Scripps Networks Interactive's (SNI) CEO Kenneth Lowe on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Scripps Networks (SNI)

Scripps Networks Interactive (NASDAQ:SNI)

Q2 2014 Earnings Call

August 07, 2014 10:00 am ET

Executives

Mark W. Kroeger - Chief Communications Officer and Executive Vice President

Kenneth W. Lowe - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Burton F. Jablin - President of Scripps Networks

Joseph G. NeCastro - Chief Financial & Administrative Officer and Principal Accounting Officer

Lori A. Hickok - Executive Vice President of Finance

Analysts

Anthony J. DiClemente - Nomura Securities Co. Ltd., Research Division

John Janedis - Jefferies LLC, Research Division

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

Michael C. Morris - Guggenheim Securities, LLC, Research Division

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

Laura A. Martin - Needham & Company, LLC, Research Division

Amy Yong - Macquarie Research

Michael Nathanson - MoffettNathanson LLC

Eric O. Handler - MKM Partners LLC, Research Division

David Carl Joyce - ISI Group Inc., Research Division

David Bank - RBC Capital Markets, LLC, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Alan S. Gould - Evercore Partners Inc., Research Division

Todd Juenger - Sanford C. Bernstein & Co., LLC., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Scripps Networks Interactive 2014 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Mark Kroeger, Executive Vice President and Chief Communications Officer. Please go ahead.

Mark W. Kroeger

Thanks, Kathy. Good morning, everyone. On the call with us this morning is Ken Lowe, our Chairman, President and CEO; Joe NeCastro, Chief Financial and Administrative Officer; Burton Jablin, President, Scripps Networks; and Lori Hickok, Executive Vice President of Finance.

We'll start the conference call with prepared remarks that should take about 20 minutes, then we'll open it up for questions.

Let me remind you, if you prefer to listen in via the Internet, go to our website, click on the Investor button and find the microphone icon on the landing page. Additionally, on the page under the microphone icon, you'll find our second quarter earnings presentations materials that we'll be referencing during the prepared remarks portion of our call. An audio archive will be available on the site later today, and we'll leave it there for 2 weeks so you can access it at your convenience. [Operator Instructions] Let me remind you that our discussion this morning will contain certain forward-looking statements. Actual results may differ from those predicted, and some of the factors that may cause results to differ are set forth in our publicly filed documents, including our Form 10-K.

And with that, I'll turn it over to Ken.

Kenneth W. Lowe

Okay. Thank you, Mark, and good morning, everyone. As always, we appreciate your interest in Scripps Networks Interactive. We have another solid quarter under our belts, building on the momentum that we've created with our extraordinarily powerful and ubiquitous lifestyle television networks. Our shareholders are benefiting from the unique competitive advantage that we've carved out for ourselves in the media landscape. Our family-friendly networks in the home, food and travel content categories are extremely popular with viewers of all ages, but they particularly appeal to upscale women who watch our programming live. That makes all 6 of our television networks remarkably attractive marketing platforms to the broadest range of prestigious premier advertisers, all of whom know, without a doubt, that their commercial messages will be seen and acted upon by the most engaged and upscale audience in all of television.

It's a winning combination that's tough, I might even say impossible, to beat. Whether on television, online or on mobile devices, we touch the lives of 177 million U.S. consumers each and every month. And now, we're successfully exporting that expertise and competitive advantage across the globe.

Now this is a company that's growing and on the move. It's a company committed to creating value for its shareholders. And we do that by doing what we do best.

For example, we just completed another peer-leading advertising upfront. We achieved solid mid single-digit CPM increases, and for the third consecutive year, we booked $1 billion in business, just an outstanding record. Huge props, by the way, to our ad sales team, led by Steve Gigliotti and Jon Steinlauf. They prove year in and year out they're the best in the business. And their success in this year's upfront is proof positive that our brand of lifestyle video content stands far apart from the crowd.

We have a unique place in popular culture. We set trends and we define a world's conversation about home, food and travel. It really doesn't get any better than that. So now let me turn the call over to Burton Jablin, who will underscore some of our network trends and highlights before we go to Joe and Lori to discuss financials. Burton?

Burton F. Jablin

Thanks, Ken. And you're absolutely right. All of our networks proved during the second quarter that they continue to be immensely popular with audiences in just about every daypart.

Starting with the home category, which includes HGTV and DIY Network, it's safe to say that things are good at home. The second quarter was a record breaker for both brands. HGTV finished the quarter ranked fourth in primetime among all ad-supported cable networks for women 25 to 54. That was up 2 positions from last year and our best quarterly finish.

In adults 25 to 54, we closed the quarter at #8, also 2 slots higher than last year. HGTV continues to dominate cable on weekends, ranking as the #1 network among women 25 to 54. More than 14 million viewers watched HGTV each weekend during the 3-month period, helping the network achieve its highest rated second quarter. And HGTV enjoyed an exceptional June, setting records for both primetime and weekends. Our new show, Flip Or Flop, has been a huge hit and recently led the network to its highest-rated Tuesday night. Another new show, Fixer Upper, has already been seen by more than 19 million viewers since its April premiere and is posting double-digit ratings gains for its time slot over last year. And viewers can't get enough of all things House Hunters. House Hunters Renovation, now in its third season, is achieving its highest ratings yet.

Over at DIY Network, the second quarter was the second best in networks -- in the network's history for adults in primetime, and that was just below the record set in this year's first quarter. DIY Network also was particularly strong among men.

