, and we made the decision to host a virtual meeting this year to allow stockholders to participate safely from any location around the world. We are very pleased to have each of you joining us this morning. I will now introduce the other members of the Discovery Board of Directors, all of whom are in attendance today virtually: Decker Anstrom; Robert Beck; Robert Bennett; Paul Gould; Kenneth Lowe; John Malone; Steve Miron; Daniel Sanchez; Susan Swain; David Wargo; and David Zaslav, President and Chief Executive Officer of Discovery. In addition to Mr. Zaslav, we also have several other members of Discovery's senior management team in attendance virtually today: Gunnar Wiedenfels; Bruce Campbell; Savalle Sims; Adria Alpert Romm; JB Perrette, President and Chief Executive Officer of Discovery International; David Leavy, Chief Operating -- Chief Corporate Operating Officer; Jon Steinlauf, Chief U.S. Advertising Sales Officer; Daniel -- Nancy Daniels, Chief Brand Officer, Discovery and Factual; and Kathleen Finch, Chief Lifestyle Brand Officer. Also in attendance virtually are Tara Smith, Senior Vice President and Secretary of the company; James DePonte; and [ William Matheson ], representatives of PricewaterhouseCoopers, our independent registered public accounting firm, who are available to respond to appropriate questions. Ms. Smith, as the Secretary of the company, has informed me and has presented proof by affidavit that the notice of the meeting has been duly given to our stockholders of record. Ms. Smith, please annex the affidavit to the minutes of the meeting. Ms. Sims will now review the rules of conduct for this meeting.

Thank you, Mr. Miron. The meeting agenda and the rules of conduct for today's meeting are available on our virtual shareholder meeting, or VSM, platform. We encourage you to review these materials as they are now in effect. As a reminder, today's meeting may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based upon management's current expectations and which are subject to risks, uncertainties and changes in circumstances. Numerous factors could cause our actual results and conditions to differ materially from those described in any forward-looking statements. Please see our annual report on Form 10-K for fiscal 2019 and our quarterly report on Form 10-Q for the first quarter of fiscal 2020 for a description of the risks and uncertainties associated with our business. At our meeting this morning, we will first address the matters described in the company's notice of meeting and proxy statement dated April 29, 2020. We will then open the polls for voting, announce the results of the voting and adjourn the formal portion of the meeting. Following the adjournment of the formal portion of the meeting, we will have a presentation from our CEO and address appropriate general questions from stockholders regarding the company. Questions may be submitted in the field provided on our VSM platform. If we encounter any technical difficulties that prevent us from continuing the meeting, we ask our stockholders to stand by for 15 minutes for resolution. If we are unable to resolve the technical difficulties after 15 minutes, please refer to the Investor Relations section of our website for an update relating to the meeting. In order to attend at this meeting, you must have been a stockholder of record as of April 20, 2020. [Operator Instructions] Please remember that any questions during the formal portion of the meeting must be relevant to the meeting and pertinent to the matters properly presented before the meeting. The Board of Directors have appointed Thomas Ferrari, a representative of Broadridge Financial Solutions, Inc., to serve as inspector of election for this meeting. The inspector is in attendance virtually and has taken his oath of office, which will be filed with the minutes of this meeting. A certified list of registered stockholders entitled to vote at this meeting is available and may be inspected by any stockholder during this meeting by logging into the VSM platform using the control number found on your proxy card and clicking on the registered shareholders list link. I now call on Ms. Smith, the Secretary of the company, to present the inspector's report after stock representation.

Mr. Miron and Ms. Sims, the inspector report said the outstanding capital stock of the company at the close of business on April 20, 2020, the record date for determination of stockholders entitled to vote at this meeting, consisted of a total 166,532,095 shares of Series A common stock and Series B common stock, which vote together as a class, and 7,852,582 and 4/9th shares of Series A-1 preferred stock, which converts to 70,673,242 shares of Series A common stock. Present at this meeting are 143,037,249 shares of Series A and Series B common stock voting together as a class and 70,673,242 shares of Series A common stock as converted from Series A-1 preferred stock. This represents approximately 88.61% of the total voting power of the Series A and Series B common stock, 100% of the total voting power of the preferred stock and 91.33% of the total voting power of Discovery's outstanding voting stock, which is more than the amount necessary to constitute a quorum.

