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Time Warner (NYSE:TWX)

Q1 2010 Earnings Call

May 05, 2010 10:30 am ET

Executives

Jeffrey Bewkes - Chairman and Chief Executive Officer

Douglas Shapiro - Head of Investor Relations

John Martin - Chief Financial Officer and Executive Vice President

Analysts

Jessica Reif-Cohen - BofA Merrill Lynch

Douglas Mitchelson - Deutsche Bank AG

Thomas Eagan - Collins Stewart LLC

Imran Khan - JP Morgan Chase & Co

John Janedis - Wells Fargo Securities, LLC

Anthony DiClemente - Barclays Capital

Richard Greenfield

Spencer Wang - Crédit Suisse First Boston, Inc.

Tuna Amobi - S&P Equity Research

Ben Swinburne - Morgan Stanley

Operator

Hello, and welcome to Time Warner's First Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now turn the call over to Doug Shapiro, Senior Vice President of Investor Relations. Sir, you may begin.

Douglas Shapiro

Thanks. Welcome to Time Warner's 2010 first quarter earnings conference call. Before we begin, there are a few items I need to cover. First, we'll refer to certain non-GAAP financial measures. Schedules setting out reconciliations of these measures to the most directly comparable GAAP measures are included on our earnings release and trending schedules. These 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. Second, as we mentioned last quarter, the company has decided to move from using adjusted OEBITDA and OEBITDA as company financial measures and instead will use adjusted operating income and operating income.

Finally, today's announcement includes certain forward-looking statements, 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 Form 10-K and Form 10-Q. Time Warner's under no obligation, and 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. With that, I'll turn it over to Jeff.

Jeffrey Bewkes

Thanks, Doug. Thanks everybody for joining us this morning. As you all know, we'll be talking with you at length in a few weeks at our investor meeting, so I'll keep it fairly brief today. It was a great quarter for us and a great start to the year. We posted our best revenue growth in almost two years and the most profitable quarter in our history. Our margins were up across the company, driving adjusted operating income up almost 40% and adjusted earnings per share climbed over 60%. Remember that's off a big increase last year.

So it was a record quarter fueled by a healthy advertising environment, strong performance of our content and continued cost controls. Even though there's still uncertainty about the health of the economy, we're seeing demand come back across key advertising categories at both our Networks and our publishing company. Last quarter had Turner scatter pricing was 20% to 30% above the upfront and it remains strong in the second quarter, including right now, as we go out in the quarter. Our ratings are not yet where we want them to be at all of Turner's Networks, but we've made some real progress lately, particularly at TNT, where ratings were up in the quarter. truTV continues to deliver great numbers, placing it among the top 10 cable networks in prime time for the first time. And we see trends at TBS improving as the year progresses. Ratings do remain down at CNN and we're working to fix that.

With all that said, Turner posted very strong Advertising growth in the quarter, up 9%. This performance was a testament to the strength of our brands, the quality of the sales force and our ability to take advantage of the favorable environment.

At Time Inc., advertising rose 5%. It was the first quarter of ad growth in more than two years. Our film content is also delivering. Warner Bros. posted its eighth consecutive quarter of adjusted operating income growth, driven by strong home video and theatrical releases like The Blind Side, Sherlock Holmes and Valentine's Day. After the quarter ended, we released Clash of the Titans, which exceeded our expectations passing $400 million at the global box office. That also underscored consumers' healthy appetite for 3D. We recently announced that all of our future event films, our superhero titles and special effects-driven releases will be produced in 3D. And this year, that will apply to four more films, including the next installment of Harry Potter and soon to be a legend, a new title called, the Legend of the Guardians: The Owls of Ga'Hoole. I hope that becomes familiar to all of you in the future.

Beyond 3D, we're enthusiastic about the rest of this year's movie slate. And we're confident that we'll have another strong pick-up season in our TV and Production business at this year's upfront. We're moving slightly but staying with our content. This quarter, HBO premiered The Pacific, a 10-part miniseries that's the companion piece to Band of Brothers. It debuted to outstanding critical acclaim and is now averaging 9 million viewers per episode. In addition to our operational performance, we also made important strategic progress. As you know, in terms of our long-term goals, we'd basically got four key goals: First, leverage our scale and brands to deliver compelling content; second, develop business models that benefit both consumers and our economics; third, expand internationally; and fourth, maintain a relentless focus on cost and capital efficiency.

Here are some examples. Two weeks ago, Turner and CBS reached a deal with the NCAA to secure the exclusive U.S. television online and mobile rights March Madness for the next 14 years. Over time, 65% of the programming from NCAA, including the Final Four and the championship game will be on our networks. In today's TV marketplace, this kind of marquee must-have programming is absolutely critical. It's a game changer for Turner and it will dramatically increase the appeal of TNT, TBS and truTV with viewers, advertisers and affiliates. And we'll achieve all that for what we consider to be a relatively modest annual cost, which is locked in over a very long period of time.