Second quarter brought the best ratings week in DIY Network history among adults, and the weekend of May 31 also tied for the network's highest-rated weekend ever. Airings of Lake Life and Barnwood Builders contributed to the success. Other top-performing programs included Rehab Addict, The Vanilla Ice Project, Holmes Inspection and Decked Out.

Now a word or 2 about Great American Country. We made a strategic shift a few months ago and tucked the network in with our home category group. The home team jumped at the opportunity to program the network, and thanks to their creativity and enthusiasm, there have been really nice results there. The adults 25 to 54 audience grew 19% year-over-year, which made Great American Country one of the fastest growth stories among all ad-supported cable networks. Much of the programming drawing new viewers is lifestyle content, borrowed or re-purposed from the Scripps' library, which is an excellent use of our extensive programming archive.

Shows contributing to the second quarter's audience growth included Flea Market Flip and Junk Gypsies, which attracts the most upscale audience for the network. So some positive momentum at Great American Country.

Over at Food Network, we're finding new and younger fans, thanks to our growing team of high-profile, high-energy, on-air personalities and next-generation breakout hits. Simply put, Food Network continues to dominate in the food lifestyle space, delivering the best programming in the genre 24/7. Food Network finished second quarter as the #11 rated network in primetime in all of cable, driven by shows like Food Network Star, Chopped Tournament of Stars and Worst Cooks in America.

For the first half of the year, adult 25 to 54 primetime ratings were even with 2013, while other demos were up. In total day, we were up in women and younger viewers. We're building on the success of several recent primetime hits, including Cutthroat Kitchen, Guy's Grocery Games and Beat Bobby Flay. Our In the Kitchen, day time and weekend block, showed nice gains in all demos, particularly among women. The strength of In the Kitchen helps us identify and establish new stars and provides an effective marketing platform for primetime.

We've seen growth among younger viewers, allowing us to appeal to advertisers on multiple demographic fronts. Food Network viewers are also watching longer than ever, which underscores engagement.

Our other network in the food category had a great quarter as well. Cooking Channel posted its best primetime ratings, up 4% in adults and up 5% in women. The audience continues to get younger at cooking, and we're attracting more women.

One of our new series, Rev Run's Sunday Suppers, was the network's top primetime program. So Cooking Channel is clearly one of our big success stories.

At Travel Channel, we continue to make steady progress in establishing brand identity and reaching an upscale audience. Solid results from programs like Bizarre Foods America, Hotel Impossible and Xtreme Waterparks contributed to the quarter's growth. The loyalty factor is growing at Travel Channel, with 16% year-over-year growth in the number of nights viewed and continued growth in time spent viewing. Median income, a key measure of audience quality, was up 6% year-over-year to almost $58,000. And viewers of Hotel Impossible, one of Travel Channel's most popular returning series, reported a median income of $74,000.

Appealing to an upscale audience is a Scripps trademark, that's why we have the #1 network group for reaching high-income viewers and one of the reasons we outperform in ad sales. We're very encouraged by the progress the team is making at travel and we expect to see more.

On the international front, during the second quarter, we launched Food Network and Fine Living in The Netherlands, Belgium, Slovakia and the Czech Republic; and Fine Living in Croatia, and soon we'll add Food Network and Fine Living in Hungary.

In Asia, we launched the Asian Food Channel in Taiwan and Vietnam, and we're still on schedule for a major network launch in South America. Audience reception in global markets continues to exceed expectations. For example, Travel Channel just won the U.K. Freesat Award as the Best Specialist Channel, beating some stiff competition including last year's winner, our very own Food Network U.K. So another great quarter's performance for Scripps Networks Interactive, driven by the global popularity of our lifestyle networks and peer-leading operating results.

And with that, I'll turn it over to Joe and Lori to discuss the financials.

Joseph G. NeCastro

Great. Thanks, Burton, and good morning, everyone. So all those positive audience trends you just mentioned drove another good quarter for the company and for its shareholders. Results for the 3-month period were right in line with the expectations we outlined during our first quarter earnings call.

Consolidated revenue was up 6.5%, driven by strong growth in both advertising and affiliate fee revenue. Total company expenses were up 13%, and were generally in line with our expectations, with one notable exception. We took the opportunity in the quarter to spend about $10 million for the early termination of service agreements for our London-based operations. We expect this investment over the long term to give the company and its shareholders all the upside from our rapid expansion in Europe, the Middle East and Africa.

Now excluding the impact of that one-time international expense, earnings per share would have been about $1.14 versus $1.07 we reported this morning. It's also worth noting that earnings per share got a lift from our share repurchase activity during the period. We repurchased 4 million shares at a total cost of around $300 million.

Now with that, I'll turn it over to Lori who's going to drill down into the results and comment on our outlook for the balance of the year. Lori?

Lori A. Hickok

Thanks, Joe. Looking at key revenue drivers for the second quarter. Consolidated advertising was up 7.6% and affiliate fees were up 4.5% compared with last year. This advertising performance was consistent with our expectations of high single-digit advertising growth. The affiliate revenue growth was a bit stronger than we had anticipated.

Advertising revenue growth in the quarter was driven by the strength in the scatter and the 2013, '14 upfront market in the U.S. Scatter-versus-scatter CPM pricing was up mid to high single digits year-over-year and up mid to high teens over the broadcast upfront.

As for advertising categories, our top 5 were food, retail, home improvement, consumer packaged goods and financials. Here, the biggest change was in home improvement, which was up significantly; and autos, which was down and dropped out of our top 5 categories.

