Sinclair Inc (SBGI) 2002 Q3 法說會逐字稿

Good evening, ladies and gentlemen, welcome to the Sinclair Broadcast Group Incorporated Third Quarter 2002 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone key pad. As a reminder, this conference is being record. I would now like to turn the conference over to your host, Mr. David Amy, Executive Vice President and Chief Financial Officer, thank you, sir, you may begin.

Thank you, operator. In the room with me today are David Smith, President and CEO and Lucy Rutishauer, Treasurer. Before we begin I would like to remind everyone that redistribution of this call is prohibited without written consent. Certain matters used on this call may include forward-looking statements such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those contained in the forward-looking statements as a result of various important factors set forth in the company's most recent report 10K filed with the SEC on March 29, 2002 and is included in our third quarter earnings release. The company undertakes no obligation to publicly release the result of any revision these forward-looking statements that may be made to reflect any future events are or circumstances.

With that out of the way, let's turn to our financial highlights and third quarter on a reported basis. Our net broadcast revenues were up 10.3 percent or $15.3 million dollars for net broadcast revenues of $163.9 million. The increase was due to strength in the local markets which are up 9.8 percent excluding political and incremental political advertising dollars were $5.6 million. Broadcast cash blow increased 24.2 percent or $13.9 million dollars for a broadcast cash flow of $71.3 million. These increases were due to the higher revenues netted by incremental sales expenses associated with those revenues and offset by a slight increase in our film attainments. Our after tax cash flow was 44 cents an increase of 19 cents higher than last year. The increase in after tax cash flow was due primarily to the higher revenues lour interest expense as a result of refinancing activities which was offset by higher film amortization and higher expenses associated with those increased sales. Broadcast cash glow margins increased to 43.5 percent invest quarter due to the reasons I just discussed. This is the 11th consecutive quarter that we have met or exceed expectation and consensus estimates.

For 2002, we have adopted a FAS 142 accounting for goodwill and other intangibles, had we adopted it for the second quarter of '01 the impact would have been to reduce our amortization of intangibles by 11. -- [Missing Text]$22.1 million. This would have resulted in a basic loss per share from continuing operations to improve from 39 percent loss per share to a basic loss per share of 25 cents. You'll need to keep a couple of ideas in mind here as I go through some more information on FAS 142. Keep these in mind regarding Sinclair. First, during the '90s with' wired the neighborhood of about $3 billion in television assets and second our valuation methodology was based on we actually valued our TV licenses separately and placed the balance of our valuations into goodwill which may be different than what you're used to seeing, there's a lot of broadcasters use the residual valuation method where they would place the difference between other hard assets and intangible assets into license assets. So and as we go on here, keep that in mind as I describe the balance of this 142 issue. So in accordance with FAS 142, we are required to Defendant our broadcast licenses and goodwill for impairment.

This is a two step process. We have [indiscernible] the first step. In the first quarter of this year, we wrote down about $41 million dollars in association with our broadcast license which was accounted for under cumulative change and accounting principle. The next step is to have an outside party prepare a valuation on the balance of our intangibles, so in the fourth quarter we expected to see that completed and we expect to see an impairment charge. After the first phase of testing we identified 15 markets wins our software company which had a net carrying amount of 933 million of goodwill, which we are currently testing so with that, we expect to see a significant impairment charge incurred during the fourth quarter. We'll move on from here to Lucy and she'll take you through the balance sheet.

Thanks, Dave. Let's try the leverage first. Leverage improved significantly in the third quarter due to the sale of WTT-TV in Indianapolis and from free cash flow generated from operations. Leverage, net of cash and is defined in the bank credit facility with 5.8 times on a adjusted EBITDA of $251.3 million dollars and what 6.55 times dilute high tops on adjusted EBITDA of $252.9 million. Senior leverage continues to be low at 1.56 times. Cash on hand at September 30th was $44.1 million and at the end of the third quarter it was zero drawn under the revolver. We had approximately $176 million dollars available to draw plus our cash balance on hand. So liquidity is not a problem. Capital expenditures in the quarter were 18 million. We have just under $70 million dollars remaining. Now I would like to turn the call over to David Smith to discuss our operating performance in the third quarter and our outlook for the fourth.