Also in April, we signed a deal to bring Conan O'Brien to TBS, starts this November. That step will help cement TBS' position as TV's number one comedy network. With Conan, George Lopez and the strength of Adult Swim, Turner will essentially own late-night television. When we combine all that with all of our other great programming and the strength of our brand, it makes us very optimistic heading into this year's upfront. We're also looking for ways to develop business models that are good for consumers and good for us. Warner Bros. recently reached agreements with Netflix and Redbox that established a 28-day window between our home video releases and their availability through these distributors. And through these deals, they should have enough product to satisfy their customers. While at the same time, we expect to increase demand for DVD sale-through and Video-on-Demand.

Keep in mind that we typically sell 75% of our DVDs in those first four weeks after release. And VOD carries much higher margins for us than other rental outlets. In a similar vein, in February, HBO launched its online video offering called HBO Go. On Verizon's file service, HBO Go is a great example of our TV Everywhere initiative to providing 600 hours of on-demand programming to HBO subscribers on demand on their broadband devices at no additional cost.

Turning to our international expansion, this quarter we brought out our partners at HBO Central Europe and we increased our stake in HBO Latin America to more than 80%. These steps give us greater economic exposure to these fast-growing businesses. We'll also be able to rollout product extensions in these regions and expand in additional territories more aggressively.

So wrapping up, we achieved a lot in just the last few months. I'm increasingly confident about our how we're positioned for the remainder of this year and the years beyond that. We're looking forward to talking more with you about this, our strategy, our competitive position and our growth opportunities in depth across our businesses in the next couple of weeks from now. I think the more you know about Time Warner, the more you'll share in our confidence. With that, I'll turn it over to John.

John Martin

Thanks, and good morning. As usual, there are slides available on our website that I will refer to during my prepared remarks. And getting right in to it beginning on the first slide, which contains some highlights for the quarter, you can see from the highlights that we're off to a great start to the year. As the operating environment improves, we're seeing the benefits from both the business investments we've made and the cost-savings initiatives we've put in place over the past couple of years.

During the first quarter, we saw very healthy top line revenue trends and we maintained focus on costs. That led to very strong adjusted operating income growth, meaningful margin expansion of 500 basis points and more than 60% adjusted EPS growth. The first quarter had the highest revenue growth since the second quarter of 2008 and adjusted operating income increased 37%. That's better frankly than we expected going into the quarter. And while some of these outperformance was due to timing, as Jeff described, much of it was due to a better-than-expected advertising environment, terrific film slate performance and ongoing cost controls.

Free cash flow, which is typically strong for us in the first quarter was also up over last year. And we returned over $750 million in the quarter through dividends and share repurchases while maintaining the strength of our balance sheet. So just a terrific start to the year and I'd ask you to move to the next slide, which shows our consolidated income statement highlights.

Revenues were up 5%. Subscription revenues continue to be a very consistent growth drivers for us, up 7% and Advertising was up 8% in the quarter. This is the first quarter of Advertising growth at Time Warner since the third quarter of 2008, and it represented a significant improvement from the 8% decline we experienced in the fourth quarter of last year. Adjusted operating income was up nearly $400 million in the quarter. As I said, margins climbed 500 basis points, they expanded across all four of our operating divisions, reaching the highest levels ever for our company.

Operating expenses declined modestly, as compared to the first quarter of last year and that was due to, as I mentioned, all of the cost initiatives that we put in place, as well as some favorable timing, primarily in our program expenses, and I'll speak to that in a couple of moments.

Turning next to our segment highlights. And we're going to begin at our Networks division where we had our highest quarterly profit ever at this division, more than $1.1 billion. That's up 22% over last year. Both Turner and HBO saw growth of adjusted operating income well into the double digits year-over-year.

Advertising grew 9% and here, our Domestic Entertainment Networks grew advertising in the low-double digits and international was also up significantly. And these more than offset declines at domestic news. The improvement at our domestic entertainment networks was due primarily to very strong scatter pricing and yield management. And underlying growth at our international networks was in the mid-teens. Our international results also included the impact from several transactions, which contributed approximately 200 basis points to total Advertising growth in the quarter. And these are transactions that we expect strong growth from in the future. Looking ahead, scatter pricing remains vibrant, still up better than 20% over the upfront and we expect continued strong advertising growth into the second quarter. Subscription revenues grew 7%, and that reflects higher rates at both Turner and HBO, as well as international growth and expansion.

Adjusted operating income was up a very strong 22% in the quarter and margins expanded 400 basis points year-over-year to 39%. Total expenses were only up modestly here with programming cost down slightly. A quick note in margins, keep in mind that margins typically decline sequentially for us in the second quarter when we realize a meaningful proportion of annual sports rights amortization. I'll also point out that investing in high-quality content remains a critical part of our strategy. Based on our original programming schedule, we plan for programming expenses to be up in both the second quarter and the full year. But to be clear, we fully expect margins at our Networks division to expand for the full year 2010 versus 2009. So that's good. But we wouldn't expect a similar level margin expansion for the rest of the year that we saw in the first quarter.

