Sinclair Inc (SBGI) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sinclair Broadcast Group Incorporated third 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 0 on your telephone keypad. 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. In the room with me today are Dave Smith, President and CEO and Lucy Rutishauser, Vice President of Corporate Finance and Treasurer. Before we begin I'd like to make our forward-looking statements disclaimer. Certain matters discussed on this call may include forward-looking statements regarding, among other thing, 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 forms 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. The company under takes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. In accordance with FP, this call has been made available to the public, along with a webcast of the call, available on our website, www.SBGI.net under the investor information page, menu 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 matrix, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These matrix are not meant to replace GAAP measurements but are provided as supplemental detail to assist the public in their analysis and evaluation of our company. In accordance with regulation G, a reconciliation of the nonGAAP matrix to the GAAP measures in our financial statements is provided on our website, again, www.SBGI.net under the investor information page, menu option reports and filings. Now, with that we'll turn to the financial highlights of the third quarter. And on a reported basis, net broadcast revenues were down 1% or $1.6 million for net broadcast revenue of $161.3 million. This exceeds our guidance provided on August 8th for net broadcast revenues to be down 2 to 3% due primarily to better than expected local revenue growth.

Excluding political, net broadcast revenues were up 1.9% as compared to the third quarter 2002 on a ex-political basis, local spot was up 5.1% while national was down 3%. There is 1.3 million of political revenues booked during the quarter versus 5.9 million during the same period last year. Of that, about a half a million related to the California recall with another 300,000 booked in the fourth quarter. For the quarter we realized $5.9 million in direct mail revenues compared to 2.9 million in the same period last year. Year-to-date revenues generated through direct mail initiatives total about 15.2 million versus about 4.2 million last year, more than offsetting the absence of 7.7 million of year-to-date political revenues.

Television operating expenses, defined as TV production expenses and SG&A, were up a modest 3.1% or 2.2 million, and this is due primarily to the higher sales expenses, but $2 million less than our prior guidance. Operating income was 41.7 million a decrease of 3% over last year's result of 43 million. Interest expense is up 3 million due to the financing of the High Tops redemption but down 3 million when netted with the high tops dividend line. We had diluted income per share of 5 cents compared to a diluted loss per share of 28 cents in the same period last year and we exceeded First Call estimates of no earnings per share. 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 65 million or 9% lower than last year's broadcast cash flow of 71.4 million.

The $6.4 million decrease was due to lower revenue and higher expenses we already discussed and 2.1 million in higher program payments, but was 4 to $6 million better than the previous guidance implied. EBITDA, defined as BCF for broadcast cash flow less corporate expense and minus a loss or plus the income from other operating divisions was 59.2 million in the quarter or 9.9% lower than the 65.7 million from last year. The $6.5 million decrease was due primarily to the lower BCF but was again 5 to $7 million better than prior guidance implied. We generated $5.4 million of free cash flow in the quarter even after spending 17.5 million on capital expenditures. BCF margins were 40.3% versus 43.8% last year and EBITDA margins were 33% versus 36.8% last year. With that I'll turn it over to Lucy and she'll take you through the balance sheet.

Thank you, Dave. Cash on hand at September 30th was $12.9 million. As Dave mentioned capital expenditures in the quarter were $17.5 million, of which approximately 8 million was for the DTV rollout, 8.1 million was for the news rollout, and the remainder was for maintenance and repairs. Our estimate for fourth quarter CapEx is approximately 17 million, which would bring our full year spend to about 71 million. Previously we had guided for 80 million this year and 20 million next year. Our new forecast for CapEx is 71 million in 2003 and 40 million in 2004. And the 2004 forecast breaks down as follows. About 10 million for routine CapEx. 4 million, which represents the unspent news amount from this year that carries over into the next year. We'll have 8 million for building and tower projects.

