Sinclair Inc (SBGI) 2003 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Sinclair Broadcast Group Inc First Quarter 2003 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 recorded. It's now my pleasure to introduce your host, Mr. David Amy. Mr. Amy, you may begin.

Thank you, operator. In the room with me today are David Smith, President and CEO and Lucy Rutishauser, Vice-President of Corporate Finance and Treasurer. Before we begin I would like to make our forward-looking statement and to remind everyone that redistribution of this call is prohibited without the written consent of the company. Forward-looking statements. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties.

Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors as set forth in the company's most recent report filed on Form 10-K as amended with the SEC and as included in our second quarter earnings release. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect future events or circumstances. In accordance with Regulation G and it's limitation on the use of non GAAP financial measurements including it's requirement to reconcile any non GAAP results to a GAAP equivalent, we will no longer be providing guidance or actual results for such non GAAP measurements as broadcast cash flow, after tax cash flow, or EBITDA based on programming payments.

We will provide free cash flow in operating income excluding certain charges through our earnings releases. As well as provide a reconciliation for these non GAAP financial metrics on our website at www.sbgi.net, under the investor information page, menu option Report and Filings. You will also find some changes to our income statement this quarter. Some required for the accounting rule and others to provide more transparent details The line item Other Revenue is now called Other Operating Division Revenues and includes revenue from our internet consulting company G1440 and Acrodyne which as of January 1 we were required to consolidate on our books. We also include a corresponding expense line item called Other Division Expenses. Previously this line was included in the SG&A line. Also, we now break out Corporate Expense which had previously been included in the SG&A line.

For 2002, cost associated with the early extinguishment of debt that had been reported as Extraordinary Losses are now required to be included above the pretax line. We reflect this as a separate line item called Loss From Extinguishment of Debt. And with that now we can turn to the financial highlights. For the first quarter on a reported basis, net broadcast revenues were up 5.5% or $7.9 m for net broadcast revenues of $152.5 m. The increase was due to strength in the local markets which were up 8% and national which was up 1.9%. Excluding political revenues were up 6.9%.

Considering the many revenue generating events in the first quarter 2002 that we did not have this year, we posted some very strong numbers. Last year we had approximately $4.4 m in incremental political, Olympics and Super Bowl revenues. However, our direct mail conversion initiatives more than compensated for these absent revenues. For the quarter we brought in an incremental $5.3 m in revenues and expect another $2.9 m in the second quarter. Operating income expense excluding certain charges defined operating income plus depreciation plus amortization of intangibles was $46 m. An increase of 6% over last year's result of $43.4 m. The increase was due to the $7.9 m in higher revenues and $1 m in lower film amortization. Offset by about $3 m of higher promotional expenses.

If you recall last year we did not promote during the February sweeps due to the Olympics. Plus $1.6 m of additional sales expense from the direct mail initiatives and about $900,000 in higher promotional sales expenses and from WNAB, the Nashville WB station not being in our numbers last year. Plus $900,000 in added corporate expense for the rollout of our new central and the removal of our salary and wage freeze as of January 1, and about another $900,000 in operating loss for Acrodyne which is now part of our consolidation. Margins for operating income excluding certain charges were 26.9% versus 26.1% last year. Earnings per share was a loss of 5 cents versus diluted loss per share of $6.72 last year. Of that last year amount, $6.67 per share was due to the cumulative effect for the change of accounting principle required under FAS 142.

Excluding that the loss per share last year would have also been 5 cents. Free cash flow use was $1 m net quarter versus $5.8 m generated in the quarter last year. The difference being attributable to the higher operating income and lower interest expense offset by higher capital expenditures. Free cash flow from discontinued operations which we had last year and deferred tax benefit this year versus a provision last year. And note here the free cash flow amount does not include the $36 m federal tax refund we received in the first quarter. And with that. Lucy will take you through the balance sheet.