Moving to our Film division. Warner Bros. once again, had a great start to the year and a great quarter. Operating income was up 43%. Warner Bros. took advantage of healthy box office trends and maintained its number one position in home video across every format. Despite some continuing challenges in the broader Home Video category, our Home Video revenue was up 34% due to stronger titles, including The Blindside and Sherlock Holmes, as well as more releases. Last year, we had only five title releases and that compared to 10 titles released this year in the first quarter.

Margin trends at the studio remained positive with margins up to 300 basis points over last year. Looking ahead, the theatrical performance of Clash and (sic) [of] the Titans, as Jeff said, has already exceeded our own expectations, and we're very optimistic about the rest of this year's release slate includes Sex and the City 2, Inception, Harry Potter and the Deathly Hallows. And we're confident we'll have another great TV pilot season. We also have a significant pipeline of syndication revenue going in later this year, as well as several exciting video game releases including two new LEGO titles.

Moving on now to Publishing. Time Inc.'s ad revenues improved nicely in the quarter, up 5%. This is the first quarter of advertising growth in this division since the fourth quarter of 2007. So it's quite encouraging as it's been a while since we've been up in advertising. Time Inc.'s top seven advertiser categories were all up. And that was led by Domestic Auto, Beauty and Financial. And online revenues were up more than 20% here in the quarter.

Looking across Time Inc.'s three operating units, our Style and Entertainment unit was again our strongest performer. It grew advertising double digits led by strong growth at People, Entertainment Weekly and In Style. Trends at the Lifestyle and News units also improved with total ad revenues for both up modestly in the quarter.

Looking ahead, train advertising trends remain positive into the second quarter, and we once again expect total advertising to be up here in Q2. Subscription revenues improved modestly year-over-year, largely as a result of some favorable foreign currency translation. Domestic circulation trends, however, do remain somewhat challenged.

Total expenses at Time Inc. were down almost $90 million in the quarter over last year. That reflects continued cost savings initiatives that were put into place at the end of last year, as well as lower marketing and pension expenses. As you know, we have moved very aggressively at this business to rightsize the cost base during the economic downturn, and we absolutely expect cost to remain lower than they were last year in this division for the remainder of 2010.

Let me move to the next slide, which contains our new updated outlook. And here, our current forecasts reflect more optimism versus where we were at the beginning of the year, so that's good. As you saw on our release, we now expect full year adjusted EPS to grow at least mid-teens over the base of $1.83. We think this updated outlook may prove to be conservative in the fullness of time. And it's not like we're seeing anything bad out there. But we're mindful that it's still early in the year. And as we look ahead, visibility in advertising remains somewhat limited and that's a macro-environment point. We do have a number of big film releases ahead of us. And as I mentioned just a minute ago, we don't expect the same degree of market expansion at our Networks division for the full year as we saw in the first quarter.

But all in all, we remain extremely encouraged by both the improving macroeconomic environment and the trends there, as well as our own a strong operating performance. We think 2010 will prove to be another year of strong growth at Time Warner. And as Jeff mentioned, we're growing off of what was a record year of profits in 2009, so that makes us somewhat unique.

Lastly, I'll finish up with a brief look at our free cash flow and our capital plan. Focusing on free cash flow, we delivered $1.3 billion in the quarter. That's also a very strong start to the year for us. The first quarter is typically strong. But we were up nearly 20% against the strong first quarter we had last year. Free cash flow grew due to the underlying growth in adjusted operating income, as well as lower capital spending. And that was somewhat offset by an increase in working capital, higher cash and interest expense and higher cash taxes. I would note that capital spending was only $89 million in the quarter, that's down 12%. And capital spending represents only 1.4% of our revenues.

The last slide is a net debt roll forward. We ended the quarter with about $11.5 billion in net debt. That's flat compared to the end of 2009. In the quarter, free cash flow generation was offset by the nearly $500 million in investment and acquisition spending and continued direct returns to shareholders. The significant majority of our acquisition spending in the quarter or about 90% of it was on international cable networks and video game developers. This is consistent with our continued focus on tuck-in opportunities in cable networks and video game companies with a lot of them occurring outside of the U.S.

Coming into the year, we laid out for you our balance sheet priorities, and so far, we are right on track to achieve all of them. First, we'll continue to invest in our businesses to strengthen their competitive positions and drive long-term growth, and I don't see any better example than that than our recent commitment to NCAA. Second, we'll improve the efficiency of the balance sheet by reducing cash balances over time and carefully managing our debt maturities. And during the quarter, hopefully, you saw that we took advantage of the favorable interest rate environment. And we extended debt maturities of close to $2 billion, while also the same time, reducing ongoing interest costs.

Third, we're making an even greater commitment to provide direct returns to stockholders, and this was evident through our increased regular dividend, which we announced last quarter, as well as ongoing share repurchases. As I mentioned earlier during the quarter, we returned over $750 million to shareholders, including over $500 million in share repurchases. And that's fairly consistent with our pace from each of the prior two quarters. We also believe it's important to maintain a strategic flexibility, our leverage ratio today is about two times, which is closer but still somewhat shy of our long-term target of 2.5x. And for now, we continue to remain comfortable operating at levels that are a little bit low than our stated target leverage, as we believe a strong balance sheet is a real competitive advantage. So that concludes my prepared remarks. And we'd be happy to -- I'll return the call over to Doug. We'd be happy to open up for Q&A.