Thank you. The inspector's report will become part of the minutes. Now that we have established that a quorum is present, the meeting is duly constituted to transact business. We are here today to consider the following proposals: one, the election of 6 Directors, 3 by the holders of the common stock and 3 by the holders of the preferred stock; the ratification of our independent registered public accounting firm; the approval on an advisory basis of our named executive officer compensation; and a stockholder proposal regarding simple majority vote. We will consider each item in turn in the same order in which it appears in the notice of the meeting. To polls for each matter upon which stockholders will vote at this meeting, will open when such matters call to a vote and will remain open until I announce the polls are closed. Ms. Sims will now review the voting rules for this meeting and present each proposal for a vote.

No ballots or proxies, revocations of or changes to ballots or proxies will be accepted after the polls are closed. Near the end of the meeting, after the tabulation of the voting, the secretary will announce the voting results on each proposal. If you've already returned a proxy either by mail, telephone or via the internet, your vote will be counted automatically without any further action on your part. If you have not previously voted and wish to do so or if you wish to change your earlier vote, you may do so by clicking the Vote Here button on the VSM platform. The first proposal to be voted on by the stockholders is the election of the 3 Class III common stock directors to serve until the 2023 Annual Meeting of Stockholders. Discovery has an advanced notice bylaw provision which required any nominations for director to be submitted to the secretary of the company by March 9, 2020. No such nominations were received, and as a result, the nominations are closed. The nominees for election as a Class III director are: Robert R. Bennett, John C. Malone, David M. Zaslav. If you have any questions pertaining to these nominations, please submit them now through the ask a question field on the VSM platform. There being no questions, we will now proceed to vote. [Voting]

The next proposal to be voted on by the preferred stockholders is the election of the 3 preferred stock directors to serve until the 2021 Annual Meeting of Stockholders. The 3 nominees for director to be elected by the holders of our preferred stock are: S. Decker Anstrom, Robert J. Miron, Steven A. Miron. If you have any questions pertaining to these nominations, please submit them now through the ask a question field on the VSM platform. There being no questions, we will now proceed to vote. [Voting]

The second proposal to be considered for the stockholders is the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020. If you have any questions pertaining to the ratification of PricewaterhouseCoopers LLP, please submit them now through the ask a question field on the VSM platform. There being no questions, we will proceed to vote. [Voting]

The third proposal to be considered by the stockholders is the vote on an advisory resolution to approve our 2019 named executive officer compensation or say-on-pay vote. This vote is not binding on the company. However, our Compensation Committee and Board of Directors value the opinions expressed by our stockholders and will consider the outcome of this advisory vote when making future compensation decisions. The advisory resolution appears on Page 79 of our 2020 proxy statement. If you have any questions pertaining to the say-on-pay vote, please submit your questions now through the ask a question field on the VSM platform. There being no question, we'll proceed to vote. [Voting]

The fourth proposal to be considered by the stockholders is a stockholder proposal requesting the Board of Directors to adopt a simple majority voting requirement submitted by John Chevedden on behalf of Kenneth Steiner. Mr. Chevedden is on the line to present this proposal on behalf of Mr. Steiner. Operator, please open Mr. Chevedden's line. Mr. Chevedden, you may now present your proposal. Please limit your presentation to 3 minutes.

This is John Chevedden. Can you hear me okay?

Yes.

This is Proposal 4, a simple majority vote. Shareholders request our Board to take the steps necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated and replaced by a requirement for a majority of the votes cast for and against such proposals or a simple majority vote in compliance with applicable laws. Shareholders are willing to pay a premium for shares of companies that have excellent corporate governance. Supermajority voting requirements have been found to be 1 of 6 entrenching mechanisms that are negatively related to company performance. According to What Matters in Corporate Governance? by Lucian Bebchuk of the Harvard Law School, supermajority requirements are used to block an initiative supported by most shareholders but opposed by status quo management. This proposal topic won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy and Macy's. These votes would have been higher than 74% to 88%, if more shareholders had access to independent proxy voting advice. Currently, a 1% minority can frustrate the will of our 79% shareholder majority in an election with 80% of shares s casting ballot. In other words, a 1% minority could have the power to prevent shareholders from improving the governance of the company. This can be particularly important during periods of management underperformance and economic downturn. Currently, the role of shareholders is downsized because management can simply ignore an overwhelming 79% vote of shareholders. This proposal is especially important for Discovery shareholders due to Discovery's litany of poor governance practices. Certain insider shares have 10x the voting power of other shares. Executive pay is not subject to a shareholder vote annually. Directors are subject to election only once in 3 years. Directors only need to vote for themselves to be elected. Directors Paul Gould and Kenneth Lowe were rejected by 40% of shares, and there is little incentive to improve because they need not stand for election until 2022. Shareholders cannot act by written consent or call special meetings. Directors can only be removed for a cause, which means they cannot be removed as a practical matter. David Zaslav received $129 million for one year of work. Please vote yes. Simple majority vote, Proposal 4.