So far in the third quarter, the advertising market remains healthy. Third quarter scatter-versus-scatter pricing growth is pacing in the mid to high single digits and in the mid to high teens over the 2013, '14 broadcast upfront. As Ken indicated, in the just completed upfront, we once again finished right at the top of our cable peers, with solid mid single-digit increases in CPM pricing. Our success in the upfront speaks to the desirability of our lifestyle networks as valued programming in marketing environments with highly engaged viewers who are passionate about food, home and travel.

Affiliate fee revenues grew 4.5% in the second quarter, driven by the annual escalators in our affiliate agreements, the increased distribution from Cooking Channel and the DIY Network and our international expansions.

Looking at our network performance in the U.S., revenues were up 6% on the strong advertising and affiliate fee growth. Our domestic advertising revenues were up 6.5%, driven by the pricing increases I previously mentioned. Affiliate fee revenues were up 4%.

Lifestyle Media segment expenses were up 7.6% and as expected, Cost of Services was up 11% as we premiered more programming during the quarter. The increase in premiers also contributed to an increase in marketing and promotions expense. And as a result, segment profits for U.S. networks was up 5% from the prior year period.

Included in the consolidated results, our international businesses generated $20 million of revenue in the second quarter. This was up 15% from the prior year, primarily due to the expanded distribution and growth in our existing international operation. Additionally, our equity and earnings of affiliates was $27 million, up 7% from last year. Our international partnerships in Canada and the United Kingdom comprised slightly less than half of equity earnings. Together, our proportionate share of international revenue from equity investments, coupled with our consolidated international operations, equals almost 15% of revenue.

Just to remind you, we are reiterating our previously issued full year guidance. However, due to seasonality, I'll provide some specific comments on the remainder of the year. I'd also remind you that our guidance is based on consolidated results, including international. We expect advertising, affiliate fee and total revenue growth to be in the mid single-digit range for both the third and fourth quarter, driven by the pricing factors discussed earlier on the call.

On the expense side, based on current programming schedules, we expect consolidated expenses to increase in the low double-digit range in the third quarter and low single-digit range in the fourth quarter.

And with that, we're ready for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Anthony DiClemente with Nomura.

Anthony J. DiClemente - Nomura Securities Co. Ltd., Research Division

I just -- Lori, you just mentioned mid single-digit growth for advertising for the second half. I'm just trying to reconcile that with your previous guidance, which I think was for high single-digit ad revenue growth at the lifestyle segment for the full year. So when I think about that properly, can you get to the previously high single-digit ad revenue with mid singles for the back half?

Lori A. Hickok

Yes, we're still -- as we said, we're reiterating our full year guidance, so we're comfortable with that and that's why we didn't make a change, Anthony, so...

Anthony J. DiClemente - Nomura Securities Co. Ltd., Research Division

Okay. And Ken, just a bigger question. When you look around at the themes here on consolidation in the space, can you just give us your view where Scripps fits in? And internationally, I think, Burton talked a little bit about the organic growth in terms of new network launch. Are there other opportunities internationally for Scripps, maybe an opportunity to go on the offensive, a la what you've done with the Travel Channel? And then I have one more follow-up for Joe, if I may. Go ahead, Ken.

Kenneth W. Lowe

Okay, yes. On the bigger question, Anthony, look, I think as today's results demonstrate, our targeted brands are really must-have channels that deliver an upscale audience, that really bodes well for the future of our content on all platforms. So for us, it's really about quality over quantity. We are great partners and highly valued by our distribution providers when it comes to local advertising. We're right at the top of the heap. So as the world moves more and more to potential consolidation, we think our networks and our company is going to play very well just as we are currently comprised. So we're very comfortable in moving forward in this environment. And to your second part of your question on international, actually Joe's got a little bit of breaking news on some of the international stuff that's going on, some very good signs, especially, I think just the recent launch in Italy. But the short answer is yes. I think there are tremendous opportunities. Joe and I were just in Asia. We got incredible feedback there about the home -- our home category, food category, there are lifestyles that fit very well in that part of the world. Partnerships are popping up everywhere and we see enormous opportunity. Joe, anything you want to add on that?

Joseph G. NeCastro

Anthony, as you know, we've just taken a sort of multifaceted approach internationally, and there's not really one size that fits all. So we have been working very diligently, and I think, to use your phrase, sort of have gone on the offensive on a number of fronts. We've talked about our desired markets, the ones that are our highest priority and in each of those markets, we're working on either launches or joint ventures or potential acquisitions. So there's -- I think there'll be plenty of news to come on that front. So -- and we're really pleased with the way things have gone so far.

Anthony J. DiClemente - Nomura Securities Co. Ltd., Research Division

Okay. And one quick follow-up. Just Joe, it looks like your average purchase price on the buyback was $75. How sensitive is the buyback to the share price? And is it a dollar volume target over the course of the quarter, or is it a price-sensitive mechanism that you have in place?

Joseph G. NeCastro

Yes, it's more the latter, Anthony. We do watch the price. We are -- obviously, we're going to remain active. We feel good about where we are with the program and where we are with our discipline on that at the moment. But we're going to continue to be active. And we're not talking about a program that turns off completely or turns on at different price points. We're just talking about scale.

Operator

Our next question comes from the line of John Janedis with Jefferies.

John Janedis - Jefferies LLC, Research Division

Ken, you've always over-indexed the industry on the ad front, but the gap this quarter seems to have widened. And so is that a function of the recovery in ratings, or maybe are you better monetizing dayparts outside of prime?