Douglas Shapiro

Regina, we'd like to go over to Q&A. And please, everyone, try to limit yourselves to no more than one or two questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Spencer Wang with Crédit Suisse.

Spencer Wang - Crédit Suisse First Boston, Inc.

Maybe for Jeff, the film studio seems like its off to a very good start for the year. You have a good off-network syndication pipeline coming this fall. Could you just give us a sense of how you expect the studio to perform this year? Would you expect operating income to grow at the studio? And secondly for John, you referenced as a target leverage ratios was 2.5 and you're below that. How should we think about how you get there as EBITDA grows? And if you could just update us on MGM in that context, that would be great.

Jeffrey Bewkes

For Warner's in 2010, we're off to a really good start. We've got a lot of big films coming. As you all know, Warner has had a tremendous year in 2009 leading the industry in everything: Box office, DVD, overseas, domestics, et cetera. So it's tough comps. But having gotten off to such a great start with Sherlock Holmes, Valentine's Day and Clash of the Titans, we still have very high hopes for the remainder of 2010. And as John mentioned, with the kind of potential in releases is like Sex and the City 2, Inception, which could be a big film due date, Legend of the Guardians and then Harry Potter. There's a lot in the pipeline. So on the high side, if that does very well, we can have a very strong year. And then we will also benefit this year from some television syndication sales, Two and a half Men is coming open for cable. Closer is available for both cable and weekend syndication. Old Christine is going into syndication. So we have all those things in the pipeline. We do not have the same level of restructuring charges that we had last year in 2009. So while the comps are tough for the second half, we do expect another strong year in terms of profits. So I hope I gave you enough of a view there. But there is some variability possible on the upside and on the flatter side, depending how these big titles perform.

John Martin

Just to quickly repeat, we ended the quarter with $11.5 billion of net debt, that's around 2x. I think from an absolute net debt level, as I said, we've closed in considerably towards our stated target. But if you look at the capital structure break out between debt and cash, I would say all other things being equal, we'd probably have more cash than we need at this moment in time, roughly about $5 billion at the end of March. That is substantially down, however, from the nearly $10 billion that we had just about a year ago when we completed the Time Warner Cable spin. So I don't want you to think that we haven't already been working hard on it. And we're going to continue to evaluate the alternative uses of cash relative to opportunities that may present themselves over time. But having said that, hopefully, you all can see that we are dedicated to returning capital to shareholders. That is one of levers at our disposal. We believe direct returns should be a very significant component of our total return. In 2009, for example, we returned over 70% of our free cash flow to shareholders, and we increased the dividend more than 13% this year already. Our dividend yield, I think right now is sitting somewhere around 2.5x. I think that's 2x to 3x higher than most of our peers. And we have an ongoing share repurchase program. So we're on track to return more capital this year than we did last year. And as I said, that's one of the levers. We'll continue to evaluate the absolute level of that going forward.

Jeffrey Bewkes

Spencer, you also asked about MGM. And I think we ought to just get our view across before someone else asked about it. We normally, as you all know, don't comment on potential deals. And it's worth saying again that we feel very comfortable with our current strategic positioning and scale. So we don't need to do anything. Any deal that we do needs to provide strategic benefits after taking account of adequate execution risk and provide us an adequate risk-adjusted return in relation to alternatives that we have. So we have and we will continue to be very disciplined as we look at acquisitions. As you get to the question of MGM specifically, it could make sense but only at the right price to hit those hurdles I just mentioned. And I think it's fair for us to point out, we've walked away from this asset before when it didn't meet those criteria. We're well aware of the question of the wisdom and what you need to have as positives in order to put more capital into the Film business beyond what we're already doing in Production. As you know, we've got a pretty robust Production business going, both on the TV and the Film side. We're already scale. So we don't need to increase capital into the business. But having said all that, if there's a compelling opportunity for returns and strategic enhancement that presents itself and if MGM would fit that given the success we've got and the kind of distribution lineup we can add some of those assets to, we're averse to putting capital to work if, again, we get what we have to be pretty confident is a strong return. So we really can't say more. I know I've said a lot there about MGM. And the reason I said a lot is so we don't keep getting asked about it.

Operator

Your next question comes from the line of Doug Mitchelson with Deutsche Bank.

Douglas Mitchelson - Deutsche Bank AG

TruTV has performed pretty incredibly well since you took it over. It seems like that's one of the big opportunities for growth in the cable network space. And I know you want to probably talk about that in a couple of weeks. But it seems to me there's affiliate fee that can double or triple. Is that accurate? And when do the affiliate deals come up? And then for John, just can you give us a sense of full year tax rate or what we're looking at for the next three quarters? The first quarter was a pretty good rate for us.