Thanks, Lucy. Good afternoon, everybody. On a monthly basis, third quarter time sales excluding political, we're up 3.6 percent in July. 4.8 percent in August and 13.7 percent in September. Local was up 9.8 percent or up 10.7 percent including political while national was up 4.2 percent including political. Our local revenue mix was 58.2 percent versus 56.9 percent over last year. Categories that were up in the quarter were service which was up plus 18 percent. Automobile was up 4 percent. Medical category was up 11 S restaurant up 35, home products up 49. Telecom was up 13. Categories included fast food, which was down 8 percent and soft drinks which was down 5 percent. Political was 5.9 million versus 320,000 in the same quarter last year. All of our affiliate groups were up in the quarter on an ex-political basis our NBC stations had the greatest gains of almost 14 percent. Followed by our CBS [indiscernible] which were up 10 percent. Our fox stations grew 9 percent. ABCs were up 6 percent and our WBs and UPNs grew at a 2 percent rate. Turning to fourth quarter October time sales were up 4.4 percent or 28 percent including political, November is pacing up approximately 7 percent or 15 percent including political. Our current pacing for December is about 14 percent. On an ex-political (ph) basis our WB group is posting great numbers up 13 percent in part due to the strong fall season. Our fox group is pacing up 7 percent and our CBS stations are up 21 percent. Our NBC, ABC and UPN station, pacing currently about flat. The auto, legal department stores, movies, home products and telecom categories showing some early strength.

Fast food soft drinks are slowing a little bit of weakness. In the fourth quarter we expect to benefit from approximately 17.4 million of political advertising revenues or about 28 billion for the year. We're seeing the dollars come in from races like Ohio, Maine, North Carolina, Illinois, West Virginia, California. Our outlook for the fourth quarter is for net broadcast revenues to be up 13.6 to 14.8 percent or 3.6 to 4.8 excluding political. Forecast cash flow is expected to be up 21 percent to 23 1/2 percent. That would imply an ATCF per share of 50 cents to 52 cents. On a full year basis network broadcast revenues would be up 7 percent to 7.3 percent or 2.9 percent to 3.2 percent excluding political. BCF would be up 12.1 percent to 12.8 percent and ATCF would be up 1.47 to 1.48 per share. At this point we're not yet prepared to discuss [indiscernible] as we are still in our budgeting process, however we do want to highlight a couple of points for those of you who have been following the business for some time and those of you should already understand this. As it pertains to political, this part of the cyclicalty, this is really part of the cyclicalty in our business, comes and goes ever re two years for those of you who understand it and follow it routinely. Those dollars not wholly incremental. The actual reality is that political crowds out our normal business, if you will in other words it displaces in some cases local spot, national spot. And if we didn't have political, those spots would be sold any hours, the only issue is the rate at which they would be sold. So the bottom line as you're looking at the past year, is it the underlying business really is significantly more healthy than it was in 2001 and clearly is moving in the upper direction as we've kind of showed you today and not all political dollars will need to be replaced. That's our expectations. With that, that kind of wraps up our brief summary, with that, operator, we're ready to answer questions.

At this time we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To remove your question from the queue, please press star two. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Mr. Tim Wallace with Banc of America Securities. Sir, please state your question.

Thank you. David, if I didn't mishear you, did you say that December was pacing up 14 percent?

Correct.

Could you elaborate a little bit on that. That sounds like a pretty dramatic uptick from November because I think you said November was in the high single digits ex-political.

Yeah, I'll try that for a little bit. It's such a strong pacing at the moment and as we mentioned the guidance we're [indiscernible] in terms of the total quarter December, if December's pacing held that number would be higher as far as our guidance. We don't expect that December pacing percentage to hold at that level. We expect to see that drop-off some, it's been stronger than we expected and there's a lot of dollars that are coming in. And we mention a number of times that we see momentum in our business and we continue to see momentum in the business and that's just one example of what we're seeing.

I'm sure you may have seen this recently, there was an article in business week, this week that, talked about how the number of movies that are going to be released in Christmas time this year is going to be unbelievable and people are literally, studios are now literally fighting to get slots to get their movies out. So when you look at stuff like Harry Potter and a half dozen other movies coming out, we have every reason to believe there's going to be some significant spending going on. There just seems to be this view in the industry right now and at least in our view of the economy that things aren't that bad, believe it or not. And people are spending money and people are going to the movies and people are going out and people are buying cars, in spite of what the media might want to lead you to believe. The world isn't that bad. And as a function of what happened last night, it's arguably even better now, at least of function of what happened today, so onward and upward.

Our next question comes from Mr. Victor Miller from Bear Stearns. Please state your question.

Good afternoon. For along time, never had signed affiliation agreements with the fox network and I think this is a big change to have a three year for your 20 station group. I think that's a change for you. Could you just talk about maybe what led to that and maybe some of the significant terms that show you know how well you did in negotiating with the network and just talk about your prospects for your duopolies, bringing your other [indiscernible] into the maze with the duopolies given what happened last night.