Thanks, Dave. Cash on hand at March 31, was $49.7 m which reflects the $36 m federal tax refund which we received at the very end of the quarter. Debt on the balance sheet at March 31 was approximately 1,xx58 . Capital expenditures in the quarter were $12.7 m of which approximately $8.5 m was for the DTV rollout, $700,000 was for the news rollout and the remainder was for maintenance and repairs. We repurchased 195,000 shares of our class A common stock in the quarter at an average price of $7.94 per share. The total indebtedness ratio which is net of cash was 5.26 times through the sub debt on a covenant of 7 times. The improvement was primarily due to the tax refund. And through the HYTOPs, leverage was 5.95 times. Liquidity, as measured by our available balance under our revolver plus cash on hand at March 31 was $216 m. We are actively considering a number of alternatives for raising funds to redeem the 11 and 5/8% HYTOP security.

The alternatives include the issuance of notes, issuance of notes convertible into shares of class A common stock, a draw on our bank line of credit or some combination of these or other financing methods. In connection with these possible transactions we are also contemplating creating a wholly owned subsidiary of Sinclair Broadcast Group to hold substantially all of our broadcast assets and liabilities including the debt under our senior bank credit facility and our public bond but not our series B preferred securities, common stock or any convertible notes possibly issued in connection with the HYTOPs redemption. The HYTOPs mature on March 2009 and are currently in their second call period with the call premium of 4.65%. At 11 and 5/8% they represent a very expensive piece of debt in our capital structure. Now I would like to turn the call over to David Smith to discuss our operating performance in the first quarter and our outlook for the second.

Thank you, Lucy. On a monthly basis first quarter times sales excluding political were up 12.1% in January, up 4.1% in February, and up 6.7% in March. Local was up 8% or up 8.3 excluding political while national was up 1.9 or up 4.7 excluding political. Our local revenue mix was 61.3% versus 60.5% last year. Categories that were up in the quarter were services which was up 5%, auto up 11.5%, restaurants up 10.4, fast foods up 4.7, movies up 13, and schools up 23. Few categories showed weakness. The political revenues in the quarter were $600,000 versus $2.3 m in the first quarter last year.

Revenues from the Super Bowl which aired on 8 of our ABC stations was 1.2 m versus $2.9 m last year when it was on 20 of our Fox stations. And last year also included $1 m in Olympic revenues. Our direct mail conversion initiatives generated $5.8 m and another $3.7 m is expected for the second quarter of 2003. The $9.5 m is the result of 25 markets selling air time around 1 mailer or the May sweeps. As mentioned earlier, the revenue generated from this initiative more than compensated for the absence of political, Super Bowl and Olympic revenues. The war in Iraq resulted in approximately $2.2 m in lost revenues with about half coming from the auto category. Through March 18, we were on track to meet our prior guidance of up 6.6% to 7.1% for the quarter.

Our WB and UPN stations had the greatest gains in the quarter, up 12.3% and 19.6 respectively and our Fox stations were up 1.4%, our ABCs were up 9.9% due to the Super Bowl while our CBS stations were down 11.5% due to political and NBCs were down 3.5% also due to political and Olympics. During the February sweeps, ratings on our stations in the key 18 to 49 demo and the 5 P.M. to midnight time period were up 2.7% out performing the networks which were down 8.6% of prime time. Our Fox stations benefited from hit shows such as American Idol and Joe Maire and our late news benefited from the many weather related events in the quarter. During the quarter, we converted the 10:00 P.M. news at our Fox affiliate in Rochester, the 10:00 P.M. news for our WB in Raleigh, North Carolina and the 9 P.M. news on our WB in Oklahoma City to our new news central product. Turning to the second quarter of 2003, ad spending in the second quarter has been some what volatile despite the war being over.

Although April was strong with time sales up 6% May is basically flat and June is pacing down 2.5%. Both local and national are showing weakness in the second half of the quarter. Categories that are currently showing weakness are auto, particularly Ford, Chrysler, Telecom, soft drinks, fast food, movies and tourism. Restaurants and services are showing strength. From an affiliate standpoint, our WB Group is pacing up almost 5%. Our UPNs are up about 10%. CBS stations are pacing up approximately 9%.