Jeffrey Bewkes

Good question on affiliate rates. We're not going to lay out the schedule of our various affiliate rate rollovers. I think whether you -- I would expand your question from truTV to all the other networks. If you've got the kind of strength and brands that truTV is adding to that, Adult Swim on top of Cartoon, another network that's got some real upside. But just the strength in programming of TBS, TNT and also CNN, not to mention HBO, Cinemax, really gives us a very optimistic view of what we're going to be able to do in the short, middle and long term. So without getting in the how we're going to do that, it's a major part of our thinking.

Douglas Mitchelson - Deutsche Bank AG

And I could be brief on the second question. You know, quarter in and quarter out, the effective tax rate can change a little bit here or there. If you were to assume for the rest of this year about 37%, 38%, you'll be in the right zone.

Operator

Your next question comes the line of Richard Greenfield with BTIG.

Richard Greenfield

This sounds a little déjà vu, but CNN and CBS -- this has been talked about for a long time, there's obviously a number of press stories today out about this. It always seems to make sense, it always seems like you can't get it done because of the complexity of it. Is there any renewed reason to believe that there's something to do here given CNN's ratings troubles or the overall need to cut costs in that part of the business? And then just a quick follow-up on Redbox, Jeff, you talked about the deals you got done, which is great, I was just wondering, Netflix and Coinstar have both said how incredible the deals are that you gave them. Their stocks are both up almost 100% since the day you signed them. I was just curious whether you thought you got enough of the leverage on your side versus theirs?

Jeffrey Bewkes

Let me give you what we can say about structural change, whether it's with CBS or any other network on news, and then talk about the CNN general economics, which are much better than people realize. On the question of a structural partnership of some kind [ph] (38:00), it's no secret that we talked to other news organizations in the past, basically about taking the advantage of CNN's efficiency and quality in newsgathering and alleviating the cost problems that the broadcast news operations have. We've got capability, global reach and some real economies of scale in newsgathering that the old broadcast news operations don't have. So we have long been in discussions with, really, all of the candidates to see if there's a way to create rationale improvements for both parties. We can't and don't have any -- we don't have anything definitive to tell you about that now. But in your question on the motivation, it's not because of a CNN issue, it's really more because of imperatives at the broadcast news companies. CNN has very strong financial performance. It's the fastest earnings growth in the Turner's network portfolio over the last five years, and we expect another record year of earnings this year at CNN. And so the thing that gets a lot of attention is the ratings. Let me just say, we're not happy with the current ratings. We're working to fix that while remaining committed to non-partisan journalism. But for perspective, the ratings, while they have a decent amount of importance, were increasingly selling broader product than the competition can match. There's a premium brand at CNN that expresses itself financially in our CPM advantage, selling ads, and in our carriage piece to affiliates. CNN also still has the biggest reach, more viewers turning in. The issue really is, that our viewers, even though there are more of them, they tune in for shorter periods. And so what we need to work on is making the news broadcast more compelling, to increase the time spent viewing. There's huge success going on right now on the viewing side in Multiplatform; in other words, CNN online [cnn.com] and CNN International. So as we perfectly intend to improve the ratings, that'll be good, and it will help. But there's a lot of financial strength at CNN that essentially puts us in a pretty good position, offering a solution to the cost problems and the profit squeeze that go on in network news. You had a question on Netflix and Redbox. We're pretty pleased with the recent Netflix and Redbox agreements. And keep in mind, remember that I said, 75% of the DVD sell-through occurs in the first four weeks. So those deals kick in after that. Still pretty early, but the results indicate that, that strategy is working. Two major releases have come out from Warner's since those deals were completed with Netflix and Redbox; The Blind Side was one, Sherlock Holmes was the other. We think that the results for both have benefited from the delayed rental window in terms of holding up the higher-priced first month and then providing an efficient buy [ph] (41:20) for consumers at Netflix, Redbox in the second month. And don't forget the joint cable studio marketing programs driving [ph] (41:29) VOD is underway. And as VOD gets more important, that's going to be a bigger part of this equation, not just the kiosk and mail delivery of films. As far as we know, others studios are following our lead and have now entered into similar 28-day window deals, couple of them in the last quarter. So it seems to us that the structure is getting put into place in a very reasonable way for consumers and in a way that optimizes economics for the production studios.

Richard Greenfield

Would you put any odds on getting something done with CNN in the next 12 months?

Jeffrey Bewkes

You mean, odds here on the telephone?

Richard Greenfield

Is it likely that something could actually structurally happen over the next year or is it something where there's still a lot of work to do to get something done?

Jeffrey Bewkes

It's entirely possible that the parties, and there could be other parties, could come to an arrangement that makes sense before the next 12 months. There's no kind of a particular obstacle to doing anything that makes sense.

Operator

Your next question comes from the line of Jessica Reif-Cohen with Bank of America Merrill Lynch.

Jessica Reif-Cohen - BofA Merrill Lynch

I actually want to follow up on something Jeff just said. Can you discuss what's happened to the buy rates on VOD with the better window? And what do you need to do to really supercharge that business? Because if I might [ph] (43:10), you guys get a 70-30 split, this should be very profitable to you. And then on the cable networks, can you guys say how much HBO contributed to Cable Network growth? And John ran through those numbers so quickly, I was hoping you could just, once more, just say what the advertising breakdown was between domestic and international, excluding acquisitions?