Well, I don't want to bore down too much into the details of the discussion, but needless to say, it clearly made long-term sense for us and for the fox to get together and figure out how to do business on a more level playing field, if you will. And we sat down and put aside a lot of our historic differences and philosophy and other things and said let's just do this because it makes sense for both of us. So I don't know this is really an issue of leverage versus anything else. I think it was a point in time in history where it made sense for them, which historically it has and it made sense for us and we simply came together and said now is a good time. It really isn't anything more complex than that and I certainly wouldn't read anything into it, above and beyond the fact that it made sense for both of us to do it at this point in time.

Our next question comes from Mr. Paul Sweenny with Credit Suisse. Please state your question.

Shawn Feelly (ph) stepping in for Paul. Can you give us an update on the portfolio rationalization program and more broadly talk about the M&A climate.

Is it Shawn is that right?

Yes.

I think the M&A rationalization process is by no means over. I think there is some reluctant [indiscernible] if you will, on a part of a number of broadcasters out there to want to enter into transactions until they have a clear, an absolute crystal clear view of what the government going do do supposedly in the next spring or summer. Having said that, if it were Sinclair looking to do those transactions, Sinclair's MO historically has been to go create transactions that make sense for us and execute them well within the con fines of the rules. And we've done that very successfully for a long time. I would tell you, however, that we're probably the only broadcaster, I'm sorry to say this, but we're the only broadcaster in the country, who does that and has historically done that. So what I would tell you that the lawyers who advise the big broadcasters and the small broadcaster, under no circumstance, at least to my way of thinking and visualizing would under any circumstance say to their client you can go create a transaction even though I would tell you that the FCC has approved transactions of the nature that we've created. So in other words, if you look at a structure that we've created today, has been approved by the FCC, there are no broadcasters out there other than a handful of small markets but clearly none of the large players who are potential players for some of our asset was ever enter into those transaction, the lawyers would not permit them, even the FCC has blessed them. So you go figure why lawyers do what they did and what I would tell you that and I've said this in the past is that the lawyers to a large degree have inhibited and hampered broadcasters from being able to grow their businesses. Fortunately it hasn't impaired us.

Our next question comes from Andrew Marcus with Deutsche Banc Alex Brown. Please state your question.

Good evening, everybody. David, can you talk about the -- can you give us numbers on the impact of auto, can you give us a sense of how you approach auto in '03 as you've been through these cycles before and you're a student of the auto business in addition to being an expert on the broadcasting business, how you think the auto guys will approach their advertising budget next year.

Well, I read something that literally just today on the internet that one of the automobile manufacturers had announced they fully intend to spend significant money next year in advertising. And it's Ford has indicated they may increase their ad spending by as much as 25 percent. So the only thing I can tell you that if Ford does it serve going to have to do it to file suit. So you know notwithstanding what the financial logic is that they've sold all the cars they're going to sell this year and last year because they've been giving them with a in terms of the interest costs. Far be it from me to tanned up and say they're crazy or that they're wrong, when Ford has already come out and said here's what we're going to do. So you know I can only go off of what they're telling me which is they may be up as much as 25 percent next year. And if they're up 25 percent, then I'll expect the foreign car manufacturers to be up certainly anywhere in that neighborhood as evidenced by the past which is to say that when GM stops spending and Ford stops spending and Chrysler stops spending. The Japanese [indiscernible] the Hondas and Lexus, et cetera, got more money into market share. So if Ford is spending 25 percent, is it possible that other guys will spend 35 percent I didn't, but I think we're going to stand by and get our fair share of it, I can tell you that. I think it's simply bodes well, they're gearing up to [indiscernible] so that's a good thing.

Our next question is from Mr. Richard Rosenstein with Goldman Sachs, please state your question.

Thank you. Are you seeing any difference in performance by market sides in any way? We've heard from a couple of other companies that because there's no really no scatter inventory left at the network right now in the fourth quarter some of that demand has been spilling over into national spot predominant and top 30 to 50 markets and I'm wondering if you're seeing any of that activity and if there is any disparity in performance at different size markets.

Yeah, Rich, as I kind of look down the list of markets that are up and we have so many markets that are really up in Q3 and Q4 on an ex-political basis that it's really hard to point to any one or any particular region where we're seeing softness or extreme strength. The only thing I would add to that, rich, is you know this very well, is the larger markets when everything tightens up, the larger markets are the first, the smaller stations in the larger markets are the first to get the money. The issue is how deep does the advertiser have to go to get what he wants in terms of an average cost? So whether that means it gets down to the 200th mark other the 80th mark is a continuous variable that it's very difficult to read, only because I can't tell you what goes on in the top 15 markets or so because we're not there. So I can't, if I was in New York City and high a reference point, I could certainly or if I at WB in New York City and I saw what was spilling over I could then gauge that as to what would happen in Paducah, Kentucky, but unfortunately I don't have that data point.

Our next question comes from Mr. Bill Myers from Lehman Brothers. Please state your question.

