Sinclair Inc (SBGI) 2003 Q4 法說會逐字稿

Welcome to the Sinclair Broadcast Group Inc. fourth quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Amy, Executive Vice President and Chief Financial Officer of Sinclair Broadcast Group. Thank you. Mr. Amy, you may begin.

Before I begin today, I would like to take a moment to recognize the efforts of our Chief Accounting Officer and his staff for getting the numbers ready so soon so that we are the first ones out. Based on the new accelerated filing requirements, we are ahead by one year from what the new requirements are, and I wanted to recognize that and thank them for their efforts. In the room with me today are David Smith, President and CEO, and Lucy Rutishauser, Vice President of Corporate Finance And treasurer. At this moment, I would like to make our forward-looking statement disclaimer. 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 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 fourth-quarter earnings release, which we furnished to the SEC on an 8-K earlier this morning. The Company undertakes 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 FD, this call has been made available to the public along with the Webcast of the call. It's available on our website, www.SBGI.net, under the investor relations 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 non-GAAP 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 assist the public in their analysis and valuation of our Company. In accordance with regulation G, a reconciliation of the non-GAAP measures to the GAAP measures in our financial statements is provided on our website, www.SBGI.net, under the investor information page, menu option, reports and filings.

Now, let's turn to the financial highlights. For the fourth quarter on a reported basis, net broadcast revenues were down 8.6 percent or 16.3 million for net broadcast revenues of 173.1 million. This succeeds our prior guidance for net broadcast revenues to be down 9.7 to 10.6 percent, primarily due to better than expected local revenue growth. Excluding political, net broadcast revenues were down only 0.5 percent as compared to the fourth quarter 2002 on an ex political basis. Local time sales were up 3.4 percent while national was down 6 percent. The decline in national came from categories such as soft drinks, movies, fast food, retail and telecom, all of which we discussed in detail last quarter. During the quarter, we booked $2.4 million of political revenues versus 17.8 million during the same period last year. Of that, about $300,000 related to the California recall and $400,000 to the Iowa caucuses. For the quarter, we realized 6.3 million in direct-mail revenues compared to $2.6 million in the same period last year. On a full-year basis, broadcast revenues were down 1.3 percent, but up 2.2 percent, excluding political. Political revenues for the year were only $5.3 million as compared to the 28.3 million in 2002. Direct-mail revenues totaled 21.5 million versus $6.9 million last year, offsetting more than half of the decline in political. Television operating expenses in the fourth quarter, defined as TV production and SG&A expenses before barter, were up 4 percent or $3 million, due primarily to higher direct-mail sales costs and higher news costs for our news expansion. But about $1 million less than our guidance. For the year, TV operating costs were up a modest 3.7 percent and almost $9 million lower than our initial estimates provided last year in February of '03. Operating income in the quarter was 45.8 million, a decrease of 28.2 percent over last year's result of 63.7 million and down 6.3 percent for the year due to the reasons we have already discussed. Interest expense, net of interest income, was up 3.9 million in the quarter due to the financing of the HYTOPS redemption, but down $2.1 million when netted with the HYTOPS interest line.

Fourth quarter diluted income per share was 19 cents compared to diluted income per share of 27 cents in the same period last year, and exceeding First Call estimates for a one penny loss per share. The better than expected results were due to a better than forecasted operating performance and an unrealized gain from derivative instruments. Television broadcast cash flows defined as net broadcast revenues plus barter revenues minus television production expenses, television SG&A, barter expenses and film payments in the quarter, was 71.5 million, or 22 percent lower than last year's BCF of $91.7 million. The $20 million decrease was due to the lower revenue and higher expenses we already discussed and the $1.2 million in higher program payments, but was approximately $6 million better than our previous guidance implied. For the year, BCF was 267.4 million, down 8.9 percent from the prior year. EBITDA, defined as BCF less corporate expense and minus the loss or plus the income from our operating divisions, was 63.3 million in the quarter or 27 percent lower than the 86.7 million last year. The $23 million decrease was due primarily to the lower BCF and higher corporate expense, but was approximately $5 million better than prior guidance implied. For the year, EBITDA was 240.4 million, down 11.6 from the prior year. We generated 18.7 million of free cash flow in the quarter and 29.3 million for the year. BCF margins in the quarter were 41.3 percent versus 48.4 percent last year. And EBITDA margins in the quarter were 32.8 percent versus 42.1 percent last year. With that, I will turn it over to Lucy and she will take you through the balance sheet.

Cash on hand at December 31 was $28.7 million. Capital expenditures in the quarter were 15 million, of which 7.6 million was for the digital television rollout, 2.2 million was for the news rollout, and the remaining 5.2 million was for maintenance and repairs. 2004 CAPEX remained unchanged to our prior guidance of $40 million. Debt on the balance sheet at December 31st was approximately $1,732,500,000. Once again, the full 225 million revolving line of credit remained undrawn at the quarter.

