Sinclair Inc (SBGI) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sinclair Broadcast Group, Inc. second quarter 2003 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 recorded.

It is now my pleasure to introduce your host, Mr. David Amy. Thank you, Mr. Amy. You may begin.

Thank you operator and welcome to Sinclair's first morning conference call.

In the room with me today are Dave Smith, President and CEO; Lucy Rutishauser Vice-President Corporate Finance and Treasurer.

And before we begin, I would like to make our forward-looking statement disclaimer.

Certain matters discussed in 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 reports filed on 10-Q and 10-K ,as amended and filed with the SEC and as included in our third quarter earnings release which we furnished to the SEC on an 8-K earlier this morning.

That was the second quarter earnings release, excuse me.

The company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances in accordance with (FD), this call has been made available to the public along with the webcast of the call available on our website, www.SBGI.net., under the investor information page, manual option, conference call.

The webcast replay will be available until our next quarterly earnings release.

Redistribution of this call is prohibited without the express written consent of the company.

Included today on the call will be a discussion of nonGAAP metrics specifically, television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements, but are provided as supplemental detail to help the public in their analysis and valuation of our company.

In accord with regulation G, a reconciliation of the nonGAAP metrics to the GAAP measures in our financial statements is provided on our website, again, www.SBGI.net., under the investor page, menu option, reports and filings.

And with that, we can now turn to the financial highlights of the second quarter.

On a reported basis, net broadcast revenues were up .7% or $1.2 million for net broadcast revenue of $174.9 million. Excluding political, net broadcast revenues were up 1.5%.

This is slightly higher than the $174.2 million estimate we provided on June 30th due primarily to FOX network making a payment on the last day of the quarter to our UPN station in Milwaukee as compensation for running the Fox Kid programming. As compared to the second quarter, 2002, on an ex-political basis, local spot was up 2.2% while national was flat.

There was approximately $900,000 of political revenues booked during the quarter versus $2.3 million during the same period last year. Our direct mail conversion initiatives however, more than compensated for those absent revenues.

For the quarter, we realize approximately $3.6 million in revenues compared to $800,000 in the second quarter last year. For the first six months of this year, revenues generated through direct mail initiatives totalled about $9.4 million. On a full year basis, we expect this amount to be at the high end of our $15 to $20 million forecast.

Operating income was $55.5 million, an increase of 13.1% over last year's result of $49.1 million.

We had a diluted loss per share of 2 cents compared to a diluted loss per share of 5 cents in the same period last year. Included in the net loss for the quarter was a one-time loss on the extinguishment of debt related to the early redemption of the high tops and their associated (coal) premium write-off on amortized financing costs. So excluding the $15.2 million charge from the extinguishment of debt, and net of its associated $5.4 million deferred tax benefit, we would have had diluted earnings per share of 9 cents which was substantially higher than consensus estimates of 2 cents.

Television broadcast cash flow, defined as net broadcast revenues plus barter revenues, minus television production expenses, television SG&A, barter expenses and film payments was $75 million or 2.9% lower than last year's BCF of $77.2 million. The $2.3 million decrease was due to about $1.3 million of higher expenses, primarily sales or expense to direct mail and $1.8 million in higher program payment, and this was offset by the $1.2 million in higher broadcast revenues.

Television production and SG&A expenses grew at a modest 1.8%, lower than the 3.7% we had previously forecast.

EBITDA, defined as BCF less corporate expense and minus the loss or plus the income from other operating divisions, was $68.8 million in the quarter or 4.2% lower than the $71.8 million we had last year.

$3 million decrease was due primarily to the lower BCF and the $1.8 million in added corporate expense for the rollout of News Central and the removal -- plus the renewal of our salary and wage freeze. And again, this was offset by about $1 million in net income related to our nontelevision operations.

We generated $6.2 million of free cash flow in the quarter even after spending $24.3 million on capital expenditures. BCF margins were 42.9% versus 44.5% last year and EBITDA margins were 35.1% versus 37.6% last year.