And 18 million for DTV. And of that 18 million, 8 million is also the carryover from this year that was not spent. Now, that should complete our DTV requirement, which over the years will have totaled approximately $150 million. Debt on the balance sheet at September 30th was approximately $1 billion 739.9 million. Once again, the full 225 million revolving line of credit remained undrawn at quarter end. We permanently repaid 14.1 million of our term loan B facility. And this represented the amount of net cash proceeds from the sale of our Indianapolis TV station that we closed upon July of 2002. And the credit agreement requires that we have one year to reinvest those proceeds into the acquisition of TV assets or capital expenditures.

So this is the amount that did not get reinvested. So we permanently repaid that amount to the term loan B facility. This brings the amount outstanding under the term loan B facility to 485.9 million. Now, as previously announced, we created a modified holding company structure effective September 30th. The result is that the bank debt, the public bonds, and miscellaneous television station indebtedness, along with substantially all of our television assets have been pushed down into a wholly owned subsidiary called Sinclair Television Group. Remaining at the holding company are the preferred stock, the class A and class B common stock and the convertible bonds.

And again, the primary reason for creating the holding company structure was to allow us to return to our leverage profile that we had in place before we redeemed the high tops. And just to remind you, the high tops refinancing saved us approximately 10 million in annualized funding cost. Turning to leverage for the quarter ending September 30th, the total indebtedness ratio, net of cash, at the operating company, that would be Sinclair Television Group, was 5.58 times, well within our covenant of 7 times. Leverage at the holding company was 6.31 times on a covenant of 8 times. And just as a sidebar note, the leverage covenant at the holding company is always set at a full turn above the leverage covenant at the operating company.

Now, if anybody needs to go through this structure in more detail, I'm available to walk you through it off line. Liquidity is measured by the amount available under our revolver plus cash on hand continues to be strong with 238 million liquidity available at September 30th. So with that I'd like to turn the call over to David Smith to discuss our operating performance in the third quarter as well as our outlook.

Thanks, Lucy. On a monthly basis third quarter times sales, excluding political, we're up 1.3% in July, 1.5% in August, and up 5% in September. For the quarter local was up 5.2% or up 4.2 including political, while national was down 3% or down 8.4% including political. 60% of our revenues came from the local markets versus 58% last year. Year-to-date net broadcast revenues are up 1.6% or 3.2% excluding political. Categories that were up in the quarter, services which was up 13.5% and which represent our second largest category, auto, our largest category, which was up 10.6%, schools up 22.5%, and furniture up 14.5%.

Categories that were down were fast-food, down 4.6%, movies down 23.4%, soft drinks down 50.6% and beer and wine down 34.4%. These are the categories that are primarily driving the decline on the national side, a trend we expect to continue during the fourth quarter. Movies, for example, is down to the ad spending model changing with the studios now focusing primarily on the top movie markets. Additionally many second tier markets such as Baltimore and Pittsburgh have been downgraded, which means less ad spending by the studios in those markets. Soft drinks as a category we spoke about in the last call with big advertisers, such as Coke and Pepsi, pulling back. Good news is that Pepsi is meeting to discuss resuming spending in 2004.

The decline and instability of national ad spending points to why broadcasters need to look to the local markets for their primary source of revenue, which is one of the reasons we're spending a lot of time focusing on direct mail. From affiliation standpoint our NBC, Fox, and WB stations are basically flat, our ABC stations were down 7.3% but up 1.2% excluding political and our CBS and UPN stations were up 2% and 8.4% respectively. For every one market that was down in the quarter, it turns out two markets were up. Turning to the news world out there, during the quarter we added a 10:00 PM news in our WBN Tampa and a 9 PM news in our WBN Milwaukee and Birmingham, a 10:00 PM news on the UPN in Greensboro.. In October we added a 10:00 PM news on the WBN Las Vegas and a 7:00 PM news on its independent sister station.