Turning to covenants, for the quarter ending December 31st, leverage at the operating company was 6.01 times, well within our covenant of seven times. Leverage at the holding company was 6.85 times, also well within its eight times covenant requirement. Liquidity, as measured by the amount available under our revolver, plus cash on hand, increased by $16 million to approximately $254 million of liquidity available at December 31st. I would like to turn the call over to David Smith to discuss our operating performance in the fourth quarter and our outlook for 2004.

On a monthly basis, fourth quarter times sales, excluding political, were up $1.6 percent in October, down 0.8 percent in November and down 4 percent in December. For the quarter, local was up 3.4 percent, excluding political, while national was down 6 percent. Sixty-one percent of our revenues came from the local marketplace versus 58 percent last year. On the categories that were up in the quarter, services, which was up 15 percent and which represents our second largest category now; auto our largest category, was up 1 percent; schools were up 23 percent; furniture up 9; toys and games were up 52. The larger categories that were down in the quarter were fast food, which was down 21 percent, movies, down 29, soft drinks down 57, and telecom down 18; retail was down 7; and beer and wine, down 21. These are primarily national ad categories whose declines we have talked about in the past.

From affiliation standpoint, all affiliate groups were down due to the absence of political, with the exception of our UPN stations, which were up 3 percent, excluding political; our NBC stations up 7.3 percent; and our CBS stations were up 5.4 percent. Our ABC and Fox groups were down 1 percent each; and our WB stations were down 4 percent.

On the News Central front, we added a 10 PM news on our WB station in Cincinnati in December. If you recall two years ago, we shut down the news on our ABC affiliate in Greensboro, because the station was losing money under the traditional stand-alone news model. In January, we put the news back on the station at 11 PM using the News Central model. We now use News Central on 13 of our stations in 11 markets.

Turning to the fourth quarter, we're forecasting net broadcast revenues to be up 1 percent to 1.5 percent in the first quarter or flat to slightly up, excluding political. Included in that assumption is the $600,000 for the Super Bowl which was down from 1.2 million, booked last year when the game aired on eight of our ABC stations. Also included in the assumption is about 2.1 million of political ad revenues versus 600,000 last year.

Turning to current pacings, January, which had the Super Bowl last year, was down 1.7 percent. January ad spending was also impacted by severe weather that covered much of the Mid-Atlantic, Northeast and north central parts of the country. February, which had the Super Bowl this year, is pacing up 1.7 percent margins; pacing down currently 2 percent. But we expect it to improve as we move through the quarter, and as we come up against the impact of the war in Iraq, which resulted in about a $2.2 million loss of revenues last March. From an affiliation basis, our CBS stations are pacing up, despite having the Super Bowl this year, while ABC's are pacing down. Primarily due to not having the Super Bowl, our Fox and UPN stations are pacing about flat and our WBs and NBCs are pacing down. Looking at the rest of the year, we are excited, clearly, about the prospects of revenue growth -- more importantly, free cash flow, given the decrease of capital spending, the obvious inflow of political and the long-term growth of direct-mail. Operator with that, we will turn it over to questions.

(OPERATOR INSTRUCTIONS). Victor Miller, Bear Stearns.

On expenses, obviously, first quarter last year, your original guidance was 13 percent on expenses for the quarter, and it didn't come in anywhere close to that. But again, I want to re-visit the expense issue as you begin this year. The overall expenses for the year, TV posted 3.7; other, plus 170; total, up about 7.2 for the company, that's what you did in '03. The guidance for the first quarter, expenses plus 6.7; corporate overhead plus 29 percent. Could you talk about -- when you talk about this expense, about the 6.7, how much of that is TV related, your direct-mail related? And what's going to be the impact of direct-mail on the expense growth up and down through the quarters, if you know what I mean? In other words, do you expect 6.7 percent expense growth for each and every quarter this year as we try to look out further in the year? Thanks.

I think you have to -- to really get a good sense of what that means, you have to look at the fourth quarter expenses and relate that to the first quarter almost in a sequential basis. Because as we grow the business in both areas of direct-mail and the news operations, those are the two underlying driving factors that are increasing our television operating expenses. So we are sort of coming around the bend here when we look at first quarter of '04 versus first quarter of '03. But we are pretty close to the same cost first quarter of '04 versus fourth quarter of '03, so we are not seeing that kind of an increase in our overall expenses. As we mentioned last year, some of the factors that really drove our costs were items such as the insurance group, group health insurance and whatnot. One minor issue, but it has an impact on the percentages when you compare year-to-year, is the -- we were recognizing benefits last year in the first quarter for reversals of bad debt accruals that we had. We recognized that our bad debts had been accruals or our reserves for bad debt were too high last year. And we had to bring those down. So we have a credit in last year of about 1 million 4 versus this year -- of course, we will not have that benefit. So you see that as a driving factor from a percentage standpoint, although it's pretty small dollars in the overall view. But in terms of your long -term question, will we continue to see that growth during the course of the year? We should sustain this level of spending or approximately until the second half of the year, when we really start to see the cost of the direct-mail come into play as our number of issues start to grow. That will pick up a little bit when you see us in the second half of the year, in terms of our overall growth in our expenses.