John Martin

Sure. Maybe I could start. First, just to go back and begin, with slightly repeating what I said already, we had a great quarter in home video against the backdrop of a down macro environment. Although the macro environment there even seems to be stabilizing somewhat. And if you think about the trends in that business, the trends that we experienced last year are continuing into this year, which is that we're seeing decline or a more challenged environment, physical and very, very strong growth in the newer formats, including Blu-ray, as well as Digital. And so for us, just to give you some context in the quarter, our EST [electronic sell-through] revenues were up 29% year-over-year. And VOD, because I think you had a VOD borrowing [ph] (44:17) question, those were up 40%. And in sum -- and I think we're number one share in VOD, and in part, I think it relates to the day-and-date strategy that we've been employing now for some time. So we're quite pleased. It's one of the reason quarters why Warner's got out in the lead, and we're going to continue to drive leadership to grow these new digital revenue streams. And as we've been saying now for a considerable amount of time, on a like-for-like basis, every digital transaction for us means more money to the studio than the comparable physical transaction. So we see the benefit going forward by continuing to drive those revenue streams. In terms of the ad, I think you asked for me to repeat the advertising growth rates. Overall, 9%, it was low double-digit growth at the domestic entertainment networks and strong growth internationally. Internationally was a combination of very strong organic growth of about mid-teens, coupled with some acquisitions that we've made coming online for the first time in the quarter. That represented -- the impact to the acquisitions alone represented somewhere around 200 basis points to the overall growth numbers. So hopefully that helps.

Jeffrey Bewkes

The only thing I would add on VOD to your question, how to keep it moving, and it's doing fine. It's that the distribution company, mostly cable, that to the extent that they improve their offerings, market more aggressively, carry more stuff, create better consumer interfaces, that's going to make that business successful.

Operator

Your next question comes from the line of John Janedis with Wells Fargo.

John Janedis - Wells Fargo Securities, LLC

In the past, you've mentioned kids advertising as being soft. Assuming you've seen the turn there, what is the confidence level on the sustainability? And from a category perspective, how broad is the improvement?

Jeffrey Bewkes

Well, I'll start, then, John, you can pick it up. The kids market, generally, we think we're very well positioned. We unveiled some exciting new programming recently. You may not be familiar with it, but Adventure Time was number one on cable and broadcast for kids 6 to 11 and kids 2 to 11. And it was Cartoon Network's number one telecast of the year to date for kids of those age groups, basically, 2 to 11. And then we have two significant new prime time live action shows, live action unveiled at the upfront, Tower Prep is one and Unnatural History is the other. So in terms of our Cartoon Net progress, we think there's some challenge in some categories like food and beverage advertisers, but we feel good about the programming. And I think as the advertiser categories come back, we think we can add something there. Because we have adult swim at night, we really ought to mention because it's the other part of that equation, the Adult Swim network, which has the leading 18 to 34-year-old. The audience is up 8% in 2009, it was up 13% in the first quarter of 10. So this is the number one network in that age group for the past five years and is holding still in that position for the first quarter. We think we're going to expand the block on adult swim by another hour in 2011. So that's essentially what we're trying to do to get that overall category supported.

Operator

Your next question comes from the line of Tuna Amobi. [S&P Equity Research]

Tuna Amobi - S&P Equity Research

Just one quick housekeeping question before my real question. So this, I suspect, is for John. I see that you quantified the impact of the pension plan tweaks. It seems that you guys did on the P&L, and I was hoping that perhaps you can help us quantify that as well, if there's any expected cash flow impact from those changes.

John Martin

We made some disclosure in the documents this morning. We made some changes to our post-retirement plans that have now gone into effect. That should have the impact of reducing volatility going forward by changing the plan designs of our post-retirement benefits and also have the added benefit of saving the company a considerable amount of money over time. This year, we expect pension expense to be down for two reasons. One is due to the design changes that I just mentioned, and that's somewhere in the neighborhood of $50 million; and then also, we're just, year-over-year, we're pacing more favorably on pension expense because of the performance of the plan assets. And so taken together, that's going to be north of $100 million of year-over-year savings, probably somewhere around $125 million.

Tuna Amobi - S&P Equity Research

On savings. What about the cash flow impact, if any, over time?

John Martin

The cash flow, it's a better long-term barometer in short term because our plans are nearly fully funded. And the design changes that we've now implemented, and we're actually changing somewhat even though our approach towards managing the plan assets, our goal would be to make as few future contributions into the pension plan as possible, almost making it down to zero. So we're hoping to manage the liability going forward through plan asset performance. And so yes, if you look back at the amount of pension contributions we've had to make over the last five years, it's considerable. It's in the hundreds and hundreds of millions of dollars. We would hope, and we wouldn't anticipate having to do any of that going forward.

Tuna Amobi - S&P Equity Research

Also, this is probably a bigger picture question for Jeffrey. So on the deal that you did with IMAX, right, perhaps you can help us understand a little bit more about the incremental economics of those 20 films? I suspect you probably did some underlying assumption modeling.