Kenneth W. Lowe

It's a really good question, John, because we are, and thanks for pointing that out, over-indexing. I really think it's the advertising market coming more and more to us. Look, there's no question that Burton, sitting here to my left, and his team have been delivering some really strong ratings in food and home and garden as you heard in some the things that Burton was talking about in the script, these were top 10 networks. And especially, the engaged upscale audience that we're delivering is highly, highly valued by the advertisers. And I think as we turn more and more to a qualitative, accurate audience measurement, our brands and our lifestyle audience that we deliver becomes even more valuable. So this is the way we've been set up. This is why I say I'm confident about our future going forward even in a world that may even become more consolidated because we're targeted, we're in the right niches -- actually, to say they're niches is probably understating it a bit, in categories that are highly lucrative and we deliver the audience that advertisers are after. So my expectation's that we're going to continue to not only outpace our peers but become even more valuable to the advertising community as we get better audience information going forward, which we will do as an industry and across all platforms.

John Janedis - Jefferies LLC, Research Division

Maybe a related question. The comments around the third quarter seem, on the ad front, seem much more bullish than your peers. Are you seeing any kind of major acceleration in the domestic ad market? Is it category exposure? What do you think is going on? Or I mean, when you say -- I guess, what are you seeing?

Kenneth W. Lowe

Well, look, John. I think you've heard from enough of our peer group about the advertising market. I think it goes back to your previous question. We're just over delivering. And by the way, this is not just this quarter. I mean, go back and look, I gave credit to Steve Gigliotti and Jon Steinlauf and our sales team. It's not just about selling spots and commercials. It's about selling concepts. It's about partnerships. You've heard me say before our Dream Home giveaway is the most successful not only contest promotion in all of television but it's highly valuable to our advertisers. So it's just more of the same. I think we over-index, we'll continue to over-index. And no, I don't think we're seeing anything different. It's just out there kicking and scratching and calling and doing a better job.

Operator

Our next question comes from the line of -- from Alexia Quadrani with JPMorgan.

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

Just a couple of questions. The first one's on the Travel Channel. You guys have done such a great job in improving that channel. I guess, where are you, I think, versus where you hope to ultimately be. I guess what inning sort of are you in there? And then my second question is just on the SVOD. Are you still in active discussions, or do you think there's still a possibility that you would see a new deal on the SVOD side?

Burton F. Jablin

Alexia, it's Burton. Thanks, first of all, for your comments on the Travel Channel. I'm really pleased with the team there, Shannon O'Neill and Ross Babbit and the whole group of people are working very hard to turn Travel Channel into what we think is one of our best growth opportunities, and that's doing it the Scripps Networks way, by building a solid audience, consistency across the network schedule, a slate of new programs that will be coming on beginning in the fourth quarter and into 2015 that really reflect what we want that channel to be, a channel that looks at the world with great curiosity, a spirit of adventure and fun and intrigue. And I was just with them on Tuesday, I'm there quite often, and went through a number of these new shows, and I can tell you that I'm more excited than ever about our prospects. But I would say we're building it out for the long term and an important part of that is building the kind of audience there that we've enjoyed at our other networks: an upscale audience, high median income, educated. And we've seen within the ratings, which are relatively even with last year, but underneath that, we're seeing improvement, as I mentioned, in the median income, in the consistency of viewing, there are great signs of improvement there. So yes, I feel very bullish about it. On SVOD, yes, we're still looking to do another deal in that area, and we're working hard to be able to have something to announce on that sometime in the future.

Operator

Our next question comes from the line of Mike Morris with Guggenheim Securities.

Michael C. Morris - Guggenheim Securities, LLC, Research Division

Just a couple of questions on your digital businesses. One, the digital line item within the network segment was down in the quarter, and I'm wondering if you could just give us a little color on what -- why it was down and sort of what the trend is, what the potential for that part of the business is. And then more broadly on your digital businesses, the ones that are contained in the corporate and other segment, can you talk about what you've learned from some of the investments that you've made, CityEats, for example? And just given the success that you have in your categories on TV, are there some opportunities to maybe partner with some established digital players and maybe get some more synergies there versus trying to build your own businesses within food or home and garden or travel?

Burton F. Jablin

Great questions. It's Burton. I'll answer a couple of those. First of all, in our core businesses, like other parts of the industry, we're seeing some headwinds from programmatic buying, decline in banner advertising and increased page for use [ph] for mobile devices, which are just harder for everybody to monetize, including us. So we are facing that. We are adjusting and as I think you've seen, uLive, which is not included in the core business, it is separate, but at some point, we will include it in the core because it's past its startup days. But uLive is a response to that, to the demand for more inventory in video, for more inventory in mobile, and we're seeing some nice revenue growth there. So yes, some headwinds, but we're adjusting. And our sales team in this upfront did a number of convergent deals where we bring in digital dollars in addition to our television dollars. And as a network group, I think we're about as well positioned as anybody to capitalize on those kinds of convergent deals. On the more corporate aspects, I mentioned uLive, I'll let Joe talk about CityEats and then maybe I can come back and answer about partnerships.