Jim Boyle, Wachovia.

Previously, when Sinclair had less news operations, approximately what would have been the station's reliance or correlation to the various network audience ratings? And now with more News Central launches, would that reliance have lessened?

I am not sure I understand the question, Jim.

For instance, some of the other groups that have a lot of dominant news operations tend to say we don't have to rely upon our networks, either good ratings or bad ratings, because we can still out-index. You used to have less news operations; now you have more news operations. Does that make it easier for you to outperform your networks?

I don't really think that there is any relationship between the news business and what networks do, with the singular exception of what the lead-in or the halo effect is of the network. Clearly, to some degree, our 10;00 news, on Fox's, as an example, is driven by what happens with Fox's prime time programming. If it's good, then they are nice, when the news is up, then Fox is good. But at the same time, I can tell you that when Fox is down, as a function of whatever their content is, that does not necessarily mean that our news is always down. 10;00 newses (ph) are a point (ph) with television. So I don't know that there is any absolute direct correlation, other than what some characterize as a halo effect between the two discrete businesses, because they really are discrete businesses. I hope that answers your question.

Bishop Cheen, Wachovia.

A question on the balance sheet, Lucy. The debt numbers you gave do not include the hedge derivatives.

What is in those numbers is the fair market -- there is about 16.9 million of fair market value of the swaps that are hedging the bonds. And that is in the 1,732,000,000 number that I gave.

Also, can you tell us how many direct mail flights we expect this year, in '04, versus how many mailings you did in '03?

We did two in '03. And we will do two in the first six months of the year. And we expect to ramp up, after the first six months of the year, to a much higher pace. We are working on that pace number on an absolute basis right now.

Would you like to take the next question?

Yes, feel free.

Paul Sweeney, Credit Suisse First Boston.

It's Shawn Feely (ph) stepping in for Paul. Can you just talk a little bit about your expectations for the upcoming court proceedings? Then maybe also talk a little bit about --

We can't hear you. You have to speak up a little bit.

I am sorry. Can you hear me now?

Yes.

Just expectations for the upcoming court proceedings? And secondarily, maybe just weigh in here on the digital must carry negotiations that are going on in some of the other groups?

We are going to make an appearance at the court proceeding. We have been allotted five minutes to do a presentation to the three-judge panel. My guess is we will be one of many presenters. And we are going to be in there arguing our argument. I can no more predict what the outcome is going to be to than anybody else. We will just have to wait and see. I think with regard to digital must-carry, at this point in time, the FCC is in charge of that. They have not made a decision yet, whether there is going to be must-carry or whether there is going to be a must-carry for all channels one wants to put our; nobody knows the answer to that yet. There are certainly lots of people working behind the scenes to communicate to the FCC that if they want digital television to be a quicker success, they are going to have to provide some type of guaranteed coverage. There has got to be a motivation for people to want to pay attention to it. And the only way that's going to happen in today's world as if they act accordingly. But again, nobody really knows with any certainty what's going to happen. Next question, operator?

Sean Butson, Legg Mason.

Can you just talk a little about, thus far in the political process, in terms of the early primaries and the ones as we go through February and March, how are you tracking versus 2000? Better, worse or in line? And has it been better -- or more front end loaded this time around, in terms of Iowa, for example? Secondly, on the expense side, I think there was an earlier question about how that flows through the year, and it starts ramping up in the second half. Would that be true for the corporate line as well? Or is that just the TV expense line?

I will take the first question on political. Just to put this in perspective, I will give you some historical numbers. We did about 2.3 million in the first quarter of 2002 and about 2.8 million in the first quarter of 2000. We are expecting about 2.1 million in the first quarter in this year. The Iowa caucus money was front-end loaded into the fourth quarter. And we are seeing, right now -- we are pacing, if we compare up against the 2000 pace, which we feel is the more comparable time period -- that we are pacing behind where those monies came in. And I think a couple of the publisher companies that have already reported have also said that they have seen the same thing.

As far as the question regarding the expenses, corporate expense should pretty much stay constant quarter-to-quarter for '04. I don't see the kind of growth in the corporate expense that we would see in our operating expenses, because there is the variable costs that relate to direct-mail -- won't be there. The only driving factor that we may have on the corporate side would be sort of a shifting of expenses out of our operations into corporate, based on our new News Central model. But they would be bottom-line positive to us. I really can't speak specifically to those kind of dollars. Next call, operator.