And the NBCs are pacing up 6%. Our Fox stations and ABC stations are pacing down. In this quarter, we expect to convert our 10:00 P.M. news on our Fox station in Pittsburgh and add a 10:00 P.M. news to our WB in Tampa, Florida. Keeping in line with other broadcasters, we will not be providing revenue guidance from the expense side, we expect television production and television SG&A expenses to be $75 m or up 3.7%. With that, operator, we would like to open it up to questions and would appreciate it if we could try to limit our questions to one per person. Thank you.

Thank you. At this time, we would be conducting a question and answer session. To allow everyone the opportunity to ask a question, please limit your time to one question. 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. A confirmation tone will indicate your line is in question queue. For participant using speaker equipment it may be necessary to pick your handset up before pressing the star keys. Please hold while we poll for our first question. The first question is coming from Mr. Drew Marcus with Deutsche Bank Securities. Sir, please state your question.

Actually this is Will Hemmenden for Drew Marcus. Just a quick question, if you guys can give us color on how auto basically fell off, specifically if you could through the months of Q1 and more specifically on how it's doing right now. Thanks.

Well, we are looking for someone to give you an answer here.

There is data here. Stand by.

Let me give it to you as % of the total revenues.

Okay

So in January, automotive was about 24%. In February, -- I've got January and March for you. And March was also about 23%. I apologize for not having February here for you. But auto as a % for the entire quarter, as David said, was up -- when we started to see auto fall off was during the war. About half of the revenues that we lost from the war came from the auto category.

So those advertisers haven't come back?

Well, most of it is - what is down is the manufacturers. Not so much the local dealers, but it's the manufacturers. And as David mentioned primarily Ford and Chrysler.

Little more color. In our discussions with the folks out at the stations and at the national level, what the feedback that we are getting is that in general the number of the manufacturer incentives of zero % financing etcetera have really run their course and at the moment they are holding back in terms and cutting back in terms of their advertising. At the same time there has been an improvement in the total number of units that are expected to be sold this year. We are somewhat optimistic that we will be seeing strength a little bit later in the auto and it will come back to us. At the moment, there is a weakness there.

Our next question is Mr. Jim Boyle from Wachovia. Mr. Boyle please state your question.

Good afternoon. Did the price paid in Evansville for fourth place Fox VHF before TV de-reg surprise you?

Well, I have heard any number of different numbers that were paid for. I haven't seen any -- I'm not sure what the absolute number is at this point in time other than my impression is that it's a high number.

Were you surprised the very high number was paid in front of deregulation?

Yeah. I think so. I think that -- I don't know who the buyer was, whether it was a out of market or in-market buyer. But it points out something that we've said for a long time that there are people in markets around this country who are going to say I want to be in the television business not withstanding deregulation and that's just an example of somebody saying I want to be in Evansville, Indiana, for whatever reason. I don't see people rushing in New York to do that. But, certainly in smaller market USA you will see some of that stuff going around.

Is that hard for you for some stations that are non strategic for you?

Sure. We have always said there are stations out there that aren't strategic for us. If and when the deregulation happens or somebody comes and knocks on the door and says, Hey, I just have to be in this marketplace because I own a newspaper or I own a drugstore, anniversary store or car business or whatever, then we were certainly ready to sit down and have those conversations. We are not interested in giving anything away as you can imagine.

Thank you.

Our next question is coming from Mr. Bishop Jean from Wachovia. Sir, please state your question.

Hi, it's David. Can you tell us how the news rollout you have made a significant commitment to roll up news in I forget how many stations and markets. If you would, just give us the quick primer on the expenditures, timing of it and how long you think it will take for you to start seeing fruits of the investment.

We were already seeing the expense reductions take place as a function of the markets that we injected, if you will. our centralized operation into That's already started. I would think on an overall basis, we would like to see everything done that's going to be changed over and or launched from scratch done by year end. As I said in the past, it's our intention to want to be up and running and completely functional for the 2004 election year. And we believe we are fully on track to accomplish that.

And incrementally, how much extra however would you use the metric these days? Am I allowed to say BTF anymore?

How we'll respond to it is another story.