Joseph G. NeCastro

Sure, absolutely. Thanks, Mike. Look, I think we have a -- we are a learning organization and we have always been willing, over the years, to put some money at work in new ideas and new businesses and take some sort of measured gambles. And I'd say CityEats fits well within that. I think the learnings there have to do with what are we particularly good at and where should we be spending our energy and our investment dollars. I think we learned a lot from that experience about the applicability of our own brands as opposed to trying to develop new brands in, say, in the restaurant space. And while that area is adjacent to food, it is a very different business, and as you know, it has a dominant provider of the reservations business. So I think that was just one of those considerations. We went back and as you know, we review these routinely, we went back and just decided, given all the other priorities of the organization, that was probably not one that we were willing to continue to spend against since we had some other things that we thought were more promising and closer to the core of what we do. So I think that's probably been the major learning from that. I think I'll start the last piece of this and I'll turn it over to Burton, too. But as we go forward, we certainly believe that we should continue to put money to work and we're going to look at investment opportunities where we are not necessarily the majority investor or the owner of a business, but rather sort of a very interested party and observer and with the potential to do -- to make investments in areas where we think our assets can contribute to the success of the ventures. So a combination of the resources we bring and maybe some capital in some either investments, minority investments or maybe even some partnerships.

Burton F. Jablin

And then in looking at our success on TV and carrying that over. Our #1 goal is absolutely to increase the number of impressions for our video content, both long and short form. And we do like the idea of opportunities with partners. In fact, uLive is kind of based on that. It's a distributed network, we distribute our video content through partnerships with other digital entities, and that's proving a very nice business for us right now. So yes, we're very open to things like that.

Operator

Our next question will come from the line of Vasily Karasyov with Sterne Agee.

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

Ken, I have a big picture question for you, and it's again about the M&A speculation in the space. You're a category leader and you've gone through a couple of processes in the past several years, where you had a material ramp and a fluid revenue [ph] at Food Network, but you also had -- you acquired Travel Channel. So I was wondering the common argument that scale helps the conversations, vis-à-vis MSOs, do you share that view bulking up in the same category? Does it really drive your leverage? And then if you could also talk about -- if that -- if bulking up happened in another category, not in the lifestyle, but descriptive [ph] programming, how would that affect your position with distributors?

Kenneth W. Lowe

Yes, I think, Vasily, we've kind of always been an underdog for 20 years now from the beginning when people didn't have much faith in our ability to build HGTV into a quality brand or food into a quality brand. And from day 1, we've really been about sticking to our knitting: nonfiction, targeted, quality content that is highly engaging and viewed pretty much on a live basis. There's been plenty of this written. It's been documented that our viewership is over C3 is 94% live. So our game plan, our blueprint, if you will, is probably more viable and valuable today than it was 20 years ago. And going forward, to me, this is all about quality. This is all about must-have. I was recently told by -- she'll be nameless, a distributor, "Ken, I could never drop any of your networks because my wife and my daughter would kill me." I think the fact that all of this consolidation we get caught up in just putting everything together and therefore, size and scale are going to become more important. It's never been true in any industry. Quality, quality brands, consumer engagement and really, ringing the cash register for the advertisers is what's going to win ultimately. So I'll put our 6 brands out there against any, and I think we can negotiate going forward and very successfully. So I think we're in great stead going forward. And as far as scripted, my view, one person's is, that is becoming more of a commodity because it's not as measurable from a standpoint of everything that I talked about in delivering audience as we do. So the more scripted, the more money that goes to that, whether it's on broadcast or cable, the more competition, the more important it is, I think, about the quality of audience that you're delivering. So hope that answers your question.

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

It does, very helpful. One follow-up. Hypothetically, a company that owns 4 successful lifestyle channels and a company that owns 2. The combination of the 2 companies, is it more valuable than 2 separate companies? Or if I'm hearing you correctly, it's all about individual network's appeal to viewers.

Kenneth W. Lowe

It is about individual networks, no question. But remember, our philosophy, our strategy from day 1 has been to target upscale women. So our brands are cohesive and work well together because, and Burton talked about this very well, it makes it easier for ad sales, the team, to sell a targeted approach. If you had, for example, which we take, a nonfiction brand the targeted men highly successful, absolutely. But this, again, is just our blueprint. I'm not suggesting it's everyone's, but it's worked well for us, and I don't see that in any way lessening over the coming months and years.

Operator

Our next question comes from the line of Laura Martin from Needham.

Laura A. Martin - Needham & Company, LLC, Research Division

So 3 things. One is, on international, you guys have gotten big enough international, do you have a sense of what peak margins for international assets [indiscernible] should be [indiscernible]?

Kenneth W. Lowe

Yes, Joe, do you want to take that?

Joseph G. NeCastro

Yes, Lori [ph], you're breaking up at the end there, but I can -- we can barely hear you, but I can answer the peak margin question, or maybe update it a little bit. We're not exactly sure, but clearly, the peak margins in international will probably be lower than they are in the states. It's a very large lucrative ad market here. And internationally, you have some markets that have very robust ad markets and some that are more distribution-based. So we would sort of expect that on an O and O [ph] situation, you could get to the low to mid-30s, probably, as a peak in a lot of these markets.

Laura A. Martin - Needham & Company, LLC, Research Division

Okay. And then, Lori, you said that programming cost, if I wrote this down, it will be up double digits in third quarter but up low single digits in fourth quarter. Is that also the cash, how the cash flows out, or why the big difference quarter-to-quarter?

Lori A. Hickok

Laura, that really has to do with how we're premiering programming, so that we're basically having a lot more premieres that are going to happen and that's a year-over-year, if you just look at shift to shift, the cash, pretty much, we're spending the cash ahead of that cycle. So you may see that we had a little bit more of bump in cash because -- that's why you're seeing [ph] the third quarter and [ph] year-over-year increasing. So it really is tied directly to our schedule -- scheduling.