In total we've converted four News to News Central and added five new markets with news. And a sixth in Cincinnati should go online sometime in December. Ad spending in the fourth quarter will be negatively impacted by the absence of political revenue, no surprise there, and the weakness in the national ad spending that we just discussed. This will be somewhat offset by our direct mail initiative and positive trends in automotive and services. It is unclear at this point how retail will come in as yet. We also do not expect to see the telecoms begin advertising the cell phone portability concept until 2004. Turning to current pacings, October was down 15.3% or up 1.5% excluding political.

November's pacing down 9% and we expect it's finish slightly below this as we come up against the next two weeks of political comps. December is pacing down about 6% but expect to finish slightly better. The wild card will be retail, which has not yet been booked. For the fourth quarter last year we had approximately 17.8 million in political, just as a reference point. Net broadcast revenues for the fourth quarter are expected to be down approximately 9.7% to 10.6% or down 1.4% to 2.5% excluding political. Again, retail is the unknown quantity. As we wind down 2003, we're excited about the prospects for free cash flow next year given the decrease in capital spending, the inflow of political, as well as our increased focus on direct marketing. With that, operator, we'd like to turn it over to questions. Please try and keep it to one question per call. Thank you.

Ladies and gentlemen, at this time we will 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. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. To participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Bishop Cheen with Wachovia Securities. Please state your question.

Good morning, David, David, Lucy.

Good morning.

Just the question, then one housekeeping, if you would name -- tell us the political, if any, from this quarter. But my question is, David, as you do the direct mail, would you characterize that as all new incremental business or is any of it shifting business that you already had?

Well, it's a combination of both, bishop, and I think it probably always will be. The vast preponderance of it is all new business at this point. I would suggest that appreciate the local advertisers use multiple forms of advertising. A lot of them use direct mail, a lot of them use television, radio, yellow pages, newspaper, sign boards, whatever. When we go in and we talk to a traditional advertiser, who is a potential spender in television, it's not our intent to shift dollars from spot over into print. We're going after the print budget specifically. And obviously for the people who have never been on television, it's a whole new world for them. So can at this point in time, the vast majority of it is all new business, never been on television before.

Just to answer the housekeeping question, it's about $2 million in political for the fourth quarter of '04 -- right, of '03.

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

Good morning. Could you just run through now that you have some markets that have been using your new News Central, walk through a little bit what you've been seeing in the revenue expense side. What I mean by that is on the revenue side you should be getting more units, because you've got news versus the syndicated product you probably ran before where you may have actually shared some news on a barter basis. Are you seeing more revenue for your units. On the cost side, now that you're not bearing the cost of the syndicated product, are you actually on a cost effective basis able to do this for an amount cheaper than what you would have paid for the syndicated product that you replaced, or is that -- how does that work? Thanks.

The long-term answer to the second part of your question, Victor, is that you look at news -- I'm not telling you anything out of school here, because you can look at a rating book for any city in the country that has been doing news for 30 days, a month or 10 years, what you'll see, when you look at these things over time, is the long-term generally consistent ramp up to a particular level. And when we decided to go into the news business, we made the conscious decision that the long-term benefit of us being there certainly outweighed the game of us continuing to buy syndicated product at ever-escalating prices. So while after two days or two weeks or two months of putting a new newscast on the air, it really isn't the right point in time in history to sit down and say is it doing everything you expected it to do. What I can tell you is, with some degree of confidence, that I fully expect at the end of probably two to four years, that the numbers will be radically higher than they are today and the revenues will follow. That's just the way it historically has been done. When we first put news on the air here in Baltimore in 1991, I think it was, it took a while for people to get comfortable with the idea that they were buying somebody else's newscast in the marketplace, because buyers mean what they are, to some degree, which is creatures of habit, tend to want to stick with the known quantity. And only after a period of time of a local newscast proving that it can deliver ratings do people tend to shift their model and their thinking. I think we've done very well to date. I see overnights from time to time indicating that there are times, and I'll use our WB in Birmingham, Alabama, again, it's WB in Birmingham, Alabama competing against a Fox V, HF station. What I would tell you is that we're very impressed with the kind of data we're seeing coming out of the marketplace. We see the same kind of data out of Milwaukee, Wisconsin, where again it's a UHF WB competing against a Fox V. Our news here in Baltimore that we now run at 11:00 as a prototype that we'll probably roll out in a number of markets next year, to go head to head with typical ABC, NBC, CBS, that's been functional now for a few months, routinely beats the ABC affiliate in this marketplace, which is a V. The news is a slow growing business that requires constant promotion and constant pushing in the marketplace so people know that it's there and understand what's going to be there. It really is day in day programming that we're just really getting comfortable with in our new markets. But in the grand scheme of things, we fully expect it to outweigh and be of significantly greater benefit to us than the notion of buying syndicated product. There's just no doubt about that over the long-term. That was a long-winded answer. I'm sorry.