Jeffrey Bewkes

Tuna, are you asking about a deal from Warner's to IMAX on old films?

Tuna Amobi - S&P Equity Research

No, I'm talking about the upcoming releases that you expect to...

Jeffrey Bewkes

IMAX 3D?

Tuna Amobi - S&P Equity Research

That's correct. Those 20 films that you identified. So you had Clash of the Titans, which was an upconversion, I presume, which significantly outperformed your expectations. Those moderate [ph] (51:17) costs was not as much as you would incur for these new releases coming up. So I wanted to understand a little bit more about your underlying assumption economics about the incremental returns, if any, that you expect, on the average, for each of these films?

Jeffrey Bewkes

Yes. We're not -- we can't obviously project film by film 20 films out in the future. I think the general way to look at this is, that since Warner's has a very consistent high performance of the kind of films that do well both in IMAX and in 3D, and we've been a huge partner of IMAX and they've been huge partner of ours in driving both the Warner films and the IMAX footprint, that it's good for everybody if we make our relationship a little more committed and predictable going forward, so that we have access for our films to the best venues at the critical times of the year. And with the lead scale and tent poles that we need to get out, that's the judicious thing for us to do. In terms of 3D generally, we've always, at Warner and Time Warner, overall, had a long history of using technology to improve the consumer experience. We did it in cable, with VOD, multiplex and now TV Everywhere. We've done at Warner's with DVD and VOD now and 3D and HD. So we're just trying to help all of those developments keep moving forward, to keep the general content business healthy for consumers. And we think on the 3D side, the economics are basically good. Most of our, the kind of films we just announced for 3D, we're going to shoot them in 3D, we're not going to convert them by and large. So I'm not sure if that was your question, but we plan...

Tuna Amobi - S&P Equity Research

Lastly, just real quick here, I wanted to ask since you are the number one studio, maybe who better to ask about your opinion on this upcoming box-office futures exchanges that is coming up. Do you -- what's your view on that? Do you feel, on balance [ph] (53:36), it's net positive or negative for the industry?

Jeffrey Bewkes

We're not, by the way, putting in bets on that.

I don't think you should either.

Operator

Your next question comes from the line of Imran Khan with JPMorgan.

Imran Khan - JP Morgan Chase & Co

One question for John and one for Jeff. John, you talked about increasing programming cost at the net gross level. Could you give some us more color into it? How should we think how much programming cost increasing we're thinking about? And secondly, for Jeff, now that we're sort of out of recession, and we have retrospective view on the DVD market, could you give some color or thinking, how you're thinking, like, what percentage of the DVD market decline was secular versus economic impact?

John Martin

I'll start, Imran. Actually, I was thinking about the DVD question -- the programming costs, I just blanked on your first question. Coming into the year, we, against the backdrop of saying that our overall expenses for the company were going to be essentially flat this year, we've specifically said that by design, we've been trying to redeploy costs and investments out of non-revenue-generating areas of SG&A and overhead into more investing and the types of products that drive revenues. And TV programming is a significant component of that. So what we had said is, that we expect for the full year, and this remains true, that our overall programming costs should be up in the neighborhood of mid single digits for the year, and that includes all programming across all networks and include sports. So given just the math, our programming costs were down in Q1. We would expect and you should expect that they're going to go up for the remainder of the year.

Jeffrey Bewkes

So on your question on secular versus cycli [cyclical] on DVD, we think a fair degree, a fair amount of it was cyclical. And the reason is, you had big declines in retail shelf space last year due to some of the bankruptcies of the retail distributors that came about during the economic downturn. And there was less retail foot traffic also cyclical due to the downturn. If you then put to that and say, is that right, prove it, basically, as we look at our company as the leader, we were up in DVD in a down market. So that has more to do with some of the timing and slate mix-based things. We had stronger titles. We had a larger number of releases. And so as you work that through the various studios of the industry as a whole, you end up with a fair number of cyclical effects in addition to the downturn, not just secular ones. But the category is still a little challenged on the secular side. We've seen the sell-through decline moderating in the quarter. Sell-through was up in March. The falloff in rental seemed to be caused, as I said, by store closings, that's diminishing or moderating. And digital, not physical, but digital home video has remained strong. VOD transaction increased more than physical rental transactions decreased. And Blu-ray and electronic sell-through were continuing strong. So we basically think if everybody, and Warner's going to do this, continue to execute on the strategy, grow the higher-margin formats of high-def, VOD and electronic sell-through and try to improve the rental economies with the discount kiosk and mail order businesses in the right place, tightly manage the cost base and focus on tent poles that have been outperforming, really, across all of these home video methods. That seems to be the answer, and we think that'll lead to an uptrend, not a down trend.

Operator

Your next question comes from the line of Anthony DiClemente with Barclays Capital.

Anthony DiClemente - Barclays Capital

First, for John, you guys mentioned in the release, and you were clear about the programming costs, which declined 3% in the quarter, but operating costs and SG&A at Turner were higher. So I just wondering if you could size that for us a little bit, John, and maybe just remind us what percentage of the cost base in Networks is programming as opposed to non-programming or operating in SG&A?