And now Lucy Rutishauser will take you through the balance sheet.

Thank you, Dave.

Cash on hand at June 30th was $16.2 million.

As Dave mentioned, capital expenditures in the quarter were $24.3 million of which approximately $6.7 million was for the DTV rollout; $13.1 million was for the news rollout ;and the remainder was for maintenance and repairs.

To remind everybody once again, next year's Cap Ex is forecasted to drop significantly as we wind down our digital TV and news buildouts. We estimate Cap Ex of about $20 million next year versus the estimated $80 million for this year. That's an additional $60 million in free cash flow before realizing any anticipated improvements in the operations as we head into a political year.

Debt on the balance sheet at June 30th was approximately $1,763.3 million. The full $225 million revolving line of credit was available to us, as nothing was drawn under it at quarter end.

Included in the debt number was $250 million of notes that we've raised in May to redeem the high tops. The new financings consisted of $150 million, 4 7/8% convertible senior subordinated notes through 2018 and that was issued at a premium of 103% and also a $100 million of additional 8% senior subordinated bonds due 2012. And, as I mentioned, the proceeds were used to redeem our 11 5/8% high tops and funding associated call premium. This refinancing will save the company approximately $8 million per year in interest costs.

Total debt in (INAUDIBLE) ratio, which is net of cash, was 6.14 times, well within our covenant of 7 times. Again, the increase in the leverage is due primarily to refinancing the high tops which was a mezzanine security with subordinated debt.

Had we not done the refinancing and left the high tops out there, leverage through the sub debt would have been 5 1/2 times and leverage through the high tops would have been about 6.14 times.

Now, as we've mentioned in the past, the company is contemplating creating a holding company structure. And if we do that, that would push the bank in the bond indebtedness closer to the assets and would leave the convert preferred stock and common equity at the holding company level.

Under a holding company, if we used the June 30th results, leverage through the operating company would have been about 5 1/2 times on the covenant of 7. So that's just over .6 of a turn.

Now, whether we decide to move forward with the holding company structure is yet to be seen. We are not required to do one nor do we need to put one in place but we are contemplating it.

Liquidity, as measured by the amount available under our revolver plus cash on hand, continues to be strong with $241 million in liquidity at June 30th.

Now, I would like to turn the call over to David Smith to discuss our operating performance in the second quarter and our outlook.

Thank you, Lucy.

On a monthly basis, second quarter time sales, excluding political, were up 6.4% in April. Up 1.1% in May, and down 1.2% in June.

Local was up 1.6%, or up 2.2% excluding political, while national was down 1.3% or flat excluding political. Our local revenue mix was 59.2% versus 58.7% last year.

For the 6 months ended June, we grew the top line, both including and excluding political ads spending. For the next six months net broadcast revenues were up 2.9% and 3.9% excluding - or up 3.9% excluding political.

Categories that were up in the quarter; services, which was up 11.7%; auto, up 5.3%; restaurants,excluding fast food was up 20.5%; Schools, up 18.7%; and home products up 23%.

Categories that were down were fast food, which was down 19.2%. Surprisingly movies were down 22% with fewer releases and soft drinks down 23.2%, mostly due to Pepsi and Coca-Cola. Political revenues in the quarter were $900,000 versus $2.3 million in the second quarter last year.

Our direct mail conversion initiatives generated $3.6 million in the quarter. For the first six months of the year, we have generated approximately $9.4 million, double the 4.6 of political revenue that we had during the same period last year.

From an affiliation standpoint, our NBC, UPN and WB stations had the greatest gains in the quarter with time sales 6.2, 6.7, and 1.6 respectively. Our FOX and ABC stations were relatively flat and our CBS affiliates, pro forma for the outsourcing agreement (INAUDIBLE), were up 7.6%.

During the May sweeps, ratings on our stations in the key 18 to 49 demo and the 5:00 P.M. to midnight time period were up 4.9% on average, outperforming the networks which were down 3.5% in prime time. Our ratings performance was due in part to higher ratings on our FOX and CBS stations.

