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Executives

Douglas Shapiro - Senior Vice President of Investor Relations

Jeffrey L. Bewkes - Chairman and Chief Executive Officer

John K. Martin - Chief Financial Officer and Chief Administrative Officer

Analysts

John Janedis - UBS Investment Bank, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Tim Nollen - Macquarie Research

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

David W. Miller - B. Riley & Co., LLC, Research Division

Michael C. Morris - Davenport & Company, LLC, Research Division

Time Warner (TWX) Q4 2012 Earnings Call February 6, 2013 10:30 AM ET

Operator

Welcome to the Time Warner Incorporated Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to your host for today, Mr. Doug Shapiro, Senior Vice President of Investor Relations for Time Warner. Please proceed.

Douglas Shapiro

Thanks, and good morning. This morning, we issued 2 press releases, one detailing our results for the fourth quarter and full year and the other providing our 2013 full year business outlook.

Before we begin, there are 2 items I need to cover. First, we refer to certain non-GAAP financial measures. Schedules setting out reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and trending schedules. These reconciliations are available on our website at timewarner.com/investors. Reconciliations of our expected future financial performance are also included in the business outlook release that's available on our site.

And second, today's announcement includes certain forward-looking statements, which are based on management's current expectations. Actual results may vary materially from those expressed or implied by these statements due to various factors. These factors are discussed in detail in Time Warner's SEC filings, including its most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Time Warner is under no obligation, in fact, expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

Thank you. And now, I'll turn it over to Jeff.

Jeffrey L. Bewkes

Thanks, Doug, and thanks for listening in today. 2012 was another successful year for us, and we're at an even stronger position today than we were a year ago. Adjusted operating income was up 4%, and adjusted earnings per share climbed 13%. Looking back over the last 4 years, adjusted OI has grown at 10% per year, and adjusted EPS has grown by more than 20% per year, or over 130% cumulatively.

Our networks, which is the core of the company, grew adjusted operating income in the double digits in 2012 and 12% annually over that same 4-year period. At the same time, in 2012, we continue to build a foundation for strong ongoing growth in 2013 and beyond. And as you saw this morning, we once again expect to deliver low double-digit adjusted earnings per share growth this year.

We also continue to return capital to our shareholders, last year, paying $1 billion in dividends and purchasing more than $3 billion of our stock. That's more than 8% of our outstanding shares. Since we restarted our share repurchase program in 2009, we've bought back more than 1/4 of our equity base.

Reflecting our continued commitment to return capital, this morning we announced that our board has approved a new $4 billion repurchase authorization and an 11% increase in our dividend per share. That's the fourth consecutive year of double-digit dividend increases.

Our performance in 2012 and our expectation of continued strong growth are the products of the strategic priorities that we've put in place several years ago and which we continue to pursue today. They may not sound new to you, but one of the hallmarks of a sound strategy is that it doesn't change too often.

First and foremost, we're investing aggressively in our content. Second, we're pushing to develop the next generation of digital business models in ways that enhance value to consumers and to the company. Third, we're seeking to replicate our domestic success in the most attractive international territories. And fourth, overlaying everything we do as a continuing effort to improve our operating and capital efficiency.

I'd like to spend a few minutes talking about how we executed against these objectives in 2012 and how we aim to do it again in 2013. And I'll start with our first priority, and that's our content.

At Turner, in 2012, we continued our path of refreshing essentially the entire prime time lineup on TNT and TBS over a multiple-year period. Last year, we had more original programming on our entertainment networks than ever, including new originals like Dallas and Perception on TNT and Men at Work on TBS. We also bolstered our lineup of new acquired shows, adding The Mentalist and Castle on TNT and securing 2 Broke Girls for TBS in 2015.

And we extended our relationship with Major League Baseball, securing rights to regular season games and postseason games well into the next decade. So with the NCAA, NBA, NASCAR and baseball, we have the strongest lineup of national sports rights of any cable network other than ESPN's group.

For the most part, these efforts are paying off. In 2012, TBS was the #1 ad-supported cable network in prime for adults 18 to 34, and it was #3 for adults 18 to 49. At TNT, while we have more work to do, ratings improved over the course of the year, and it ended 2012 as the #4 cable network in prime among adults 18 to 49. TNT also claimed 5 of the top 10 cable originals of the year: The Closer, Rizzoli & Isles, Major Crimes, Perception and Dallas. And TNT had the top 3 new originals of the year on cable.

We delivered continued solid performance across our more targeted networks. For the year, Adult Swim was again the #1 cable network in total day for young adults; Cartoon ranked #1 in total day for boys 6 to 11 and boys 9 to 11; and truTV was close to a top 10 network in prime among men 18 to 49.

CNN finished the year on a high note, thanks to its election coverage. And while its overall ratings performance in 2012 fell short of our expectations, I'm optimistic that with the new leadership we've announced, CNN will once again fulfill the promise of its iconic brands.

As we've discussed with you before, over the next several years, we'll be increasingly focused on monetizing these investments in content as we enter our next round of affiliate renewals. We also told you that we expect Turner's domestic subscription revenue to grow at a double-digit compound annual growth rate between 2013 and 2016. And as we get closer to starting the renewal process, we're as confident in that forecast as ever.