John Martin

SG&A was up at the Networks. That was up, I think, low single digits, and that was typical inflationary increases, compensation and so on and so forth. We spend about $4 billion a year on programming, so that should give you a sense.

Anthony DiClemente - Barclays Capital

And then for Jeff, I was just wondering, you had talked in the past about the virtues of being a so-called arms provider to the broadcast TV networks as opposed to being an owner of one of them. And I just thought, and it relates to the question that was asked earlier in the call, given some of the synergies on sports and news, if, at this point, and given the evolution of the business model, if, at this point, you think that there are strategic benefits for possibly having a broadcast network, one of the bigger ones, within the Time Warner portfolio?

Jeffrey Bewkes

Well, we look forward to working with CBS. We have, obviously, a lot going together on sports. There are some possibilities in some other areas that have been mentioned this morning. But we don't have any need and we don't have a desire to own a broadcast network. Our networks that we've already got, our cable networks or branded multichannel networks, already have scale and lead positions. We love the economic character of all of those. And we have a very, very good business at Warner Production, making TV series and selling them to all of the broadcast networks and all of the cable networks. So that's our general stance on that.

Operator

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

Ben Swinburne - Morgan Stanley

In the media rally, we've seen, at least until this week has been fueled in addition to the advertising, were accompanied by surprisingly strong margin expansion, and that was clearly a characteristic of your quarter. At the Networks business, if I look out beyond this year, I'm curious if you guys could talk about margin expansion potential at that business? Do you assume sort of a normal ad environment? If I look at your margins over the last decade, x the WB, I think you're at sort of the high end, maybe [ph] (1:00:52) the peak margins relative to historical trends. So in the context of Conan O'Brien and the NCAA deal, what's your outlook? How should we think about cost growth beyond 2010 for the Networks business given sort of a normal ad environment?

John Martin

Look, we're not going to start providing guidance for year after this one. Having said that, if you look at Conan and if you look at the NCAA, and Jeff said in his opening remarks, our view is, that these were opportunities for us to secure marquee premium programming at a relatively modest cost. We wouldn't anticipate that they're going to have a material impact on our financial profile. And if you look at the last five years, the performance that we've had at our cable networks, we've had very strong and steady revenue growth. We've got good tight controls on costs. We would anticipate our approach is going to remain the same. And so this is about driving these businesses forward, improving profitability. Margins are important, but margins are not the only metric that drive our business focus here. But as I said, the commitments that we've recently announced are not going to have a material impact on our cost and margins.

Ben Swinburne - Morgan Stanley

Jeff, you talked about HBO GO. It seems like that's a potentially huge opportunity as it relates to TV Everywhere, but also for the HBO business. The iPad's shown that engagement, and a lot of iPad product is a lot higher than it is online. Can HBO create an iPad app that has access to all the films that you have available on HBO On Demand? And what's your sort of view on how big that opportunity could be in the context of HBO's overall sort of financials?

Jeffrey Bewkes

Don't get ahead of yourself. I would say, yes, HBO could easily do that. The question is, is whether it would in its interest to do that. Remember, HBO GO means that all the HBO subscribers in the United States are going to have HBO programming on demand across every device for no extra charge. So that is a powerful offering. And that will mean, if they want to access it on the broadband device, including any device made by any company, could be Korean, could be Apple, when they turn the thing on, they'll be looking at HBO. So they don't need to make a deal or an arrangement or diffuse some of the money or leverage to a device maker because they'll view on every device for no extra charge. It's a very powerful position. Not only HBO will be in that position, every network on the dial is going to be in that position, and so is every magazine.

Operator

Your last question comes from the line of Tom Eagan with Collins Stewart.

Thomas Eagan - Collins Stewart LLC

I guess a quick question on Turner networks and then also on film. I guess, Jeff, could you talk a little bit about the improvements you're making in yield management at the networks, and maybe even quantify that for the quarter? And if that's changed at all versus the previous quarters?

Jeffrey Bewkes

A lot of different factors play into yield management in terms of inventory utilization. There is the type of advertising, the type of advertiser, whether you're doing direct response or traditional, the mix of cash units and under [ph] (1:04:36) delivery that you're working on, the sell-out levels that you want to have, how much inventory is needed for promotional activity. So it's all part of managing and optimizing the revenue. As you know, advertising was up more than our ratings, and there's plenty of things that we do in terms of the mix and management that creates that yield. I think the takeaway is two things, which is, if you have a really strong brand position and unique brand identity across a bunch of networks, and you have extremely strong sales force, which we do, you can then create very, very, sometimes surprisingly good, yield management.

Thomas Eagan - Collins Stewart LLC

And on the timing of the TV licensing, it sounds as though that's going to be, in terms of the TV syndication, it sounds as though that's going to be more of a second half of the year impact, is that right?

John Martin

Yes. A lot of it disproportionately goes into Q3.

Douglas Shapiro

Well, thank you everybody for listening. And as Jeff mentioned, we'll be talking to you in a lot more detail in a couple of weeks.

Operator

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.

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