During the quarter, we converted the 10:00 P.M. news at our FOX affiliate in Pittsburgh to our News Central product. And on July 14th, we added a 10:00 P.M. news on the UPN in Greensboro.

If you recall, 1 1/2 years ago we shut down the news on our ABC station in Greensboro. Now using the News Central model, we are able to go back into that market with a higher quality local news cast on the UPN station that otherwise would have not been able to offer a stand alone local news program.

Turning to our outlook.

Ad spending in the third quarter, although less volatile than the second quarter, is expected to be impacted by the tough political comps and declines in certain national ad categories. Nevertheless, we are encouraged by the tax refunds and believe that some businesses will increase advertising as a way to persuade consumer spending decision.

Especially, early indications for the fourth quarter are for a strong retail environment. Looking forward we expect both our television and direct mail conversion platforms to benefit from the national do-not-call registry, which we believe will force telemarketing dollars into other advertising mediums, specifically television and direct mail.

Turning to current pacings, July was up .6%, August is pacing up 2% and September is pacing up 6.7%. We expect both to finish down as they come up against political ad dollars from last year.

In the third quarter last year, we had approximately $5.9 million of political and approximately $17.8 million in the fourth quarter. Categories that are pacing up are auto and services. Categories showing weakness are primarily national advertising categories, in particular soft drinks driven primarily by Coke and Pepsi, Fast foods and movies, with few releases and no particular standout box office hits this year.

From affiliate standpoint, our WB and ABC groups are pacing flat. FOX is up 3.6%, UPN is pacing 5.6%. CBS stations are pacing up almost 14 and our NBC's are pacing up almost 8.

Again, these pace numbers do not yet reflect the political revenues so we expect the percentages to drop as the quarter goes on and we come up against political comps. We expect net broadcast revenues for the third quarter to be done approximately 2% to 3%. Excluding political however, we expect the business to grow .5% to 1.5%.

And operator, with that said, we are ready to take questions.

Ladies and gentlemen, at this time we will be conducting a question and answer session. To allow everyone the opportunity to ask their questions, please limit your time to one question and follow-up.

If you would like to ask a question, please press star-one on your telephone key pad. To remove your question from the queue, please press star-2. A confirmation tone will indicate your line is in the question queue.

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Our first question comes from Paul Sweeney with Credit Suisse First Boston. Please state your question.

Alright. Thanks very much. Good morning.

Wonder if we could just talk a little about the News Central product just for simply is it still on track for break even in '03?

And then, kind of, what your goals are - maybe broaden - I'm not sure how much detail you want to give, but what your goals are for capturing political advertising in '04 now that this process is getting on to your stations? And then, second, if you have just any anecdotal evidence on some of the ratings on the News Central stations, particularly in markets perhaps where you converted your existing news to News Central, how did the ratings perform there? Thank you.

I don't know that we're gonna project necessarily, a break even for you.

By definition I would only tell you that our expectations are and our hope is that by the end of 2004 everybody should be up and running and we should be doing well, which could be defined as break even or even profitable. But I won't go so far to tell you that because we are launching news is literally a couple weeks ago and we will be launching them in the next few weeks. Things are rolling out and we are, kind of, right in the middle of the process.

The one thing I would take anecdotally, is that we launched our news last year in Flint up against the three network affiliates and the first rating book that I saw, if my recollection is right, is that our demographics on our news cast were essentially , the relevant demos were essentially the same as the NBC affiliate at 11:00 in the marketplace.

So I don't think -- and that's in a nonmetered market which is particularly difficult on independent television stations. So I think all in all, I'm very pleased with what we are doing so far.

I think the thing you have to appreciate is that news is a long term business. It does not happen overnight. It does not launch with millions and millions of dollars of promotion behind it like network television shows do. It is a launch, slow build process and we expect over time that each one of these news operations that we are setting up will predictably end up just where we want it to, probably one to three years out.