Our next question comes from Paul Sweeney with CSFB. Please state your question.

Thanks very much. Good morning. David, you've had a lot of success moving over to the local market over the last couple of years and increasing your exposure there. Could you talk about over that time period and perhaps as you look at the next couple years to what extent the local cable interconnect have been a competitor. I know the cable and MSO’s are talk about that being a growth driver for them in local ad sales, would you talk about that as a competitor.

It's in a broad sense, yes, they are a competitor. But our kind of response to that is, they have always been a competitor. There's nothing really new about that. They are out there trying to sell spots like we are. We make a very concerted effort on a national basis even more so than on a local basis. In other words, the national folks literally come into our marketplace and assist us in converting people from spot cable back to local spot television with a great amount of success. So, yes, they are a competitor. They are not going anywhere. I suspect they are always going to be there, and we'll just have to live with them like we live with everybody else. That's why we're looking at the direct mail business as a long-term business opportunity for us, recognizing that the competitive landscape for a traditional spot is going to become more competitive. It's just a fact of life. It is what it is.

Our next question comes from Andy van Houten with Deutsche BanK. Please state your question.

Thank you. Just wanted to follow up on the revision to CapEx in 2004. It looks like approximately half of the increase is a matter of timing. And is the remainder due to the new news stations and the equipment you need to buy, or is it just extra digital expense?

Andy, last call we had talked about 20 million of CapEx for next year, and that consisted of 10 million of routine maintenance and 10 million of DTV. So you have 4 million of news that carries over from this year, because our initial guidance for news in '03 was for $30 million. And now we're guiding about 26 million for news. That 4 million carries over into next year. We had this year's 40 million of digital, which we had previously guided for. We'll only do about 32 million for that additional 8 carries into next year. The only thing that's really a new add from the last time that we talked is the 8 million for the building and tower projects.

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

Thank you. Just a follow up on an earlier question. The strength in spot cable advertising right now seems to be much more national than in local. Are you seeing that specifically as an impact on national, per se? And then are lower-rated stations or stations outside of the top three in a market more vulnerable to that competitive pressure?

I think the answer to your second part of your question is that the lower rated stations are always the last ones to get bought. There's a very clear pecking order, and there always has been. National buyers start from the top and work their way down. That's not new. That's a reality of the business. I think with regard to is national business moving to cable, I think there is a certain amount of it that is. But I think the thing you have to appreciate is that it's easy for a national buyer to buy X units on USA cable or TNN, or whatever it happens to be, in terms of the efficiency and mechanics of being able to do that. My sense is the extent to which they do that is driven primarily not because necessarily that the cable channels are a better buy, but because it's more efficient for the advertising agency and costs them less to management the process. And ultimately I think what you'll find in the longer term scheme of things is that as the cable gets bought by these national agencies, and the customers don't ring the cash register, the question is going to get asked, what happened. What they will eventually do is come back around again to local television, which is where the real eyeballs are. It's just a worm that has to turn.