Laura A. Martin - Needham & Company, LLC, Research Division

Okay, interesting. And then on a comment you just made on digital, I thought it was interesting you said you were successful kind of converging digital with linear. Did you guys -- can you size how much digital you think added to your upfront numbers this year, 10%, 20%, what do you think digital added in your upfront buys?

Burton F. Jablin

I really don't have that kind of data drilled down that much. But this year, I can say this. We purposely go out with specific shows that we have on both the television and the digital component for that we sell in the upfront, and we're very successful in creating some very nice packages [indiscernible] to sales.

Kenneth W. Lowe

Lori [ph], it's Ken, I think we've talked about this before. Because of the engagement of our audience, we think it bodes well on the digital platform, so to Michael's question earlier, this is just about us through partnerships, investments and our own creative shop creating businesses and content that will work across all platforms. So we're -- we had a very good reception in the new front, and we think this is just going to be another good revenue stream for us going forward. And by the way, good report on video.

Operator

Our next question comes from the line of Amy Yong with Macquarie.

Amy Yong - Macquarie Research

Just a few questions on the affiliate fee side. I know you're tracking for mid single-digit growth here, but any earlier thoughts -- early thoughts on '15 and '16? I think you have a few bigger, chunkier deals coming up. How are those negotiations coming along at this point, and how might consolidation on the distribution side impact your negotiations? And then before -- and then just one last part on the affiliate side. How important is it for you to push distribution in your flanker brands, like Cooking and DIY, and would that offset any kind of rate increases that you would see?

Kenneth W. Lowe

Well, thanks for the question, Amy. Without going into specifics about any negotiations or specific companies that we're dealing with right now, we are in the middle of some negotiations. I would say we're fairly pleased with how things are going and what our prospects are with most of them. These are always tough. I mean, there's just no question about it. But Henry Ahn and his team are doing a great job of establishing our value. And we think we're going to see what we deserve in terms of our rates. On the expansion of our less distributed networks, yes, we absolutely want to see those distributed more broadly, and that is part of our discussions. We think they add value to a distributor's line up. The -- certainly, DIY and Cooking Channel are enjoying some terrific numbers, whenever they are opened up in a preview, where more people can see them, their ratings soar, which indicates there's a demand for them. And we think that broader distribution will serve not only us well, but our distributors well. In Great American Country, as I've said, we are -- that is absolutely a work in progress. We're seeing some really nice gains there, and we'd love to see more distribution for it, too.

Unknown Executive

Amy, we'd be remiss if we didn't say that we think those smaller networks perform so well for distributors, that we wouldn't expect to have to take any kind of trade-off or make any kind of trade-off between rate and for the distribution of those networks.

Operator

Our next question comes from the line of Mike Nathanson with MoffettNathanson.

Michael Nathanson - MoffettNathanson LLC

I have a couple. You guys have always been very upfront -- no, that's a bad joke. You guys have always been very honest about how you've sold advertising and these kind of markets. I wonder, in this season, we've heard from other companies that they've held back inventory because they didn't like the deals they were getting this upfront. So how do you guys -- in terms of your volumes and your inventory this upfront versus previous upfronts, was there any change in your strategies? It sounds like price was pretty good, but what about the volume side?

Burton F. Jablin

Yes, this is Burton. Thanks for the question. We did hold back a little inventory because our sales team assessed the marketplace. And like some of our peers, saw what they saw. But we're always within a range, a fairly narrow range of what we open up in inventory. And the fact that we reached that $1 billion mark for the third year in a row shows that we still did pretty well in the marketplace. And of course, we did get those solid mid-single range increases in CPM. So all in all, we're feeling pretty good about how things went.

Michael Nathanson - MoffettNathanson LLC

Okay. And then I have 2 in international, and maybe this is to Joe and to Ken. I wonder what you guys think about the landscape for acquisitions internationally, and does the stepped up buyback that we're seeing now kind of say that the pipeline of things you think that are big enough is kind of drying up? So what's your view on what you guys can do on the M&A front abroad?

Joseph G. NeCastro

Yes. Thanks, Michael. This is Joe. I would say that we saw a number of sizable assets come to market over the last couple of years. We don't expect that there will be really large deals. If they do, we're, as you know, very disciplined, very careful about it. We're trying to stick to our knitting in the lifestyle and nonfiction space and maybe some adjacent categories. We would do things if we thought there was a real strategic reason to do them that are a little bit outside the space. But there's a lot of activity, it just tends to be smaller deals and the potential for JVs where somebody can bring distribution and we could bring programming. So we so we don't -- I guess to your point, we don't see huge uses of cash for international M&A. That doesn't mean we won't put the P&L to work or be very active. And we feel very comfortable that we can continue to buy back shares in an environment where we're not putting that kind of money into M&A.

Michael Nathanson - MoffettNathanson LLC

Okay. And lastly, philosophically, on this one. You're seeing some of your peers start going free-to-air in some markets and skip, and maybe leap over the traditional pay-TV gatekeepers? So philosophically, given that you're a bit later in building out distributions than some of the other guys, how do you think about trading off distribution fees for gaining free-to-air penetration?

Kenneth W. Lowe

Yes, we're very open to that. In fact our launch in Italy was essentially free-to-air, and in fact, we've had very, very good results there in terms of just getting the programming exposed to a much wider audience much faster. So there are trade-outs that you can make. And in our case, we would definitely look at those opportunities we have. And as I just mentioned, we did execute on one in Italy, and we're looking at other opportunities where they're available.

Operator

Our next question comes from the line of Eric Handler with MKM Partners.