I think with regard to -- what was the second part of the question?

How was the performance of the new station --

Oh, yeah. I think -- it's interesting.

We launched a news here in Baltimore and again this is still part of the News Central model. We launched an 11:00 newscast as a follow-on to our 10:00 newscast which is very successful here in Baltimore. And have found that the ability to launch an 11:00 newscast against three network affiliates in many cases and many nights of the week we routinely beat the ABC affiliate in our marketplace.

We think that clearly that bodes well for us long term, with regard to marketplaces where we have put News Central on in newscasts that are already operating. I think Pittsburgh is the first one we have done that. It's really difficult to tell at this point, but there are specific nights where we have numbers that are just huge numbers.

We can't tell you specifically why that is because news is such a -- is one of those things that is difficult to quantify in great detail. People tend to move in and out of it for a variety of reasons. As I say, it's not an absolute business in terms of identifying why it does what it does.

I'm very encouraged by what I see everywhere. The product looks magnificent. I think in the long term we will be held out to be a huge success. I'm confident of that.

Our next question comes from Jim Boyle with Wachovia.

Please state your question.

Good morning.

David, forecasting the behavior and timing of politicians is difficult even in the best of times. Once the rules kick in post September 4th, and many probably get challenged in courts, do you think enough uncertainty is eliminated that deals start happening or might be wide bid ask spread still slow deals? Plus do you think deals start first in large markets or mid-markets?

You know, who the hell knows? I haven't got a clue.

I would tell you, I think the most important thing you said is the vast majority -- I mean, I think when the things are promulgated on the fourth and finalized, I expect there will be a lot of court action and I think that by virtue of the court action, it may tend to slow some of the transactions down.

But just appreciate that there are probably certain aspects of the regulations that will go untested. I think the real issue isn't going to be the duopoly issue, it's really gonna be the cap issue and that battle is gonna have to be fought. So, the extent to which there are people who want to try to put together duopolies today, where they otherwise couldn't, we fully expect those transactions will move forward. And there probably isn't any reason why they shouldn't because nobody seems to be concerned about them.

That's about all I can really tell you, is that I think us, like a lot of people, believe they're just - this all will be settled by the courts and notwithstanding what Congress's view of the world is, the courts will determine what the law is and the politics will be set aside. Just going to take a little time for that to happen.

We will have to wait to see what happens on September 4th and ultimately see what Congress does when they return.

Our next question comes from Bishop Jean with Wachovia. Please state your question.

David, by the way congratulations on doing a very good job of laying everything out including with your website. It's pretty clear. Maybe Reg D does have some benefits after all.

The - the - Going forward with your Cap Ex, do you expect to be drawing any down on your untapped facility in calendar '03?

Right now, Bishop, we had about $16 million of cash sitting on the balance sheet at the end of June. So if we do have to go into the revolver, it will be minimal.

I was going to say, it depends on how the revenues come in in the second half of the year.

We still expect to see positive free cash flow this year. Maybe from a standpoint of timing, that would be the only issue if we have to step into it.

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

Morning. Given the nice numbers this morning, that was sovereign music you played before the conference call there.

It wasn't my choice, Victor. Do you have any recommendations?

I don't know -- maybe -

Trying to get '60s stuff in there.

Anyway, few things, David.

First of all, can you go through your duopolies. Which one's you think are gonna be able - you're gonna be able to buy in with no issues.

Secondly, the waiver standards came out and it looks like they actually give quite a bit of latitude. So could you talk about the ones where it wasn't so obvious you could bring them in and whether you can bring them in under the waivers?

And then Lucy, could you give us sense on the expense side? How much more burden or how much more expense was associated with in this quarter with the direct mail and the News Central operations ,so we can get a sense of what the real core expense growth was relative to last year. Thank you.

Victor, I think the ones that will come into question are Columbus, Ohio, Charleston-Huntington, West Virginia, Dayton, Ohio KRB. (INAUDIBLE)

It comes under the waiver.