You know what, that's the whole other thing. I can't get the latest mathematics back to your quarter by quarter release of February 13. So maybe you have to go over that with you in E-mails. I just can't get there using the new math. I don't know if I'm supposed to or not.

Bishop, we have up on our website the 2002 quarters and the first quarter of '03 reconciled back to the operating income excluding certain charges and also the free cash flow. We have that up on our website.

Well, I will take a shot at it. It's like doing the math with my 11-year-old daughter. It's a lot of fun. If I have a problem, I will holler. Thanks.

Thank you. Our next question is coming from Mr. Victor Miller with Bear Stearns. Mr. Miller please state your question.

The Fox network we're probably looking at 16% or so dollar increases, Warner Brothers probably 25 to 30% in terms of dollars. How does that translate for you in terms of the tone you think you will see coming out of that upfront given the fact that it's the majority of your cash flow. Thanks.

I would think it's a respond positively to that given the fact that we had a very good February book with our Fox and WB. As we mentioned earlier, the WB numbers were up significantly during the first quarter compared to last year and we talked historically about the importance of that statistic in that the WBs typically are the first off the buys and the last back on to the buys. That's a good indication that the WBs are coming back and growing their revenue line. As far as Fox, they posted one of the strongest books we've ever seen in February and that has benefited our 10:00 news or 9:00 central time news and our Fox affiliates and that adds a tremendous amount of value to those Fox properties going forward. The market as we mentioned is weak and there is nothing we can do about it. But from the stand-point of the strength of the company and the positioning of the company, we are certainly in the right place.

Thank you.

Our next question is from Andy van Hauten with Deutsche Bank. Please pose your question.

Good afternoon. In the press release and you commented on the call regarding the potential refinancing of the HYTOPs and a variety of alternatives. I know that you probably don't want to go into this into a lot of detail. But could you talk very generally about your thoughts of bringing the financing up at this time? Does it have to do with the drop in the call premium of the HYTOPs, the strength in the high yield market. Potential thoughts about acquisitions you may have coming down the line.

The answer is yes to those, your speculations. The HYTOPs are the highest costing piece of capital that we have at 11 5/8 and despite the benefit that we receive from a tax standpoint it's still very expensive. When you look at the strength of the market now, look at one the other day, a 6 1/2% bond, the interest rates are so compelling right now to take advantage of that and certainly with the step down and the premium on, the call premium, that adds more incentive to us. And I have been saying for probably the last six months on these calls and the conferences that the HYTOPs redemption or call is a real priority for this company. And that has not changed and we -- it's a very complicated structure. Any of the investors out there have or hold HYTOPs, you may appreciate the complexity that the company went through back in '97 when we issued the HYTOPs in terms of the structure there with the Sinclair Capital and at KDSM De Moines television station being put in place as collateral. It's taken a couple of months or so to just work through all the legal issues that relate to kind of unwinding the transaction so we can be in position to make a call on that.

Great. Thank you very much.

Our next question is coming from Mr. Victor Miller from Bear Stearns.

Just a follow-up. On your dowopily stations, when the June 2 rules change and it looks like they will change to favor your ability to buy in your local marketing agreements, how much will you have to pay for those local marketing agreements and how much will they contribute in incremental cash flow? Thanks.

The debt that's out there is about $35 m.

And the incremental cash flow associated with those?

I remember we talked about this.

On page 496 of our notes here it will take us awhile to scroll through -- We will have to get back to you on that one, Victor.

Thank you.

Only good.

All right, thanks.

Thank you. Our next question is coming from Mr. David Goldsmith with Buckingham Research. Mr. goldsmith, please state your question.

Good afternoon. Confused is the best way. All the other network affiliates except Fox and I think you said NBC are pacing up -- Fox and NBC are pacing down and at the same time you talked about auto advertising being kind of weak. Why would those other network affiliates be facing up if they all have the same amount of auto advertising? Particularly with Fox's ratings being as strong as they are.

