Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery
Thank you, JB, and good afternoon, everyone. As you heard from JB, we are taking thoughtful approach in how we intend to scale our D2C business smartly and methodically. And it's just one component of a more balanced distribution strategy versus one that seeks to drive subscriber growth at any cost. This will be an important theme throughout the discussion of our second quarter financials and our outlook for the balance of the year as well as 2023. Turning to our financials. As you can see, it's been an extremely busy first full quarter as a combined company, strategically, operationally and financially.
Picking up from when we spoke to you last, while we've already implemented a significant number of initiatives following the closing of the WarnerMedia transaction, we've only become more confident about the long-term potential for Warner Bros. Discovery. The strategic logic behind bringing these two great companies together is as apparent and sound as when we announced the deal. As noted prior, the recently concluded upfront is a timely example of just that.
Despite the more challenging macro environment, we're very pleased with our performance, which proved the enormous value of our content portfolio to our advertising clients and as a differentiated means to service brands. Out of the gate as a combined company, we have been focused on debt paydown, and I am pleased to report that by the end of this month, we will have paid down $6 billion of debt since closing the transaction. We're equally as focused on integration and efficiency, and I'm very pleased with the progress of the synergy program. We now have 1,000 individual initiatives staffed. Measures already implemented worth $1 billion of run rate savings. The clear grip on milestones and business cases for at least another $2 billion in flight and eyes on further upside and opportunities.
We will continue to update the market on progress as well as implications for related cost to achieve as we move our synergy program through the implementation stages. Now I'd like to very briefly address our Q2 results, which we are providing in a new segment structure. The composition of our new segments is very similar to the way Time Warner are presented previously. In addition to the second quarter financials, we also provided trending schedules, including 2021 segmented pro forma financials with the earnings release this afternoon to give you a financial baseline for Warner Bros. Discovery.
The trending schedules are also available on our Investor Relations website. I will speak to the second quarter financials on a reported basis. And we'll address growth rates on a pro forma combined FX basis, as always, to provide more transparency on underlying performance. Let's turn to the individual segments, starting with Studios. Studios results were driven by strong games performance, specifically behind LEGO Star Wars: The Skywalker Saga as well as consumer products, while home entertainment and theatrical face difficult comparisons against last year's strong COVID-lifted catalog sales and larger film slate.
With the Networks, revenue was up 1% and EBITDA was down 11%. Advertising increased 2% globally, largely driven by sports on the Turner Nets in the U.S. while international advertising was down modestly, in large part due to the sale of Chilevisin last September as well as a decline in EMEA. Global Distribution revenue was down slightly with the U.S. flattish and international down 3%, which was impacted by pricing declines in Western Europe. EBITDA decreased in part due to increased sports rights cost versus last year.
Within D2C, revenues increased by 4%, while adjusted EBITDA declined $325 million year-over-year. Performance was mainly driven by: number one, substantial content investments across the global footprint as part of the push to launch HBO Max in as many markets as possible prior to closing the deal; as well as number two, revenue pressures in the wake of sunsetting the Amazon distribution deal last September; and number three, tough prior year comps with 2021 enjoying the benefit of the day and date windowing strategy for Warner Bros. feature films.
Consistent with our prior comments, we continue to thoughtfully spend ahead of the launch of our integrated product. In part, having put some planned new country launches on the back burner, but we are gearing up and are very excited for the global release of House of the Dragon in August, the highly anticipated prequel to Game of Thrones. Importantly, we are changing the way we present our D2C subscriber numbers going forward to align our subscriber definitions across the legacy Discovery and WarnerMedia businesses.
Starting with the paying subscriber count reported on our Q1 earnings call of roughly 100 million subscribers, we have made the following key adjustments that totaled 10 million subscribers. First, the HBO Max subscriber number historically included certain unactivated subscribers under the AT&T Mobility distribution agreement. Consistent with legacy Discovery policy, we will exclude such unactivated subscribers going forward. Second, as JB detailed, we have refined our strategy with a clear focus on one combined D2C product.