In addition to monetizing this content through traditional revenue streams, we also started to license Turner content to SVOD providers. In the last few months, Turner and Warner Bros. together announced deals with both Amazon and Netflix, licensing serialized shows such as Dallas and Falling Skies, along with animated series from both Cartoon Network and Adult Swim. This emerging back end for cable originals is a very promising sign since it should result in production values for cable originals getting even better over time.

In 2013, we'll do even more of the same. That includes airing originals on TNT and TBS year round and increasing the number of original episodes on those 2 networks by more than 40%. We'll do that within the cost growth envelope that we've discussed with you before.

At HBO, our content lineup is the best it's ever been, and it just keeps getting better. In 2012, we added several popular and critically acclaimed new shows like the Newsroom, Girls and Veep to a schedule that already included blockbuster series True Blood, Game of Thrones and Boardwalk Empire. Underscoring the amount of quality programming on that network last year, HBO won more Emmys than any other network for the 11th year in a row. It also just received more Golden Globes than any other network, too.

As usual, last year, HBO also offered by far the largest slate of Hollywood blockbusters of any premium network, roughly 1/2 of the top 25 films in the pay window. In recent months, we've extended our output deals with both Fox and Universal, helping solidify HBO's leading position on theatrical films well into the next decade.

The strength of this programming on HBO and Cinemax and the success of HBO GO and MAX GO helped generate the best subscriber gains in a decade. Both brands are an improvement at virtually all of our major affiliates. Together, they added 1.9 million subscribers domestically for the year.

At Warner Bros., our investments in great storytelling also paid off last year, enabling us to post the second-highest annual profits ever, even without a Harry Potter release. Our TV studio was again the leading producer of broadcast TV programming in the 2012-2013 season. With hits like The Big Bang Theory, The Voice, Revolution, Two and a Half Men, 2 Broke Girls, The Following, Mike & Molly and Person of Interest, Warner's now accounts for 1/3 of the top shows on broadcast TV with adults 18 to 49, including 3 of the top 4 comedies on television.

Our game plan in 2013 is the same, to foster the best possible environment for the best writers and producers in Hollywood. And we expect another very good year. As you know, we're seeing great secular dynamics in TV production right now with increasing demand from all our buyers, broadcast, cable originals, off-mix indication, international and subscription VOD.

For instance, besides the deals that Warner Bros. and Turner struck with Amazon and Netflix, which I mentioned earlier, in recent months, Warner's also cut a comprehensive slate deal with Netflix for new serialized shows in the U.S., as well as a series of agreements internationally, including Canada, Latin America, the U.K. and Ireland and the Nordic region. These deals boost our confidence that we'll be seeing strong SVOD revenues again in 2013 and beyond.

We also had a great year at the film studio, led by The Dark Knight Rises, which grossed $1.1 billion at the global box office, making it the highest grossing film in the franchise. We also have the first part of The Hobbit trilogy, which is on track to reach $1 billion globally; Magic Mike; and the multiple award-winning film Argo.

Driven by countries like Brazil, Russia and China, we're increasingly seeing international box office totals outstripping domestic box by more than 2:1 for our biggest hits. It's hard to top that, but our 2013 theatrical slate looks even better. It includes Man of Steel, The Hangover 3, Great Gatsby, Pacific Rim, the sequel to 300 and, of course, the second film in The Hobbit series. In fact, that was all content.

So turning now to our second main priority. In 2012, we continue to lead the digital transition across our businesses. At our networks, Turner expanded its TV Everywhere offerings, adding new platforms and new apps. Turner's TVE services are now available to over 80 million households, and we offer over 1,000 hours of on-demand content and our first live streaming app for CNN.

Adoption of TV Everywhere clearly has not progressed at the consumer level as fast as we would have liked. However, with growing availability of authenticated content for many of our cable programming peers slated for 2013 to finally joining us, we expect much greater consumer awareness and usage starting this year.

At HBO, HBO GO and MAX GO are now available to essentially our entire domestic subscriber base, and they're available across a wide variety of devices and platforms, including iOS, Android, Kindle and Xbox. As we've discussed with you before, we've seen very healthy usage, and consumer satisfaction is through the roof. Gross subs said they are more loyal to HBO and they're watching more HBO, and monthly usage per user climbed 80% between the end of 2011 and 2012.

We've also just launched a program to bundle in HBO GO on college campuses to help us attract the next generation of HBO subscribers. We're rolling out GO as an authenticated product where we have linear networks internationally, too. It's now available in 10 countries in Central and Northern Europe and 8 countries in Latin America. This year, we'll start to launch in Asia.

At Warner's, as you know, we're spearheading a number of initiatives to improve the consumer proposition of buying and owning digital movies. UltraViolet has only been in the market for a short time, but it's gaining momentum. UV is now supported by almost every major studio. Over 8,500 titles are available in the UV format, and it has more than 9 million registered users.

In 2013, we expect to see a lot more retailers coming on board. Flixster and the other providers are also launching in-home disc-to-digital services that allow consumers to unlock the digital rights to their physical DVDs right from their home computers. With UV already available in the U.S., Canada and the U.K., this year, we also plan to roll it out in Australia, France, Germany, Ireland and New Zealand.