There isn't an absolute answer to that other than to say that there are some variances in all the markets. What goes on in the market with a Fox affiliate in Baltimore isn't necessarily consistent with the Fox affiliate in Columbus, Ohio, or with the CBS in Sacramento versus Portland or such as that. There is no absolute answer. I think we are kind of looking at the market right now asking ourselves generally given that the war is over, given that there is good economic news in lots of places and interest rate environment is what it is, we are I think kind of like a lot of other broadcasters trying to understand why at this instant and time have certain advertisers chosen to do what they are doing. We can tribute some of it to good salesmanship in one market and not necessarily in another market. There is no -- it's very foggy. And I'm sure it will become clear any minute now to all of us as an industry. I don't think what we are seeing is an anomaly to us. Frankly.

Thank you. The next question is coming from Mr. Richard Rosenstein from Goldman Sachs. Mr. Rosenstein please state your question.

Big picture question with the respect to use of cash. Can you give us a little guidance on your strategy over the near time. Your highlight that debt reduction is a big priority. But I see you did buy a tiny bit of your stock last quarter and wanted to know if there is a certain price it get into that investment and what about other investments on your car dealership or any of the near term.

I answer part of question. Our biggest use of cash for this year is going to be to reinvest back into the company. Particularly with the DTV and news rollout. Anything else you want to add?

I'm sure you can appreciate we aren't going to make any comments on what we might be doing 60 - 90 - 120 days from now in terms of acquisitions or anything else other than to point out that where there are opportunities to produce the rates of return that we look for, we will certainly engage in that process.

And I don't think -- we talked about the fact that there are a number -- we keep talking about nonstrategic markets and values that relate to those nonstrategic markets and potentials sales of a couple of these markets as well. And just a value that might bring in and that certainly hinges on what happens over the next three weeks in terms of de-reg. Is it cash that will come in, would it be a trade from one station to another market. There any number of federations that may occur here once the de-reg becomes clear.

I think it's safe to say that clearly everybody's standing on the sidelines with the -- ready to go play. We no sure what game to suit up for, yet. We know there's going to be a whole lot of games but we're not sure what the games are. We wish it would hurry up like everybody else. But we are all sitting here looking at our clocks and, well, here it is the Thursday and we have another couple weeks left and, okay, who will be coming to who and who is going where? We are all doing it every day. We are just waiting. Waiting to get started.

If I can follow-up on Victor's question earlier about the -- if we bought in some of the elemays, what would that equate to. An that would be about a $5 m expense savings for us. And that's an annualized number.

Ladies and gentlemen, as a reminder if you would like to ask a question please press star-one on your telephone key pad at this time. Our next question from Mr. Paul Sweeney with Credit Suisse First Boston. Mr. Sweeney, please state your question.

It's actually Shawn stepping in for Paul. Can you guys just talk about as you continue to roll out a new central product, how you think about the time frame in terms of profitability in those markets.

We expect they will be profitable very quickly. The entire -- you almost have to look at the entire news organization any more as a separate discreet business. That's the way we tend to kind of bifaricate it internally. So when we look at a news business, we say here's how much is expected to cost to run it on an annual basis and here is the revenue we expect and here's the margin we expect. As a collective unit, it's a very profitable business and as we add on businesses and/or modify businesses, the margin is only going to get better. I frankly would think and I will try to use Flint as an example. We launched Flint last year and I would fully expect that Flint should be profitable this year. If not sooner. We think we have a very workable, very bonafide structure that wouldn't surprise us much in the same way everybody followed us when what we did elemay in 1991. It wouldn't surprise us that for companies that have the scale as ours that they will sooner or later avail themselves of the economics of this model. In the final analysis, it has no impact on the product on a day to day basis if it's done properly. We are very happy about it and excited about the opportunity it presents us and look forward to becoming a higher margin business in that space, across the entire platform.

Ladies and gentlemen, once again, it's star-one on your telephone key pad at this time. Mr. Amy, there appear to be no further questions at this time.

Thank you, everyone for participating in our call today. And that will conclude it.

Thank you very much, operator.

This concludes today's conference. Thank you for your participation you may disconnect all lines at this time and have a wonderful evening.