As such, going forward, we will exclude non-core D2C subscribers outside of the discovery+ or HBO Max products from our account, such as subscribers of MotorTrend, Eurosport Player and a few smaller other products. Against this harmonized definition, we ended Q2 with 92.1 million subscribers, representing 1.7 million sequential net adds during the quarter. Please refer to the aforementioned trending schedules for historical subscriber data as per the harmonized definition.
Please note that while we have adjusted our ARPU calculations for the corresponding revenues, total Warner Bros. Discovery D2C segment revenue will still include fees received from N4. Those subscribers no longer included in our core subscriber count. Now turning to the consolidated group. On a consolidated basis, revenue was down 1%, driven by increased intercompany eliminations, impacted by larger internal sales and licensing, while adjusted EBITDA was down 31% or $812 million year-over-year.
These results are driven by the legacy WarnerMedia businesses with significant cost increases across all segments. Please note, year-on-year, FX was a $228 million headwind to revenues and a $30 million headwind to adjusted EBITDA during the quarter. Despite the many crosscurrents running through our P&L at the moment, we ended the second quarter with $789 million of reported free cash flow. This included approximately $250 million of cash restructuring and onetime charges related to the merger and integration.
With respect to overall Q2 financial performance, clearly, these results are neither indicative of the health of the underlying assets nor of their longer-term trajectory, but rather the fact that we're starting from a less favorable position compared to our expectations. In addition to the clearly more challenging macroeconomic backdrop and a changing industry dynamic in the streaming space, we have also now had an opportunity to fully assess legacy WarnerMedia's financials post closing.
Having concluded this process, we determined that certain legacy WarnerMedia budget projections that were made available to us prior to closing, varied from what we now view as legacy WarnerMedia's budget baseline post closing. On taking a deep dive in pressure testing, what we found, our assessment has resulted in lower EBITDA projections. Specifically, we identified a number of approved investments and foregone revenue in various parts of the business that, when taken together, impacted full year 2022 EBITDA by roughly $2 billion. Some examples of these business decisions include: number one, significant reductions in external content sales.
As part of a corporate initiative to prioritize HBO Max growth globally, new content licensing deals to third parties were largely halted and content was, in general, made exclusive to HBO Max. This is, of course, an upside opportunity over time as we ramp initiatives back to a balanced level of monetization depending on relative value contributions. Number two, similarly, certain actions taken to limit HBO Max B2B distribution provided a headwind to performance, and we believe there may be opportunities to course correct.
Number three, substantial investments in kids and animation content for both linear and D2C platforms without an adequate investment case against them. Number four, substantial investments in direct to HBO Max films, for which, again, we did not find sufficient support. This means adjusting the way we invest going forward and also evaluating those projects already completed or in progress.
Wonder Twins, Bad Girls and Scoob!: Holiday Haunt are examples of streaming films that do not fit this new strategic approach. These are difficult decisions, but we are committed to being disciplined about a framework that guides our content investment for maximum return. Number five, significant incremental and loss-making content investments for the Turner networks. Specifically content spend on shows that did not have a path to generate sufficient ratings or incremental monetization potential.
And number six, incremental corporate expenses transferred from AT&T resulting from the spin-off of WarnerMedia as per the final carve-out financials. While these factors will, of course, impact our 2022 financial performance and 2023 to a lesser extent, we have implemented immediate measures to address and redirect the trend line. Most importantly, supported by key leadership changes and the introduction of a more robust framework for capital allocation based on financial metrics and measured KPIs.
Key measures include: number one, the shutdown of CNN+. Number two, restructuring the scripted content portfolio on the linear net, kids and animation, direct to HBO Max films as well as international local content not sufficiently supported by robust enough investment cases. Number three, a more balanced approach to external licensing as we embrace a more holistic content monetization model for Warner Bros. Discovery globally, generating significant revenue upside while protecting key strategic franchises such as Friends, Big Bang Theory, Game of Thrones, etc.
Number four, implementing an HBO Max distribution strategy aimed at wide availability as opposed to D2C only distribution. As well as number five, greater accountability, alignment and communication across businesses. Turning now to synergies. Our work on integration and transformation since closing gives us increased confidence in the synergy opportunity. Every day, over the past 15 weeks, I have experienced the muscle memory that many on our integration teams have built over the past years of change and integration. We have already implemented initiatives totaling more than $1 billion of run rate impact.