Time Inc. significantly expanded its digital efforts in 2012, too. That included launching

[Audio Gap]

iOS, Android and Kindle platforms, and we've seen some encouraging signs so far. For instance, our tablet subscribers are younger, they have higher incomes, and over 70% of them have never subscribed to those titles before.

A third priority I mentioned earlier is expanding our presence internationally in key territories, particularly our network businesses. Turner is focused on increasing its scale in each of its targeted territories, including investing more in local production and securing distribution from new networks in countries where we already have a presence. We're also looking to significantly streamline our operations in areas where we don't have scale like Western Europe.

HBO is following the same playbook internationally that succeeded so well domestically, increasing local production and rolling out product enhancements like HD, On Demand and now, HBO GO. It's working. HBO and Cinemax grew to 73 million subscribers internationally. That's up more than 35% from the end of 2011. Adding in our domestic cap, HBO now has 114 million subs globally. That's far more than any competitor. And HBO is also expanding into new territories. Last year, we launched new HBO premium services in the Netherlands and the Nordic region, and we announced plans for the first premium TV service in India.

The fourth and final objective I mentioned earlier is one that informs everything else we do, and that is continual striving to improve our operating and capital efficiency. And reflecting that focus in 2012, total operating expenses actually declined 2% even as we invested more in content. We may not be able to replicate that every year, but closely managing our expense growth has become a way of life at Time Warner. As one example, we're making progress on our enterprise services initiative that will ultimately improve the efficiency of certain IT, real estate and HR functions. In 2013, that will require some additional investment, but we expect to ultimately save several hundred million dollars annually on a run-rate basis. And at the same time, we know that active balance sheet management is a critical component of equity returns. Over the last 4 years, we've generated $11 billion in free cash flow, and we've returned $15 billion in dividends and share repurchases, including more than $4 billion last year. As you saw with the dividend increase and a new repurchase authorization that we announced today, returning substantial capital to our shareholders remains a cornerstone of our capital plan.

So we accomplished a lot in 2012. I think we're exiting the year stronger than we ended it. And with another year of double-digit adjusted earnings per share growth under our belt, I think it's fair to say that our approach is working. Our track record shows that a combination of good organic growth, tight cost controls and active balance sheet management can consistently deliver attractive financial performance and strong equity returns.

With that, I'll turn it over to John. Thanks for listening.

John K. Martin

Thanks, Jeff, and good morning. I'll begin by referring to the first slide, which is now available on our website. Starting with the consolidated highlights of the first slide, you'll see that the fourth quarter was a terrific way to end what was another really strong year. The fourth quarter was our strongest quarter of the year in terms of growth, coming in even a little better than we anticipated, with adjusted operating income up 16% and adjusted EPS up almost 25%. And that helped us post another year of double-digit adjusted EPS growth, up 13%.

As Jeff mentioned, the initiatives we put in place several years ago have allowed us to achieve consistently strong results. In fact, 2012 was our fourth straight year of double-digit adjusted EPS growth, and that was despite a slight dip in revenue which resulted from very difficult comparisons at the Film and TV Entertainment group, as well as a very challenging environment in Publishing.

We were able to accomplish that due to a continued positive mix shift toward higher margin networks and TV production businesses, a continuing big focus on costs across the company and our ongoing share repurchase program.

We reduced operating expenses by low-single digits in 2012, enabling us to push up margins by over 100 basis points for the full year. That included holding network costs almost flat even as we made significant investments in original programming at both Turner and HBO. As you know, that's been a consistent theme at the company now for a long time. On a consolidated basis, we've kept our expenses essentially flat over the past 4 years, increasing margins by more than 500 basis points over that period.

For the full year 2012, we also deployed about $1 billion in dividends and over $3 billion in share repurchases. And as evidenced by the dividend increase and new repurchase authorization we announced this morning, we remain committed to delivering attractive shareholder returns. So we're very pleased with how the year ended, and we feel great about how we're positioned going into 2013 and beyond.

Now let me turn to the segment highlights, beginning at the networks, where both HBO and Turner grew adjusted operating income double digits for both the quarter and the full year. That resulted in another record year of profits for this segment.

Subscription revenues were up a very healthy 7% in the quarter and 6% for the year, and that's despite a modest negative impact from foreign currency. That growth reflects both higher domestic rates and continued international growth. And as Jeff mentioned, HBO is experiencing the strongest domestic subscriber trends it's seen in years. That includes improved performance across most of our major distributors, and we've seen particular strength from satellite and telco, which continue to take share from the cable operators. Keep in mind that due to the nature of our affiliate contracts, the majority of these subscriber additions are non revenue-generating, still with sub growth provided some boost in 2012 and gives us a good start heading into the year.

So we feel good about the trajectory of subscription revenues here, and that's before we see the expected benefits from our upcoming domestic renewal cycle at Turner, which will begin to kick in, in 2014.

Moving over to advertising, revenues were up 3% in the quarter, with domestic advertising revenue up 7%. And that was helped by additional NBA games compared to the year-ago quarter, which was impacted by the NBA work stoppage. We also had a very good quarter at CNN, which benefited from higher ratings around the U.S. presidential election. International advertising revenues declined just under 10% in the quarter. Growth was negatively impacted by the shutdown of Imagine and TNT Turkey, as well as unfavorable foreign exchange movements.