Our next question comes from Vincent Vickers with JP Morgan. Please state your question.

Good morning. On your direct mail business, I think on the second quarter in your press release you guys had said that you expected about 10 million or so from that business. Seem to have had good results but fell a little bit short of that. Could you just talk about that a little bit, please? Thanks.

Yeah. Vince, I'm not sure what you're looking as far as us falling short. The original numbers we had put out to the street was for that business to do 15 to 20 million, and we should come in, as we said, on the last call at the high end of those numbers. So we did almost 6 million in the third quarter, and we have over 5 million expected for the fourth quarter.

If I could add any flavor to that, we're looking into first quarter of next year, as far as the sales initiatives that we have today for direct mail, and the momentum that we have behind that is nothing short of extraordinary. So the sale is actually picking up momentum at the different stations. And the enthusiasm for the product, by our sales people continues to grow. We really expect bigger and better things next year than the dollars that we put on the books this year.

Our next question comes from Sean Butson with Legg Mason. Please state your question.

Thanks. Good morning everybody.

Good morning.

I had a question about the different categories. It made it sound like kind of the soft drink weakness was more temporary, whereas the movies might be more of a secular decline, moving away from kind of small, middle markets to big markets. Then just two others, on retail, I'm wondering is the holiday spending you see from retailers on the ad spending, do you normally see that by now? Here we are in early November. Do you normally see that by now or is it coming in later than usual. Lastly I realize this is one question with four parts. On the wireless local number portability, why is it that you don't think you'll see that until '04, rather than when it goes into effect in late November?

Let me take some of these. The retail typically does not book in, we don't start to see it until we get closer to Thanksgiving. That's the first part for the retail. The telecom piece for the cell phone portability, the reason we're saying we don't expect to see it until 2004 is we're just not seeing anything for it right now. And I believe the portability doesn't go into place until November 24th anyway. The movies, I would say, is probably going to be more permanent. And the soft drinks, that's a category that we've been seeing decline throughout the course of this year. Again, depending what Pepsi decides, that's a category that could come back next year. I don't have any details as far as what Coke's ad spending plans are. But my guess is, as does most product placement, they are going to have to at some point come back in and start advertising for their products.

Just one variable on the movie issue is, just appreciate that when Hollywood isn't producing movies that are making a lot of money, the first thing they do is they cut back the markets they spend advertising in. So the fact that they may not be spending money in Pittsburgh, a top 25 market, may to some degree be indicative of the fact they are not making as much money as they would like to, and therefore cut back spending. That's not an uncommon practice in any business. You start from the smaller markets and work your way up. We'll have to wait and see what the affect is long-term, but right now it's an unknown quantity.

I would just say we didn't talk about auto here too much, we're talking about sort of the product, the categories that are on the downside. I think we were all happy to see the strength in auto, given that they are our number one advertisers. There's been a lot of discussion about fear that auto is going away. And in fact we're seeing growth in auto. So that's an important point to consider as we go into next year.

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

Sure. Good morning, guys. Just a little bit confused. You guys are talking despite the direct mail effort about an organic decline in advertising in the quarter. And you're probably the only one of the TV broadcasters that has reported as talking about that. Others are talking about flat up to oh, mid single digits or what have you. I'm just wondering what difference there is between your markets and some of the others that you would have that experience?

It's not an organic decline so much as just the phenomena of fourth quarter having so much political dollars in it. Probably most of the broadcasters that you're referring to are major affiliate companies that have the major ABC, NBC, CBS groups, that have 8 to 15% of their revenues coming from political. Our percentage is more around 4 to 5% range. Because of that, as the political dollars go away from them, they have more inventory this year than last year. There's a tendency for dollars to move onto those properties versus us. So, that's just the way the business works. We typically lose market share because of our Fox and WB affiliation mix in these situations where so much political dollars have gone away. So it's really not an organic issue that we're talking about. It's just the nature of our affiliation mix versus the nature of the other groups that you're talking about.