Eric O. Handler - MKM Partners LLC, Research Division

Looking at specific networks, Food Network, in terms of its year-over-year growth, had the strongest quarter since like the third quarter of 2012. Wondered if you could sort of drill down a little bit in terms of what's driving that growth now in terms of the advertising market versus affiliate fees? Because it seems like ratings have sort of just kind of been holding steady there. And then in contrast, when you look at Travel Channel, Travel Channel probably had its slowest growth quarter in a couple of years. And what's impacting that?

Burton F. Jablin

Well, this is Burton. On Food Network, I think what's going on there is just the solidity of that brand even with its ratings struggles. If you're an advertiser who wants the high-quality audience that they have, wants the environment that they've created, the kind of specific food programming that doesn't vary depending on the daypart, there really is still only one place to go. And the quality of that audience, quality of the brand and the fact that they have had some shows, as I mentioned earlier, Guy's Grocery Games, Cutthroat Kitchen, Food Network Star is doing very well, Worst Cooks within the second quarter, all of which are growing in ratings. And combine that with -- even beneath the relatively stable ratings that they've had over the last year, we're seeing some really healthy signs for the network. The median age has come down a couple of years, median income remains incredibly strong. Food Network, at the moment, continues. In July, Food Network was a top 10 network in adults 25 to 54, Top 5 network in women 25 to 54. So I think it really is just the strength of the brand and quality of the audience. Even if there's more competition, I don't mean to be bragging too much, but the highest quality will stand out. And on travel, as I said earlier, we're building that network. So we're going to see some fluctuation in what's going on there. We are happy with what happened in upfront. We showed advertisers what we're working on for the future. I'm pleased with the reaction to that. And most importantly, for this network, we are improving the quality of the audience. We're not where we want to be exactly yet with that quality, but we're moving forward. And the new shows that will come on will make that an even more apparent differentiation for the network that will attract more advertisers.

Operator

Your next question comes from the line of David Joyce with ISS Group (sic) [ISI Group].

David Carl Joyce - ISI Group Inc., Research Division

One kind of follow-up on prior question. With your programming investment on Travel Channel really being -- aiming at ramping that network up, do you expect that to be more of a seasonal channel? Like are we going to see some more ebbs and flows? I just wondered if you could provide some more color on how that has performed and where do you think it should go? And then secondly, on the international side, since you've got about 15% revenue exposure at this point, consolidated and unconsolidated, what portion of your programming investment is currently being allocated outside the U.S., and where do you see that going in time?

Burton F. Jablin

So this is Burton, I'll start on the Travel Channel question. We see some seasonality with some of our networks, DIY puts landscaping programming on in the summer -- spring and summer because that's when people are mostly interested in it, for example, and of course, we have tremendous tune in for our holiday programming and Internet content on Food Network. With Travel Channel, there's not as much seasonality there. There's a little bit during the summer. We have a great campaign that says we own summer. There's programming on along the lines of summer fun, extreme water parks, roller coasters, amusement parks, things like that, and those do very, very well in the summer. They tend not to do as well in the winter. So there is some seasonality. We believe, though, that we can sort of even some of that out with some of the new programming that's in the works. But there will always be some attempt to capitalize on people's interest in certain subjects, depending on the time of year.

Joseph G. NeCastro

Yes. And David, this is Joe. On the international programming question, I think the learning that we've had there, much to our delight, is that the library that we have here has performed much better than we thought it would on an international stage. We went into the business with the conviction that the concepts we had and the genre that we were distributing were going to be very attractive globally. And obviously, we wanted to put the library to the test. We knew that it was appealing to certain markets, because we've been in the licensing business for a long time. But now that we have an equity stake in many of these ventures, it's been more important to us to see how the library performs. And we've been very happy with it. We do a very modest amount of programming, original programming in some of these markets, and that may ramp up as we get bigger because the bigger you get, the more viewership you get and the more local network might need to be in certain markets. But for now, the library has performed extremely well for us.

Operator

Your next question comes from the line of David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

Kind of follow-up on the commentary you made on the upfront volumes. You said you hit the $1 billion mark again, which is a pretty powerful number. But did you actually quantify what the delta in volumes were year-over-year? And then I guess as a follow-up, it sounds like you had probably a relatively stronger upfront than some of your peers. And I'm curious, what you think -- where do you think the volume is going? Is it going into scatter? What -- have discussions sort of convinced you of that -- is it going out of the market into other media? Is it slower ad spend for the advertisers? What's really happening in this process right now?

Burton F. Jablin

Okay. Well, this is Burton, David. On the first question, no, we're really not going any further than to say we held back a little inventory but still hit our $1 billion number. So we're very pleased with that. In talking to Steve Gigliotti and Jon Steinlauf about where the dollars have gone, a little bit maybe has gone to digital, but our sense is that advertisers are holding back for calendar upfront and scatter. And that makes us feel pretty good because our sales force is really geared toward scatter business. We have a long history of doing exceptionally well in scatter markets, both in terms of the deals we do and the CPM, the pricing. So we feel pretty good about where that's going. But other than that, there doesn't seem to be too much of a mystery, just some holding back because advertisers want to wait for scatter.

Operator

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

Benjamin Swinburne - Morgan Stanley, Research Division

I wanted to ask on the affiliate revenue side. The acceleration this quarter, which I think you credited to some additional distribution for your emerging networks, that sounds like that should continue in the back half? I just wanted to clarify that, that was the case.

Lori A. Hickok

Yes, Ben, that's actually incorporated into our guidance in our back half, yes.