Looking through these items, international ad revenue would have been about flat in the quarter, and that's clearly below what our longer term expectations are here, and that's due to the tough economic conditions that currently exist in Europe, as well as some current rating softness in Latin America.

Looking ahead to the first quarter of 2013, we anticipate total reported advertising revenues to be about flat. And that's a little slower than the fourth quarter, and that's due to a few reasons. First, we're not going to benefit from additional NBA games; or second, the 2012 U.S. presidential election as we did in the fourth quarter; and third, we'll have fewer NCAA games versus the year-ago period, and that's due to timing of the tournament.

However, we expect the pace of advertising growth to pick up starting in the second quarter as we lap the transfer of management of SI.com and Golf.com to Time Inc. and the international network shutdowns that I previously mentioned. Our year-over-year comparisons also ease somewhat as the year progresses. So for the full year 2013, we still anticipate solid growth in networks advertising.

Adjusted operating income at the networks group was up a very strong 17% in the fourth quarter and 10% for the full year, with margins expanding almost 200 basis points for the year. In addition to solid revenue growth, that reflects continued tight cost controls, which was evident throughout the year. For 2012, programming expenses were up just 2%, and overall expenses were up only 1%. And that's despite a high-single-digit increase in original entertainment and sports programming.

Expenses and margins benefited from international network shutdowns. But even without those, 2012's results were the continuation of a multi-year trend in margin expansion. Networks margins are up over 600 basis points since 2008 and over 1,000 basis points over the past decade. And we expect those trends to continue over the next several years.

At our international networks businesses, including HBO's unconsolidated ventures, profits were relatively flat in 2012 at around $650 million. And that was largely due to the negative impact of foreign currency exchange rates; the macroeconomic conditions in some territories, especially Europe; and HBO's expansion into new regions. But we're confident in the longer-term growth trajectory here, and we continue to expect these businesses to reach about $1 billion in adjusted operating income in the next few years.

For 2013, we expect to have another great year at the networks segment. As I just mentioned, we feel good about subscription and advertising revenue trends. And on the cost side, we remain very focused on investing in programming while limiting growth in non-revenue-generating expenses. And internationally, we anticipate a return to very strong profit growth this year as a result of improving organic revenue trends, a reduced drag from FX and recently announced cost savings initiatives in Europe.

So putting that all together, we expect another year of margin expansion, an attractive growth in adjusted operating income at this segment.

Let me turn now over to Film and TV, where Warner Bros. posted its highest quarterly adjusted operating income ever in the fourth quarter of 2012. And from what we can tell, it's actually the highest quarterly profit any studio has ever generated in any particular quarter. And for the year, Warner Bros. had its second-highest profits ever.

For the quarter and the year, margins benefited from both a mixed shift towards higher margin TV revenue and a decline in P&A spending due to fewer theatrical releases. To put the year in context, if you set aside 2011 for a moment, adjusted operating income was more than 10% higher than in any other year in its history. And of course, we did that without a Harry Potter theatrical or Harry Potter home video release. Warner's ability to maintain such a high level of profitability is a testament to the diversity of revenue streams here and in particular, to the strong performance of the TV production business.

In 2012, Warner Bros. TV accounted for approximately 60% of Warner Bros.' profits and it grew both revenues and profits year-over-year despite an extremely challenging comparison against the syndication of The Big Bang Theory and Friends in 2011. It was able to overcome those comparisons partially due to growth in demand from SVOD services and international syndication. For the year, we've recognized around $350 million in SVOD revenues, the majority of which came from our television product.

In our theatrical business, we had a very good year and a very successful fourth quarter despite difficult comparisons. The first film in The Hobbit trilogy has generated around $950 million at the global box office and is on track to join The Dark Knight Rises as our second 2012 release to pass $1 billion in global box office. The strong box office performances of The Hobbit and the critically acclaimed film Argo helped keep our theatrical revenues almost flat in the fourth quarter, and that's despite a decline in the number of theatrical releases.

Looking ahead to 2013, we are very optimistic about the film slate, which, as Jeff mentioned, includes the second film in the Hobbit trilogy, Man of Steel and Hangover 3, to name just a few.

Additionally, we have another strong year at our TV studio, where we continue to see robust demand across major buyers, including domestic and international SVOD services. In addition to some recent SVOD deals, we remain in active discussions with all major SVOD services about additional content packages. The strong demand for both our TV and theatrical product is showing up in our backlog, which reached a record $6 billion at the end of 2012, and that's up 60% over the past 5 years. Backlog, as a reminder, is cash licensing revenue for television and theatrical product that will be recognized in the future. So that gives us a lot of confidence about the long-term growth prospects in this business.

We're also encouraged by recent signs of stabilization in home entertainment, with total consumer spending for the industry actually flat in 2012. That's happening because digital is now big enough and growing fast enough to make up for physical declines. In fact, Warner's digital home video revenue, including SVOD, VOD and EST, approached $1 billion in 2012, and we expect it to grow close to 20% in 2013.