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

Thanks. One question and one housekeeping. On the direct mail front, in terms of the question, how many markets are currently participating, and what's the profile of the typical customer? And then just on the housekeeping side of the 11 million taxes, what portion is the current and deferred, if you can break that down for us.

Well, the profile of the typical customer is small business who historically has used yellow pages and/or direct mail as their primary means of reaching their customer base. It's what they have done for 50 years. It's the only thing they understand. What I would tell you is really fascinating about the space is that when you go into markets, and you do stand up in front of 100 advertisers, you'd be surprised how many people in the marketplace believe that television is radically more expensive than direct mail. And it's an absolute falsehood. And one of the great challenges and one of the great opportunities for us is to say to people, in fact it may be cheaper for you to be on television than it is to use direct mail. When presented with that option, you'd be surprised how many people say I had no idea that was the case. I just assumed that TV was more expensive. So it's a huge opportunity for us to be able to go in there and tell people you've been spending an awful lot of money and the rate of return you've been getting on your postcard, or whatever your free standing insert was that went into the newspaper, that got tossed in the trash is a pretty bad rate of return when you compare it to what television will give to you. I think that's one of the reason we're seeing so much success in the darn thing. Again, it's very early in the game for direct mail for us, we've only been doing this a year and a half, a year and three-quarters now. We fully expect it to be a mature business in probably five to seven years and be operating in every marketplace with some push 12 months a year. And we're not doing that now. It's really just a part-time business for us.

Bill, we have about 29 markets that are participating in the November mailer, and then as far as the tax, in the third quarter we have a current tax provision of about $1.4 million, and a deferred tax provision of about 9.7.

Our next question comes from Drew Marcus with Deutsche Bank. Please state your question.

Good morning, everybody. David, you've always been very close to the regulatory stuff. Can you pontificate how long you think it might take for new rules to take affect or not take affect.

When this thing got kicked into the third circuit, I don't really know more than anybody else in terms of what their political agenda is, to the extent they have one. I'm getting a sense, to some degree, that the FCC is looking for some opportunity by which to possibly get this thing back into the DC circuit. When you hear comments from the FCC that say they are not sure that the rules are even in effect at this point in time in history by virtue of any number of legal factors. It's almost begging the opportunity for somebody to file applications and test it, in which case it would probably end up back in the DC circuit, if it's challenged. The whole thing, as you well know, is just a quagmire right now. I don't expect it to break out any time in the next 30 days or so. I would tell you to stand by.

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

Good morning. Sorry to do this but two questions. The first is on the fourth quarter. I'm trying to ferret out what your underlying television broadcast net revenue growth or decline might have been. To do that, I need to know a couple of things. First, what a year ago in the fourth quarter the direct mail revenue was, and if I'm right, it was $4 million. Is that correct, Lucy?

Fourth quarter last year was about $2.6 million of direct mail. And political was about 17.8 million.

But you're getting almost 2 million in this currently quarter, so it's an incremental 16? On that case it looks like on an apples to apples basis or assuming no substitution of local for missed political, you're down 3% organically for the fourth quarter. The other question I have is CapEx, if we take 2003 and 2004 combined CapEx previously would have been 80 plus 20 million or $100 million. Now it looks like it's going to be $111 million, $112 million? Lucy, if you could walk through in a little important detail where the new CapEx for 2004 is coming from. I know you touched on this but some of it sounded like it was coming from facilities renovation or upgrade in 2004. And if so, where?

That's right. The primary difference is for building and tower projects that we're looking to do. Some are just tower strengthening projects. Some are just building towers that were closer to the DMA. We're looking at tower projects in Lexington, Flint, Charleston, South Carolina and down in the Pensacola Mobile market.

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

All right. Well, thank you, everyone, for attending our morning call. And again, if you have any questions, feel free to give us a call off line. Thank you.

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