Benjamin Swinburne - Morgan Stanley, Research Division

Got it. And on the advertising side, Lori, is it sort of your expectation to see a little slower growth than the first half in the back half? It sounded like that was the guidance implication, I just wanted to clarify.

Lori A. Hickok

You are right on target. If you look because we're staying with our full year guidance, so based on the pricing information we provided, as well as looking at the first half, that's a very good deduction on your part.

Benjamin Swinburne - Morgan Stanley, Research Division

Basic math for me. And I just want to ask on the subscriber front. There's been a couple of comments -- Disney made a comment on their call about a little bit of a headwind on pay-TV subs for the fully distributed networks. I didn't know if you were seeing any of that. I know it's probably tiny if it's there, but it is something that we've heard from a couple of other companies. If you're seeing any different tiering or packaging in the pay-TV business that might benefit Scripps as being sort of a core basic cable network, any comments there would be helpful.

Lori A. Hickok

Well, Ben, we are seeing those same headwinds that others have talked about, but probably not to the same extent because we're a must-have in a lot of the packages. So what we're seeing is the impact. As they lose subs, of course, that impacts all of their packages. But the good news is the telcos are gaining share, so that's helping to offset some of that, plus the fact that we're gaining distribution for our smaller networks. So all in all, I think we're boding better because again, to the things you've heard Ken and Burton talk about, about the quality of our networks, it holds true when you start looking at bundling and packaging. So I think that we continue to fight against all those headwinds that the industry is seeing.

Operator

Our next question comes from the line of Alan Gould with Evercore.

Alan S. Gould - Evercore Partners Inc., Research Division

I've got 2 questions. First, on the advertising side. Industry-wide, if there's a higher supply of advertising in the scatter market, what makes you confident that there'll be a higher demand and that pricing will hold up beyond the third quarter? I mean, the third quarter, I'm sure you have a view on, and then I have a follow-up question.

Burton F. Jablin

Good question. This is Burton. My optimism is based on our track record, and the track record shows that year-after-year, we do well in our scatter pricing. And it goes back to how our networks work. We refer to this all the time. There's the quality audience, the high-quality environment. Endemics play a big role in this, for almost all of our networks. And for many of them, we're the only place to go. And so that let's [ph] us stand out even if the supply is greater in the scatter market.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. So you are differentiated. I recognize that. And Ken, this may go back a little bit to the scale comment, but you over-index in advertising, but it appears that you possibly under-index in affiliate fees relative to your ratings. Now that could be an opportunity for higher ratings growth, but do you think that's at all a function of scale?

Kenneth W. Lowe

Let me answer that. I think first and foremost, we made a decision, and you probably heard me say this in the past, we made a decision early on not to give away any equity for initial higher sub-fees, if you will. So if you go back to the early days of home and garden and food, which, as you know, was 10 years free, it took us a little while -- a little while longer to climb up the affiliate fee mountain, if you will. Having said that, I think, going forward, in this potentially consolidated world on the distribution side, it's going to come down to the quality of the brands, the must-have brands, and those are the ones that I think are going to bode better in affiliate fees. So the good news is, we actually have some room to grow. It's kind of putting the silver lining behind the cloud, or the fact that it's taken us longer to get to these affiliate fee levels. But I'm actually fairly optimistic of our ability to grow affiliate fees. Again, if you look at what we said earlier, outside of sports and news, we're the most "live viewed networks" among all cable. So we have a lot of things going for us when we walk in and sit down in these future negotiations. So yes, we've got some grow room there, but I actually think we can grow into higher affiliate fees.

Operator

And our final question will come from the line of Todd Juenger with Sanford Bernstein.

Todd Juenger - Sanford C. Bernstein & Co., LLC., Research Division

All right, wrapping up the final question. I'd love just to hit on international one more time, if you will excuse that. I know it's such an important priority for you guys, and I think there was a really interesting case study, I think, that maybe we can learn something from in Asia. So about a year ago, you guys acquired Asian Food TV, and it sounds like your feedback from being over there recently is very strong. But then, interestingly, a month or so ago, I think some networks traded in New Zealand, a food channel and a lifestyle channel, I think Discovery acquired them. I guess I was somewhat surprised, given you're already in Asia and you had made one acquisition there that we didn't see Scripps involved in that transaction. So anything you could share on the criteria you use on choosing where you would go forward with something like Asian Food TV, but then would not choose to go forward with something like the New Zealand networks, would be very helpful.

Joseph G. NeCastro

Sure, this is Joe. I think the short answer is, we were not aware that there was a process, and it was not an open process. We knew -- we're obviously aware of the channels. We hope that someday, they might change hands. We were as surprised as anyone that they traded. So we certainly would've been there, and those are exactly the kind of things we want to active in. And when we get a shot at them, I think we are the natural buyer. There's no other player out there that has access to lifestyle programming. Typically, when somebody runs a lifestyle program in another market, they come to us to try and buy programming. So -- but going forward, Australia is certainly a bigger market and very attractive to us, and we're working on some ideas to get -- to be in that region.

Mark W. Kroeger

All right. Thanks, everybody, and we will be available for follow-ups today, and you can read callback instructions, operator, thank you.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 12:15 p.m. Eastern time today through August 21, 2014. You may access the AT&T executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code 331480. International participants may dial 1 (320) 365-3844 with the access code 331480. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Scripps Networks (NYSE:SNI): Q2 EPS of $1.14 beats by $0.01. Revenue of $708.1M (+6.5% Y/Y) misses by $2.13M.