And we also have a strong games release this year, which will include the next release in the Batman Arkham franchise. So all in all, we expect Warners to post another very strong year in 2013. And with a little luck, the year should be as good or maybe even a little bit better than 2012.

Let's move on to Publishing, where very challenging industry conditions weighed on Time Inc.'s results for both the quarter and the year. Nevertheless, Time Inc. continued to take advertising shares during 2012, and fourth quarter trends showed some signs of improvement across both advertising and subscription revenues.

Advertising revenues declined 4% in the quarter. And while clearly not where we want that to be, that marked the smallest advertising decline of the year.

Subscription revenues were flat in the quarter, an improvement over the last couple of quarters, and that included both better underlying trends, as well as the impact of having an additional week in the calendar. Newsstand sales remained somewhat soft in the fourth quarter, but People Magazine took significant share in its category.

It's worth pointing out that other revenues were negatively impacted by the absence of revenues from QSP, which was sold in the first quarter of 2012. The absence of QSP was also the principal driver of the drop in adjusted operating income at Time Inc. during the quarter. While QSP was roughly breakeven for full year 2011, it was a highly seasonal business, only generating profits in the fourth quarter. So excluding any impact of its sale, adjusted operating income would have effectively been flat at Time Inc. in the quarter.

As we look ahead to the first quarter of 2013, advertising newsstand sales remains somewhat soft, but we continue to see some improvement in underlying trends relative to recent quarters. In light of the ongoing industry challenges, Time Inc. has started the process of reducing its global workforce by approximately 6%. This restructuring will lower costs in both our domestic and international operations by centralizing certain functions, increasing collaboration across titles and streamlining research and marketing. These actions will result in a restructuring charge of around $60 million, which we plan to take in the first quarter.

Turning to the next slide, let me provide some context for our 2013 outlook. As I noted before, we were able to generate really nice growth in adjusted operating income and strong growth in adjusted EPS in 2012 even without growing revenue. That reflects our continued ability to keep tight control over costs and also highlights the positive impact of our ongoing share repurchase program.

As we look at 2013, we see continued strong profit growth at Networks, another strong year at Film and TV Entertainment and some stabilization in Publishing declines. So we expect faster growth in adjusted operating income in 2013 versus 2012.

At the same time, the share count impact will be less favorable than it was in 2012, and that's because our aggressive pace of share repurchases in 2011 benefited the 2012 share count and because the rise in our stock since the summer pushed all employee stock options into the money. All of that's reflected in our outlook for low double-digit growth and adjusted EPS. Keep in mind that our outlook includes the roughly $60 million restructuring that I just mentioned at Publishing. In addition, this year, we expect to incur about an incremental $25 million of spending year-over-year on our enterprise efficiency initiatives. It's also likely that we're going to begin to account for our nearly 50% stake at CME as an equity investment later this year, upon the expiration of our voting agreement. Assuming the same level of losses as we recognized last year, that would result in us recognizing about a $30 million amount of additional equity losses in 2013.

Looking beyond 2013, I also want to talk about why we feel so confident and why we feel we're so well positioned for the next few years. Around 85% of our profits are tied to the TV ecosystem, which is extremely healthy, both here and around the world. And that's by all measures: subscribers, viewership, affiliate fees and advertising.

Another 10% of our profits come from movies, which are benefiting from positive trends in global box office and recent signs of a stabilization at home video. And as Jeff described, our major strategic initiatives are geared to take advantage of these trends. We think we'll continue to see the payoff from those initiatives in the next several years as we leverage our content investment by increasing our affiliate fees, drive international growth in our networks, continue to monetize our content on new platforms and start to see the benefits from our enterprise efficiency initiatives. When we put all that together and we add in continued returns to shareholders, we think we can continue to generate very attractive growth for the foreseeable future.

Turning to the next slide, which looks at our free cash flow. In 2012, we generated almost $3 billion, and that was higher than we anticipated coming into the year. And that was the result of very strong free cash flow generation in the back half of the year. Free cash flow was up nicely over 2011 as we grew adjusted operating income while reducing our investments in working capital and reducing capital expenditures. The decline in working capital was largely a result of having fewer event films in production, as well as a higher reimbursement for co-financed productions. CapEx was also lower, and that was partially due to the completion of the making of Harry Potter at our studio in Leavesden.

Those positive factors were somewhat offset by an increase in cash taxes and cash interest in 2012, but we still saw an increase in our conversion of both adjusted OIBDA and adjusted net income. As a reminder, over the past few years, we had some significant working capital needs due to principally the timing and nature of film production at our studio. We've begun to see that reverse during the back half of 2012, and we should continue to see the benefits of those investments over the next several years. So as a result of that, we believe our rate of free cash flow conversion should move higher over the next several years.

Let me move now to the final slide, which looks at our net debt. We ended 2012 with a strong and flexible balance sheet. Net debt was $17 billion at the end of the year, and our leverage ratio was 2.4x, which is just below our target of 2.5x.

During the year, we took advantage of market conditions to strengthen our balance sheet and maintained strategic flexibility by issuing $1 billion of new public long-term debt and extending the maturity date on $2.5 billion of our $5 billion credit facility, all at highly attractive rates.