Thank you, Mr. Chevedden. As the Chairman of this meeting, I have determined that the foregoing stockholder proposal was made in accordance with the proxy rules in the company's bylaws and is being presented at this meeting. Ms. Sims, please proceed.

The Board of Directors has included in its statement in opposition to this proposal in the proxy statement. For the reasons stated in the statement in opposition, the Board recommends a vote against this proposal. If you have any questions pertaining to this stockholder proposal, please submit them now using the VSM platform. There being no questions, we will now proceed to vote. [Voting]

In accordance with our bylaws, these are the only matters of business which will be conducted at this meeting. I now declare the polls closed and all matters have now been voted upon by the stockholders.

I will now ask Mr. Ferrari, the inspector of election, to proceed with the canvassing of the votes. Ms. Smith, will you please present to us Mr. Ferrari's preliminary report on today's balloting?

Mr. Ferrari has notified me that in the case of the Class III nominees for election as directors by the common stockholders, the holders of a plurality of the votes cast by the common stock at this meeting have been voted for each of these nominees. Therefore, the 3 nominees for Class III directors of Discovery, Inc. have each been elected to serve until the 2023 Annual Meeting of Stockholders and until his successor is duly elected, except in the event of his earlier death, resignation or removal. Mr. Ferrari has notified me that in the case of the nominees for election by the preferred stockholders as director, all of the votes cast by each of the holders of the preferred stock at this meeting have been voted for each of the 3 nominees. Therefore, the 3 nominees for preferred stock directors of Discovery, Inc. have been elected to serve until the 2021 Annual Meeting of Stockholders and until his successor is duly elected, except in the event of his earlier death, resignation or removal. Mr. Ferrari has also notified me that the proposal on the ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020, has received sufficient votes and has passed. Mr. Ferrari has notified me that the advisory resolution to approve our 2019 named executive officer compensation has received sufficient votes and has passed. Mr. Ferrari has notified me that the stockholder proposal requesting the Board of Directors adopt a simple majority voting requirement has not received sufficient votes and has not passed.

Mr. Ferrari, please file your final voting report with Ms. Smith to be annexed to the minutes of this meeting. Thank you. This concludes the formal business scheduled for this 2020 annual meeting of the stockholders. I would like to, again, thank each of you for attending today's meeting. As Chairman of this meeting, I hereby declare that the 2020 Annual Meeting of the Stockholders of Discovery is adjourned. We will now proceed with a presentation from our CEO, David Zaslav.