This will grow from this point, the opportunity to implement transformational change across the global organization is enormous, and we're being thoughtful about its prioritization and cadence. Individual initiatives range from direct merger-related opportunities such as consolidating our real estate footprint against hybrid and agile work environments to opportunities tied to David's operating philosophy as one integrated company. The latter opens up tremendous transformation potential along systems integration, process harmonization and importantly, optimize utilization of our O&O promotion and advertising potential.
I am very pleased with how well the program has progressed so far and based on the savings potential in our initiative funnel, I have full confidence that we will expect at least $3 billion of synergies overall, with $2 billion to $3 billion of synergy realization in 2023. Naturally, we'll update the market regularly as certainty on value and timing increases. With that, I want to share our current thinking on the 2022 and 2023 financial outlook.
As you may recall, we first developed our guidance for the combined Warner Bros. Discovery 15 months ago. Today, after 100 days of thorough analysis and financial planning post close, we are adjusting our 2022 and 2023 EBITDA outlook, primarily based on: first, a less favorable macroeconomic backdrop resulting in a more conservative outlook overall and for ad sales specifically. Second, a change in the streaming industry dynamics and our strategic response. And third, as noted earlier, the difference is in legacy WarnerMedia budget projections that were made available to us prior to closing versus what we now view as legacy WarnerMedia's budget baseline post closing.
Taking all these factors into account, 2022 will clearly be a transition year, and we see an adjusted EBITDA in the range of $9 billion to $9.5 billion. For further context, I'd like to provide some color on third quarter trends. Global advertising revenues in the third quarter will be impacted by some tough prior year comps, specifically the Summer Olympic Games, two NBA Eastern Conference finals games played in early July last year, as well as the sale of Chilevisin. And given the less favorable macro environment, we are seeing softer demand and the scatter market at the moment.
As such, we expect Q3 global ad sales to decline by high single to low double digits based on current booking trends. On the positive side, we are beginning to see the impact of our course correcting measures and we expect some synergy capture beginning in the back half of this year. Furthermore, we expect to generate free cash flow of around $3 billion after cash cost to achieve in 2022. On that basis, I am expecting net leverage at year-end to be approximately 4.8 times. Turning to our outlook for 2023. Based on the full year impact of our 2022 corrective actions and $2 billion to $3 billion of synergy realization in 2023, we expect adjusted EBITDA to be at least $12 billion.
We expect to convert approximately 1/3 to half of our adjusted EBITDA into free cash flow in 2023 as we make progress towards our long-term target of approximately 60%. The cadence of content investments, restructuring spend, capex and working capital improvements will impact the timing of free cash flow generation. With that, I want to give a quick snapshot on our balance sheet. We are reiterating our long-term gross leverage target of 2.5 to three times, which we expect to hit by the end of 2024, and our gross leverage will be within our current ratings category by mid-2024 or earlier. As stated before, we will continue to dedicate virtually all free cash flow generated to debt reduction until then.
We had $53 billion of total debt at the end of Q2, including $6.5 billion of term loans. Importantly, our debt financing is generally long term with an average maturity of more than 14 years and a 4.3% average interest rate and equally importantly, interest rates for the vast majority of our debt are fixed. We have no remaining payments due in 2022, and we currently have $1.3 billion due in 2023 and $4.3 billion due in 2024. Also note, earlier this week, we finalized the post-closing working capital adjustment process with AT&T as part of the merger agreement.
And as a result of that, AT&T will pay us $1.2 billion in August. With that, and combined with prepayments made in July, by the end of August, we will have paid down $6 billion since closing the transaction in April. We've covered a lot of ground today, but we've really only scratched the surface with respect to the significant amount of strategic work being done across the organization. And we'll take you through a much deeper dive with a comprehensive look across continent networks as well as D2C at our Analyst Day towards the end of the year.
In closing, if there is one key message to take away is that we have never been more excited about the underlying strength of the creative bedrock of this combined company and the broad monetization opportunities for decades to come. David's leadership team has come together quickly, and we're fully focused on driving hard to deliver the value upside of this combination, and I remain excited to share our progress with you along the way. With that, I'd like to turn it over to the operator, and David, JB and I will be happy to take your questions.