In addition to investing in our businesses, we deployed just under $700 million in strategic M&A transactions, including the acquisition of Bleacher Report, as well as increasing our investment in CME. Also, as I previously mentioned, we returned over $4 billion of capital in the form of dividends and share repurchases. So if you look back over the past 4 years, our approach has been one of balance and consistency.

Since 2008, we have generated over $11 billion in free cash flow, and we've paid out close to $4 billion in dividends. We've repurchased over $11 billion of our shares, or 27% of the base, and we've spent a little under $3 billion on acquisitions.

In 2013, our philosophy of capital deployment will not change. We'll continue to aim for the appropriate balance between maintaining a strong balance sheet, providing us access to the capital markets and strategic flexibility, as well as actively deploying our capital. And we still think that a targeted leverage ratio of 2.5x is the best level that balances all of these goals. This will enable us to invest in our businesses, make strategic acquisitions and return a substantial amount of capital to stockholders.

So I appreciate you listening today. So with that, let me turn the call back over to Doug, and we'll start the Q&A portion. Thank you.

Douglas Shapiro

Thanks a lot, John. Ellen, can we get the Q&A started? [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Janedis with UBS.

John Janedis - UBS Investment Bank, Research Division

Jeff, over the past couple of months, you've announced a handful of exclusive SVOD deals. I think some of them will ultimately include current network shows, which I think is new for you. Can you talk about your ability to grow that exclusive window going forward based on existing rights? And then John, on a related topic, you gave us a $350 million of SVOD for last year. Based on what you have on the books, can you give us an update for this year?

Jeffrey L. Bewkes

Thanks, John. The -- I think you were asking about the slate deal with Netflix. Is that right?

John Janedis - UBS Investment Bank, Research Division

Yes.

Jeffrey L. Bewkes

Okay. It's not really a change in the syndication business. It's very similar to the CW deal we already had in place. We've been saying for a while that subscription VOD is the right place for serialized and library product. That's also true, by the way, of all the originals on HBO, which is serialized VOD. And on the normal syndication market, serialized series did not have that much value. So we think it's an increase to essentially the financial ecosystem of -- at least the serialized and library part of TV shows. And at the same time, we're seeing positive impact on ratings of new seasons on serialized shows from having the older seasons available on a VOD basis. And so those recent deals with broadcast networks enable us to syndicate serialized seasons -- it's basically, we put those series 1 season back, and it's not really a big change. I'm glad you asked about it because I think, as John pointed out on the call, we generated over $350 million in revenue from SVOD deals in 2012. That doesn't even include the CW deal, which is similar in that serialized "1 season back" way. And that's pretty significant. And since we've already signed some new deals in 2013 with both Amazon and Netflix, and there's some more being discussed, we feel very good about the trajectory of the business from a financial support point of view. And we think it's fitting in to the network ecosystem very well.

John K. Martin

Hey, John, in terms the question that you asked about what percentage was essentially already on the books for 2013, the short answer is it's a little bit more than 1/2.

Operator

Your next question comes from Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Two questions, Jeff, about some recent decisions you guys have made. One, can you talk about the elevation of Kevin to CEO at Warner Bros, what that might mean to the strategy and the cost structure at Warner's? And any expectation around what Bruce and Jeff may do, since obviously they play a huge role at the company? And then #2, at HBO, some people I think thought you might let one of the studios exit over time and redeploy that capital into original programming. Can you just talk about the decision to continue to pay for a film output on HBO, given sort of the macro trends we're seeing in that business?

Jeffrey L. Bewkes

Yes, fine. Thanks. Warner's first. Kevin is going to be a great leader at Warner's. We -- well, I chose him because he's got the greatest breadth of experience across Warner's businesses. I think he's going to do a very good job of bringing together the television group, which is the leading TV production group in the world; the theatrical group, which is also the leading group in the world on a consistency basis; our digital and home video business, which has always been the #1 share leader; and consumer products, which is not #1, that's Disney, but we have high expectations for that going forward. Very thoughtful -- Kevin's very thoughtful about the future of the studio business and the integration of all those businesses that we have. Having said that, we have a very strong group of execs at Warner's, notably Bruce Rosenblum, running the TV group, which is extremely successful and on a big roll right now; and Jeff Robinov running the theatrical group, also very -- much more consistently successful than the other film studios. And operating -- we only had a bigger scale. So I think with those 3 working together going forward, we've got a very good lineup. I think all of those execs, including Jeff and Bruce, have very strong benches of people beneath them as well. So we're basically moving toward -- and Barry Meyer deserves a lot of credit for creating this situation. We've got really a strong next generation coming at Warner's, and all of them are young enough to go pretty long. So one of the hallmarks of Warner's has been consistency of the management over time and a deep bench. And I'm very optimistic about how that's going to go. On your HBO question, yes, we talked about and seriously consider what was the optimal thing for HBO to do in terms of how much movie commitments. As you know, we have had the leading movie lineup at -- with Warner's first and then Fox and Universal joining. We decided to continue that out for the next decade. It gives us some very high quality programming to fill many plex feeds in a very robust VOD offering at both HBO and Cinemax, and it is true that the original programming continues to grow in profile and in volume and in quality at HBO. But still, only about 40% of the HBO subs still primarily watch movies, and about 80% of the viewing on our linear plex feeds are movies. So they still have a tremendous value. They're very important for Cinemax as distinctive offerings. Cinemax may be the world's best movie service. And I think if you look over at some of our competitors, take the move of movie -- Disney movies on to Netflix, which shows that there's some value there for movies in the VOD world. So we basically made the decision to have 1/2 the -- the exclusive rights to 1/2 of Hollywood movie outputs, a very advantageous thing for HBO over the next decade. And from a financial point of view, these deals don't come into -- there's no financial effect of these renewals for the next 3 or 4 -- 3 years or so. And then when the new deals kick over in '16, '17, they basically are aligned with box office growth. And what that means is that it's a very good financial ramp for HBO over the long run, and it provides continuously more room for original programming. And as you know, when you have hit original programming series on HBO, they not only fuel the subscription service, they are fueling the subscription growth we mentioned in the global part of HBO, which is now over $70 million, and then they fuel the content revenue. And for -- on that score, I think Game of Thrones is maybe the leading DVD seller in the world right now for TV series. So it's extremely -- it's a very good architecture at the present time at HBO.