I think it -- if you assume Columbus and Charleston Heights was your fairly substantial businesses, we will have to be dealt with either in the context of a waiver or in the context of simply, us going back into the court and asking the same questions we asked a couple years ago ago ,which were what's the basis for the waiver process. How'd you make that up? How'd you do this? How'd you do that? Why - what's the basis for the rules and so on and so forth.

I mean, I think that process is gonna ultimately determine what the outcome is, not what the black letter of the law will be on September 4. I don't again, I think I always said historically, that the Columbus transaction that was done years ago -- what's probably been 4 or 5years now, that has been in place, looking around the room here trying -- '99. Was it '99?

Let's say it's been four years, it will be another four years before a court probably -- maybe not. I'm being pessimistic about it because I know how the courts function. It might be another "X" years before the thing is ever resolved in our favor.

And I think at that point in time now you are looking at an environment where we will have been operating a business for let's say hypothetically 7, 8, 9 years and nobody has ever complained about it. Nobody has ever said there is anything wrong with it, and to think that somebody would come in and say you can't do that any more would just be stunning.

And again, we just don't think that happens in the real world. We are going to have to go through a process like Viacom is and like FOX is and make your points in court and go fight your battles. Meanwhile, we will just run the business.

As I say at the end of the day, we fully expect to be running the business. We will have to go through this next interim step of, wait and see what happens September 4th. If we don't like what we see, go through the waiver process, probably, and then once we go through that, if we don't like what we see, then we will be back in court like everybody else. So, it's unfortunate that there is an industry that you have to go through this. The fact of the matter is that this is what is going to happen.

Victor, as far as included in the second quarter numbers year over year, there about a million of higher sales expense. So there is a portion is related to direct mail, there are salaries, there's bonuses, it's all combined in there.

As far as the news that's running through the TV expenses, year over year, that's flat. So you have got expense savings from the conversions and you have increased cost related to the new rollout. And then there is about a million of incremental news cost for News Central up here at corporate year over year.

Our next question comes from David Goldsmith with Buckingham Research. Please state your question.

Good morning. Got one question then a follow-up.

One question is, how much political do you think you will get this year? You are in California, stations in the south, Louisiana, what have you, I think.

And how much do you expect out of the Iowa and New Hampshire primaries late in the fourth quarter?

Dave, to give you a feel, in the odd years we typically do a couple million dollars of political. So that would already capture the Iowa caucuses and the just regular races. You know, it remains to be seen what we will get on our Sacramento station for the recall race.

Now that you have the Lieutenant Governor and Schwarzenegger coming into the race, the money still has to be raised to be spent. We have not gotten any indication of how much money is going to get raised and spent out there.

Another question which is, if you go into the holding company formation, you shift all your debt down into the holding company, wouldn't that make it -- if you ever sold that -- the subsidiary, wouldn't that make it the most tax efficient way of doing it?

I don't know if it's the most tax efficient way or not.

It is an operating company and certainly defined in the -- as a television company specifically as to what that performance is and how, you know, the debt that's associated with it. We didn't look at it from a standpoint of defining and designing the most tax efficient structure for a sale. I really couldn't tell you if that is or isn't.

Our next question comes from Bill Meyers with Lehman Brothers. Please state your question.

Hi, thanks.

On the direct mail, it looks like Q2 is down a couple (INAUDIBLE) sequential from the first quarter. Is that a function of ramp up or seasonality?

I mean, basically, do you see seasonality in the business or is it just, sort of, too early to tell?

I think it's a little bit to early to tell.

But I think the magnitude of the market is so great that I can't tell you that we have been affected by any seasonality to the extent that there is any.

We are in the process of ramping up a business across a lot of cities. It's like starting any other business. You are hiring sales people and you're starting to push into the marketplace and establish a beach head. So we aren't even off the beaches yet, if you will, but I expect a year from now we will be substantially imbedded in the business and we will certainly have a better handle in terms of the turnaround times and execution times and all the things necessary for us to put our hands around the business over the long-term.