Hi, hi David. Your philosophy with news has always been to make money or get out. Can you update your news strategy and centralizing the operations.

Absolutely. It's one of our topics these days. We launched what I would only say is our first of what's going to be many in 2003 of centralized/decentralized news operations and I'll tell what you that means. Is that our model is really predicated on a very simple notion that what we replicate every day in the context of a news organization is unbelievable. In other words, when I put a piece together in Columbus, Ohio involving CNN, involving a Gulf war as an example, the predator aircraft drone aircraft that blew up the [indiscernible] automobile the other day on Sunday, that same story is being created 20 different times multiple times a day at all of our television stations that are in the news business. And what we think made very simple sense was we're only going to create it one time and we'll deliver it from here. So in a sense, what happens is you don't have this redundancy and this obvious repetitive nature of news, repetitive from the standpoint everybody is doing the same thing. So what we're finding is that we can produce a very, very effective newscast that spends as much or more time focusing on local news while putting together national news one time that's disseminated to everybody. We just launched our first trial balloon of this and I would think about television, there's no such thing as a trial balloon once it's on the air it's done. In Flint, Michigan, a week ago Monday. And the reports that we're getting back from the market marketplace suggest that our newscast is better than anybody else in the marketplace. So that's the kind of feedback we're getting. And of course, we're obviously excited about that and what it means long-term as we attempt to become more efficient at offering better content [indiscernible] city where we do news. Now, obviously it's easier to go into a marketplace and restructure a news organization to do what we want to do, but having said that, we're not only going to be restructuring, but we're going to build out newscasts essentially [indiscernible] city where don't have news next year. So hypothetically in a Cincinnati, Ohio, that's a five station marketplace and I'm not in the news business, which means I'm not typically playing for the 30 percent of the dollars or 30 percent or 25 percent depending on what the market. I'm not playing for that money. I intend to be in that business and the beauty of our model is that that our cost to produce a newscast is roughly one half or less than one half what it typically costs somebody else to do it. Because I don't have that infrastructure that creates all that other content T gets created one time. So we're very upbeat and encouraged by what we've created here. And as I said, I think we fully expect in the year 2003, to restructure most of the news' that we do now and launch [indiscernible] in all the other markets. So news for us is going to be in all the markets where we currently don't do news is going to be a whole new revenue strain that here to fore we haven't been able to play in. So it's going to be a big business for us for probably the next three to five years.

Our next question is from Mr. Greg Cools (ph) from Morgan Stanley Dean Witter, state your question.

Good evening Lucy and David. The quick question, the political number that you gave for the year is that net political?

Yes.

The $17 million for the fourth quarter. And then Lucy, what is the comparable -- forgive me for my memory not serving me well, what was the net political number in 2000?

$26 million.

$26 million? yes.

So just something to keep in mind there, Greg, this is kind of an ad on to bill's question. Needless to say that every two years [indiscernible] this was an off year, essentially what we did in 2000 for the presidential election, one of our charges here is to literally get this infrastructure up and running by the end of the year. Which I don't need to tell you what that means to us, when you're in news in 20 more cities or so, whatever it happens to be that is just basically more free money for us. So literally the cost of everything that we're going to be doing here for the next year-and-a-half, believe me when I tell you [indiscernible] to other things we do is going to pay for itself in a few months. So we're looking forward to getting these things going and functional by no later than December 31 next year because the money is going to start rolling and we are going to be there to get it.

Our next question comes from Bishop Cheen (ph) with Wachovia Securities. Please state your question.

Hi, David. I know your balance sheet has moved around a little bit and I would be the last person to want to chalk up too much debt for you. Were k we simply go dilute September 30th balance sheet in terms of cap leases, the swap, I know some of this you gave and the notes to affiliates, cap lease and notes to affiliates, which I think that pretty much covers all the major categories in your balance sheet.

Bishop, we had total debt on the balance sheet of [indiscernible] $587 million before the high tops. And zero under the revolver, $375 million under the term loan. 1,060 million for the notes. Approximately $43 million for the fair market value of the swaps. About $5 million for the founder notes. And then we have the $35 million for the Cunningham debt. And about $69 million for capital leases and other. And then the $44 million of cash.

There are no further questions at this time. Would you care to make closing comments?

No other questions, operator.

There are no further questions.

Thanks very much, everybody. For tuning in. As we said earlier, we think 2003 certainly is around the corner, we're getting geared up for it, we have a lot of work to do. We're becoming clearly more efficient and more stream lined as the company in terms of how we're going to do business going forward. Our news [indiscernible] and things like that are going to be expanding significantly. We see a lot of up side, long-term upside in our business as a function of the things we're doing and know that everything we're doing is only going to return significant value to all of us. Thanks for being there and we'll see you soon.

This concludes teleconference, thank you.