Operator

We have Alexia Quadrani with JPMorgan.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Could you give us an update on how you view Netflix's move into original programming? While they're obviously a nice customer of yours, 5-year content, can they also be viewed -- or do you view them also as a competitor, particularly to HBO? And any influence you think it might have on HBO going forward?

Jeffrey L. Bewkes

Yes, thank you. Let's start with HBO first, since they -- HBO is

[Audio Gap]

I feel great about how HBO is doing today. I think we just talked about it. It's got the best original programming slate ever, a lot of very high-profile series and more every year. We've locked up the theatrical movie position for the next decade. The HBO GO product is a fantastic, 21st-century, Internet-ready product, and we just added more subs than at any time in the last 10 years. Now let's go over and give a little credit to Netflix. They're doing a great job. I think the functionality of their service, some of the really consumer-friendly effectiveness of their search, if you're watching it, finding what you want to watch, getting recommendations to go through a very, very deep library, a lot of programming, it's -- the more programs you have on a service, the more important it is to be able to find them. But if you talk about original programming, HBO has always operated in a competitive environment. We've been happy to see some of the successes at Showtime and Stars recently in originals. Netflix has a new original that's pretty good, House of Cards. I think that's great. It'll take a while for that to turn into -- I forget, what does HBO get? 10 or so hits here? It's all good. I think it reminds consumers of the choice that they have of television programming on demand. And it's an extremely -- the cycle of making breakthrough original programming and having people find it and use it, which HBO has been doing for 20 years, and Netflix is now joining, it takes a while to get back up to scale.

Operator

We have Tim Nollen with Macquarie.

Tim Nollen - Macquarie Research

I wanted to follow up on TV Everywhere, please. What can you do to help galvanize the industry to promote the service better, get more content on and also to promote VOD? Because it seems like you are really -- you have been leading the effort here, and you mentioned it's been a slow start. But I would just like to know what you can do to get your peers both on the distributor, as well as the content owner sides to go further with that. Can I also ask a question on ratings, please? You spoke last time, I think, about doing some things to try to improve the rating systems, whether it's moving from C3 to C7, whether it's including VOD or TV Everywhere, whether it's to include tablets. Just updated thoughts on what might be underway there.

Jeffrey L. Bewkes

Okay. Let me -- good, let's start with TV Everywhere. Basically, that structure of having streaming and VOD available is embraced by basically every program network, every distributor. Even broadcasters are now embracing TVE. For example, NBC had great success with its Olympics coverage, and Disney had a very positive response to its apps for sports. And Fox is authenticating prime time content on hulu.com and fox.com. I think Scripps and Viacom have also made recent TVE announcements. And as you said, Turner, Time Warner, HBO, all of our networks were the first to put most of our shows on a VOD -- television everywhere basis. I think the technology is evolving. Adobe Pass is now an authentication solution. It's in use by most major programmers. It was developed by Turner and Adobe together, and it enables consumers to authenticate just once across unaffiliated networks. So it makes it much easier for a consumer to get keyed up and not have to do it every time they turn on their device or they try to switch channels. Other enhancements like modem-based authentication are also streamlining the authentication process. We totally agree. I view [ph] with your -- the premise of your question, which is it's really important for the distributor world to make it easier, faster, not complicated or daunting, for people to use this fantastic set of rights. So one of the things -- I think HBO GO, which is so powerful and easy to use, is showing everyone exactly how much of a rainbow -- on how much of a pot of gold is at the end of the rainbow. So hopefully that'll stimulate more action. We think there are some very important device companies, Apple may be one of them, who are working to try to create better interfaces with devices people love to access their TV Everywhere content. Of course, that makes your network more valuable if you have it on a device and in an interface that you like. On ratings, we agree generally that probably -- the same point really, to get consumers a stronger connection to their favorite network viewing. It makes more sense for people to work on a weekly basis, not a 3-day basis. So we think C3 should expand to C7. Look, if the rights go there at the office, the measurement will follow. And that's probably how it will happen.