Thank you, Mr. Chairman. Good morning, and thank you for joining us for our first virtual annual meeting. This has been a time of unprecedented challenges for our nation, for the world and for people everywhere. I'm proud of how our employees have pulled together at this difficult time with heart, creativity and optimism. Safeguarding the health and wellbeing of our people at Discovery is always our #1 priority, never more so than during this pandemic. And as we continue a thoughtful process of reopening offices, which have started already in Asia and in Europe. With nearly our entire employee population working remotely, we have not missed a beat. We have been able to protect our employees and move our business forward while continuing to serve our advertisers, partners and viewers and drive long-term value for you, our shareholders. I am more convinced than ever that we will emerge a better, stronger and more cohesive company. The world has clearly changed a lot since last year. Discovery entered 2020 and this period of uncertainty from a position of real strength, thanks to the set of growth drivers that put us at the top of our peer group. As I have said before, 2019 was a story of promises made and promises kept. We delivered outstanding progress strategically, operationally and financially by any measure, whether domestic and international advertising and affiliate, and our stockholders were rewarded. Our stock appreciated last year by more than 32%, exceeding the performance of any of our direct peers. Free cash flow has become a critical yardstick for companies in an industry undergoing transformation. Last year, we achieved our post-merger free cash flow target of $3 billion by generating more than $3.1 billion in free cash flow. We delivered the highest OIBDA growth and one of the highest OIBDA to free cash flow conversion rates among our direct peers. This allowed us to reduce our leverage to our 3x target as we promised versus the 4.8x following the acquisition of Scripps just a few years ago. And we began to buy back our stock last year, exhausting our initial $1 billion authorization in 10 months, and at the same time, continuing to invest significantly in our direct-to-consumer future. We feel good about our hand and our mix of assets. We are in a different market than the industry heard, low-cost programming that we own and people can't live without beloved personalities and brands that are safe and trusted. In the U.S., we are leveraging our category leadership, including the #1 portfolio for women across all TV for much of last year. With direct-to-consumer verticals like Food Network Kitchen and the forthcoming Magnolia, which is our joint venture with Chip and Joanna Gaines, 2 of the most authentic voices on television. We continue to drive our differentiated strategy with a strong combination of powerful brands, blue chip content and industry-leading programming, and we are pleased with the results. TLC has broken through the cultural zeitgeist, with this year's biggest TV franchise, 90 Day Fiance, beating all the broadcast and cable on Sundays, the most competitive night in TV. The Discovery channel recently had its #1 nonprime telecast in history with a live broadcast of SpaceX. So we cannot be prouder of last week's two-night global special hosted by Oprah Winfrey, OWN Spotlight: Where Do We Go From Here? This timely and critical discussion about racism and social justice was watched by nearly 12 million viewers across our U.S. portfolio. We continue to be singularly focused on strong execution and operational discipline, guided by an entrepreneurial spirit that sets us apart and got us to where we are today. We thank our shareholders for their continued support. And with that, I hand it back to you, Bob, our Chairman.

Thank you, David. We will now answer questions that were submitted through the VSM platform during the meeting. Andrew, what is the first question?

Thank you. We have a question and a comment that I would address to our CFO, Gunnar Wiedenfels. With the understanding that there is a need for the company to have visibility of free cash flow over the next few quarters before initiating share repurchases, there is a concern that by the time Discovery has that visibility of the stock, we'll have moved back into the 30s. Repurchasing stock at these levels will be much more accretive to shareholders than at those levels. Would Discovery consider a slightly more aggressive approach to share repurchases? For example, keeping minimum cash of, say, $1.5 billion and spending the excess on repurchases? And the thanks for being stewards of our capital, especially during these circumstances.

Yes. This is Gunnar Wiedenfels speaking. Thank you, Andrew. And let me answer this first by reiterating the strong balance sheet that this company has, further reinforced through the financing measures in the first half of this year. And also, as David pointed out, the strong free cash flow generation, which, as we have previously noted, has continued through the COVID crisis so far. Regarding capital allocation, our priorities are well communicated. We are committed to maintain our investment-grade rating. We will continue investing in the company and in our strategic pivot world to say, direct-to-consumer world, and we will continue to return excess cash to our shareholders. And if you look at the past couple of months, you will note that we have been very active in the market towards the back end of last year and then the very beginning of the year 2020. However, I do think that it's prudent to tread lightly right now from the perspective of capital returns as we still navigate through an environment of global macroeconomic uncertainty. And from that perspective, we're keeping a little more caution here in the system as we otherwise would.

Great. And it looks like to be our last and final question. Mr. Miron, would you feel -- would you be able to discuss the company's plans, if any, to address board-level diversity?

Sure. Thank you, Andrew. Our Board does acknowledge and agree that there is a great benefit provided by diversity throughout the company, and we could do more to enhance diversity at the Board level. We have engaged a director search firm to assist our Board, developing a diverse slate of potential candidates that meet our Board needs. We also will rely on our current directors to bring forward potential diverse candidates, and I believe our current board has done a stellar job through the years and has provided the company with consistent leadership and guidance through difficult times. Thank you, Andrew.

And that appears to conclude the questions that have been submitted.

So with that, I would thank you all for virtually attending the 2020 Annual Meeting of Stockholders of Discovery, and we're fine. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.