Lee Westerfield, Jefferies & Co.

I have two quick questions. Lucy anticipated it by mentioning the Iowa caucuses moving back into the fourth quarter. I was wondering if we could quantify what the impact was on the local growth in the fourth quarter from Iowa caucuses, as well as -- I think you had classified this way -- from the incremental upside that developed from your direct-mail initiative in the fourth quarter. And then, I have one follow-up question about your platform buildout in a moment.

Lee, from the Iowa caucus -- effective we only brought in -- there is only about $400,000 that was brought in into the fourth quarter from political monies. So in the scheme of the our total numbers, it's insignificant. In the first quarter, you probably have about 100,000 that came in. So not a lot from Iowa. And that money is not going to drive any of the local numbers, that we reported.

Go ahead, Lee. Okay, next question, operator.

Bill Meyers, Lehman Brothers. Your line is live. Do you have a question?

Can you hear me now?

Yes.

In terms of the fourth quarter direct-mail, what's the embedded revenue assumptions -- versus I guess about the 6 million you did in the quarter last year?

At this point in time, Bill, we have been reluctant to provide any direct guidance on direct-mail. We view it, at this point in time, as it evolves as a particular category. It is not of a significant enough nature in relation to half a dozen other categories that we think, at this point in time, is worth getting into. But more importantly, I think our view is that as we have told the public, we're entering a new competitive space. And there are things that are going on within that space that, at this point in time, it's for proprietary reasons, we just don't want to discuss in great detail. We are very open and candid about the direct-mail business to the public. But we are not to our competitors, because it's a very complex space. It's a very difficult business, but it's a very large business for us. And as a function of those kind of thoughts, we tend to kind of stay away from having great deals of discussion except in a clearly defined public environment, where we know it's controlled and we know who is in the audience. I hope you appreciate that.

(OPERATOR INSTRUCTIONS). Richard Rosenstein, Goldman Sachs.

It's Lee Chans (ph) for Rich. Most of my questions have been answered. But just quickly, on March, I guess most of the upside, it seems from your comments, is coming from the lost revenue from the war last year. Is there no other sort of improvement happening? It just seems that with January pacing down, and February slightly up and March upside just coming from the cancellations, it seems like business is really, maybe softer than we expected. Any commentary on any improvement in the core broadcasting area?

That's is kind of a problematic issue to address right at this point in history. As I look out my window in Baltimore, there is still snow all over the ground. I don't think literally in the last month that there has been one week that's gone by without literally an environmental disaster, if you will, such that basically the city shut down. And we you think it's bad here, then you should go to Buffalo or Rochester are Syracuse, or pick any sitting that's above the Mason Dixon line, and the weather has been so bad that I have to believe people are not advertising on a national or local level, because there is no reason to because people can't go anywhere. In Portland, Maine it is 20 below zero, and people are not going outside to shop or do anything because you can't' it is life-threatening. Add to that, one of our biggest markets, Columbus, Ohio, they have been subjected to terrible weather as well. There is apparently a terrorist out there who is shooting people on the beltway, very similar to what happened here in northern Virginia last year, where it basically shuts down a 20, 25, 30 mile radius, where people just don't go outside or shop; they are terrified! So we've got crazy weather going on that certainly is going to end in the next probably 45 days. But we tend to think that is just a large component of what's going on across the country. There is nothing we can do about it. We have to kind of sit still and wait for it to melt away.

Drew Marcus, Deutsche Bank.

I have a clarification and a question. The clarification is, I apologize, can you give the monthly numbers, the January, February and March one more time? The question is, during this period of political uncertainty, what is your ability to close deals, including some of your existing LMAs into owned stations?

I think the political uncertainty has been hanging around there for about 10 or 12 years now. Drew. We only have a few transactions left to close in the context of Cunningham. And if the transactions are going to be hung up in limbo like they have been for as long as we do -- I don't know how many years it's been now because I tend to lose count with these kind of things, because it's almost not important anymore -- then they will just continue to be in limbo on an ad-in (indiscernible) basis, until ultimately the courts just deal with it. As far as I am concerned, it is business as usual.

Drew, in terms of the current pacings, in January is down 1.7 percent. Remember, that had the Super Bowl in those numbers last year. February, which had the Super Bowl in it this year, is pacing up 1.7 percent. And March is currently pacing down 2 percent.

At this time, we're showing no further questions in queue. I would like to turn the floor back to management for any additional or closing comments.

Think you, operator. We appreciate everybody calling in. And if there is anything anybody wants to get with us about offline, feel free to give us a buzz. Otherwise, we will see you at the end of next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.