Operator

We have Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Jeff, you emphasized a greater level of originals at TBS and TNT. I think you said 40-plus percent more this year, and I know it's been an ongoing strategy. This puts acquired syndicated product as a lesser and lesser part of the mix while you, I guess, look at viewership or dollars spent or however you want to look at it. Is there any update you can give us regarding the effectiveness of acquired syndicated products and any implications for the studio or the cable network business to the extent that syndicated content doesn't provide the same value that it used to for networks like TNT and TBS?

Jeffrey L. Bewkes

Well, it's kind of -- if you're asking whether secularly acquired product is questionable, no, because you've got to look at which kind and which type. If you took the Big Bang Theory, for example, moving on to TBS this year, it's the biggest show in any Cable network anywhere. It took the ratings up 30% to 40%. It's hugely successful. If you then look at the kind of original programming series that come into networks like TNT, USA, et cetera, you have to look at where -- the era which they come from. And as we've talked about before, 3, 4 or 5 years ago, the broadcast networks had a slump in scripted drama and some original series. And so it's important not to generalize from that slump. We've had some come on and work really well. Castle is on TNT, it's a drama. It's working better than we thought. We had The Mentalist come on to TNT. It was the #1 show back when we brought it on, and it has fallen off a bit at CBS in terms of new shows next week, and the same at TNT. So you do have a mixed bag. What we think is that since we at TNT, TBS have essentially a sister company access to the production company that makes the best shows across television, Warner Bros. TV has shows more than 2 at every 1 of the 5 networks, we think that we are in a good position to be able to pick the ones that fit our networks and to put them into an economic system as we dial up and down the mix of acquired series that are hits. You should look at them as hits, not reruns. They're not reruns for the people who watch them. And then if you pick the right diet of increasing, in our case, original series, and you mix that with the right sports offering, you have a very powerful network to launch things. It's kind of the new version of what the broadcast networks were 30 years ago.

Operator

We have David Miller with B. Riley Caris.

David W. Miller - B. Riley & Co., LLC, Research Division

Can you talk about -- Jeff, can you talk about what the scatter-over-scatter performance was at TNT, excluding the NBA and also including the NBA? I'd just be interested in the delta between those 2 numbers. And then, Jeff, can you talk about whether or not your bias would be to renew the output deal with Legendary over here in southern -- in Los Angeles? Obviously, they're just a huge supplier of premium content for you guys. I think they're doing Man of Steel. I think they're shouldering most of that cost burden, correct me if I'm wrong. Hangover 3 is in there, Pacific Rim is in there. There have been some rumors over here in Los Angeles about some contentiousness in the negotiations. Could you comment in any way?

Jeffrey L. Bewkes

Yes, let me start with Legendary. The deal with Thomas Tull's Legendary goes to the end of the year. We're all very close to Thomas. We've got a great relationship. No, there's not contentiousness. There is problem solving going on, and we expect to have very meaningful discussions with Legendary about the extension and the term -- on the basis basically on which it would make sense for Legendary and for us. We're confident in our ability to generate a robust slate of films regardless of our financial partners, and we have very high regard for Legendary. So don't worry about that on either our account or theirs.

John K. Martin

Hey, David, it's John. One always wonders if somebody is going to ask a question that you haven't thought of, and I think you would get the award for this call. I don't know because we don't really look at scatter-over-scatter in terms of the way we run the business in general. So looking backward, with and without the NBA, you'd probably need to follow up with Doug and team afterwards. I will tell you, in Q1, at the risk of repeating what we already said, scatter is pretty steady with pricing up, which probably means current quarter scatter-over-scatter is up a little bit. But we'll have to get back to you in terms of looking backward.

Operator

The last question comes from Michael Morris with Davenport & Company.

Michael C. Morris - Davenport & Company, LLC, Research Division

Two questions. First, on sports rights, Jeff, you mentioned that you have the second-largest collection of national sports rights after ESPN. So my question is, would you consider establishing a standalone sports network? You look at ESPN doing over $5 per sub per month. Is that something you would contemplate? Why or why not? And then second, internationally, you mentioned streamlining Western Europe. Does that mean that you would not look to expand your channel's holdings in Western Europe through acquisition? Or is that still a possibility?

Jeffrey L. Bewkes

Okay. Let me start with sports rights. Sports rights, particularly the ones we've been renewing lately, the NCAA championships, the baseball deal, we're very happy with the performance in terms of ratings, and they're a very important part of the value of our channels as we go through affiliate renewals. So they're an important part of the offer, but we're focused on having the right sports. We'll continue to evaluate potential opportunities in the future, but we will do that basically in the framework of our current existing networks, not as a startup of standalone sports networks. If you go to Europe -- I'll start. What we meant by streamlining Western Europe is we don't have as much scale in essentially locally based networks there or, to some extent, in distribution of our worldwide networks as we do in Eastern Europe, Latin America and Asia. And so we were streamlining the staff layers there. We don't have a big -- we don't have -- we're not interested in going out trying to rig a big acquisition in Western Europe, if that's what you're asking. John, you want to add anything?

John K. Martin

Nope.

Douglas Shapiro

All right. Well, we're upon the hour, so thanks, everybody, for listening.

Jeffrey L. Bewkes

Thank you.

Operator

Thank you, ladies and gentlemen. This concludes Time Warner Incorporated Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. Thank you for participating. You may now disconnect.

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