If I can just add to that, David.

You know, as far as the direct mail first quarter versus second quarter, you know, this year we really just have two mailers scheduled, one more May and one in November. So, you know, what you saw is in the first quarter is a lot of the tv ad spending dollars go into the first quarter in advance of that May mailer. So, it's not that the direct mail dropped off, it's just the way that the revenues came in for that mailer.

That's a very important point. We are not only talking about two mailers this year with May and November which that, as Dave's saying, that will accelerate next year into more than just two mailers.

Our next question comes from Lee Westerfield with Jefferies. Please state your question.

Thank you very much, good morning.

I wanted to focus on the change of free cash flow from this year into next. Lucy, you mentioned first the Cap Ex greatly comes down next year versus this year and also thanks to the refinancing on your debt, interest expense is down.

But as you just mentioned, David, direct mail campaign may increase this excuse me, next year versus this year. What are your preliminary plans on next year assuming that this year's test run continues to be a success.

And then, I have one follow-up question regarding your third quarter guidance.

We aren't -- I'm not going to put numbers on papers yet that we are prepared to talk about it publicly. From a rollout perspective, we have been doing this on what I would call a semi-annual basis in a number of our markets. And while we have made just a fortune at it, we think we haven't even touched the tip of the iceberg, if you will.

We are in the process now of establishing here in Baltimore a separate discreet sales organization independent of our spot sales organization whose sole purpose is going to be to do this type of business. We have started that a few months ago and we are starting to develop a comfort factor with the processes that are in place from a standpoint of selling to executing and starting the mailing process.

As a function of that initial better understanding of how to go through these steps, we are now gearing up in five other cities to build up these separate discrete operations. And I would like to think that they will be done by year end structurely and if we like what we see from the standpoint of how those things are rolling out, we will roll it out every place else as fast as we can.

So in a perfect world I would like to think that by the end of 2004 we have completely functional direct mail/spot conversion businesses up and running at each one of our facilities. 2005 I think will really be the real year where everybody is firing -- every station is firing on all cylinders.

We had a slide presentation, and part of our presentation on one of our slides, we talk about, just the magnitude of the market in direct mail how that relates to our opportunity. And I think we have been looking at it from a conservative standpoint in terms of what kind of share we should be able to take down from the direct mail business. We are seeing somewhere in the $80 to $100 million possibility in direct mail revenues for our company.

That's once we're up and running and really have everything, kind of, buttoned down. But, as I say, we are in a, kind of, a planting stage, if you will. So we just need a little bit of time to get this thing put together and functioning the way we want it to.

Our next question comes from Richard Rosenstein with Goldman Sachs. Please state your question.

Hi. Thank you. Good morning, everybody.

Just curious, David, your opinion or view on News Corps's pending acquisition of DirectTV and specifically what implications you think that might have for you, not only as a local broadcaster but maybe the difference in being a FOX affiliate in certain markets versus affiliates of other networks, if there's any distinction there?

I don't really see any distinction at all, Rich. I think the - I don't think it affects me one way or another whether I'm a FOX or CBS.

I think the more interesting opportunity really is longer term to see how, assuming Murdock gets the deal, which I think he will, decides to go aggressively after the cable industry. 'Cause he certainly has a whole lot more capital available to him than the current owner does, or has an interest in investing in it. So my sense is, that if I'm Murdock, I'm gonna bear down very hard and I'm gonna start doing what I need to do to push cable aside as fast as possible, and that's gonna precipitate, I think, a greater need for a tighter relationship of the local broadcast facilities than anything from a merchant perspective or otherwise.

I'm anxious to see him in the game because the faster he gets bigger, the better off we are from the standpoint of negotiating with cable.

Mr. Amy, there are no further questions at this time.

All right. Well, thanks very much, Operator. Thanks everybody for tuning in and we will talk to you shortly.

This concludes today's teleconference. Thank you all for your participation. All parties may disconnect now.