Sinclair Inc (SBGI) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Sinclair Broadcast Group Inc. second-quarter 2004 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. (OPERATOR INSTRUCTIONS) 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. And before we begin 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 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 on form 10-Q and 10 K as filed with the SEC and as included in our second-quarter earnings release, which we furnished to the SEC on an 8-K earlier this morning. The Company undertakes no obligation to publicly release a result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

In accordance with Reg FD this call has been made available to the public along with a webcast of the call available on our website. The webcast replay will be available until our next quarterly earnings release. A 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 or to provide a supplemental detail to assist the public in their analysis and valuation of our Company. In accordance with regulation G, a reconciliation of non-GAAP metrics to the GAAP measure in our financial statements is provided on our website at www.SBGI.net.

And now for the financial highlights. On a reported basis, net broadcast revenues for the second quarter were 179.9 million, an increase of 2.9 percent or $5 million over second quarter of '03 and within our guidance provided on our last earnings call for net broadcast revenues to be up by a low single digit percent. Excluding political, net broadcast revenues in the quarter were up 1.1 percent.

Television operating expenses in the second quarter defined as station production and station SG&A expenses before barter were 81.2 million, an increase of 8.3 percent or $6.3 million over second quarter last year's expenses of 74.9 million. The increase was due primarily to higher Nielsen costs, costs related to our news expansion in the back half of last year, higher sales expenses related to the revenue growth, additional sales staffing, increased production costs for those markets that did not offer a mailer last May and an increase in general and administrative costs related to higher employee costs and a reduction in bad debt expense last year as compared to this year.

Approximately $5.5 million of corporate overhead in 2003 and a forecasted 7.1 million in '04 representing amounts associated with new central new business sales promotion and programming overhead was reclassed to TV expense from our corporate overhead.

Operating income in the quarter was 53.1 million, a decrease of 4.4 percent over last year's results of 55.5 million due to the reasons we just discussed. Interest expense is net of interest income and the subsidiary trust minority interest expense line was down $4 million in the quarter due to the redemption of the high cost with lower-cost debt. We had diluted income per share available to common shareholders in the second quarter of 24 cents per share compared to 2 cents per share diluted loss in the same period last year. The 26 cents improvement was due to lower net interest expense and unrealized gain on derivatives, lower extinguishment of debt costs and offset by a higher tax provision and depreciation expense.

Television broadcast cash flow in the quarter defined again as net broadcast revenues plus barter revenues minus station production expenses, station SG&A, barter expenses and program payments was 71 million or 3.5 percent lower than last year's broadcast cash flow of 73.6 million. The $2.6 million decrease was due to higher television operating expenses and program payments offset by the higher revenues as we have discussed.

EBITDA, defined as BCF (ph) less corporate expense and minus a loss or plus the income from other operating divisions was 64.8 million in the quarter or 5.8 percent lower than the $68.8 million from last year. The $4 million decrease was due primarily to the lower BCF and the lower EBITDA related to our non television division. We generated $15.9 million of free cash flow in the quarter and have 17.0 million dollars of free cash flow year-to-date. Our broadcast cash flow margins in the quarter were 39.5 percent, and our EBITDA margins in the quarter were 32.2 percent.

And now Lucy will take you through the balance sheet.

Thanks, David. Good morning everyone. Cash on hand at June 30th was $7.4 million, and debt on the balance sheet was approximately 1 billion, 698.1 million. Leverage at the operating company at quarter end was 6.12 times and leverage at the holding company was 7.02 times. There was approximately 92 million of borrowing capacity at quarter end.

Now just when you thought we were done with the balance sheet, we once again successfully refinanced our debt at lower prices. During the quarter we redeemed the 461 million of term loans that were priced at LIBOR plus 225 with a $150 million term loan A facility priced at LIBOR plus 175 and with pricing stepdowns tied to a leverage grid and also with 250 million term loan C facility priced at LIBOR plus 175.6. Amortization is minimal beginning March of 2005 with final maturities remaining in 2009. We made no changes to the revolving credit facility.

This transaction has 2 significant benefits. First, it reduces our borrowing costs by about $2.4 million annually. But because we financed some of the term loan redemptions with revolving debt, we now have a temporary use of our cash flow that allows us to benefit the debt reduction on a nonpermanent basis while we evaluate the best uses of our free cash.

And speaking of cash flow uses, we made another significant announcement during the quarter, and that was to declare a common stock dividend for the first time in our Company's history. This is a 10 cent annual dividend payable quarterly. Not only does this dividend represent our giving back to our shareholders, but it also makes a modest statement about our long-term free cash flow story.

While we're on the subject of free cash flow uses, during the quarter we repurchased approximately 63,000 shares of our preferred stock at an average price of $43.08 or approximately $2.7 million. Now this is an expensive security in our capital structure when you consider that the security pays a 6 percent nondeductible coupon and currently trades below its issuance and conversion price.

And finally, we acted on an opportunity that the market has overlooked. And that is buying common stock. During the quarter we repurchased approximately 455,000 shares of our Class A common stock at an average price of $10.87 or approximately $4.9 million.

Now David Smith will take you through our second-quarter operating performance.

Thank you, Lucy. On a monthly basis, time sales excluding political were flat in April, up 4.9 percent in May and up 3.9 percent in June. For the quarter excluding political, local time sales were up 1.3 percent while national was down .2. Categories that showed increases in the quarter were services, paid programming, schools, fast food, telecommunications and medical. Categories that were down were software, retail, restaurants, beer and wine. Auto was up in June and up slightly for the quarter.

Once again, political revenues at 4.1 million came in higher than our 3 million expectation outpacing both the second quarter 2000 and 2002 political revenues at 1.6 and 2.3 million, respectively. 93 percent of our political revenues came from 9 states all of which are considered presidential swing states. Those states were Florida, Ohio, Missouri, California, Maine, Pennsylvania, Wisconsin, North Carolina and West Virginia.

Revenues from our new business initiatives in the quarter were 7.2 million as compared to approximately 3.6 million in the same period last year. And as we've mentioned in the past, beginning in August we are now able to put advertisers in monthly mail pieces when they buy a TV schedule. All affiliate groups were up on an ex-political basis except our ABCs and WB's which were down primarily due to network ratings. Excluding political, our CBS stations were up 9.5, our UPNs were up 8.7, the FOX stations were up 2.2; NBC up 1.4; and WB group was down 1; and ABC's were down 1.6.

Looking forward third quarter, while political is robust, we are seeing some weakness due to the lower network ratings; mixed advertising signals by auto; a moderation of ad spending during the Olympics on non-NBC stations; and a flat in national business market in general. With that said, we are forecasting net broadcast revenues in the third quarter to grow by 4 to 5 percent. Included in that assumption is about 6 to $7 million of political ad revenues versus 1.3 million in the third quarter last year.

Current pacings including political are up 0.7 percent in July, down 3.6 percent in August due to advertisers staying out of the market during the Olympics and up 1.8 percent in September, although we don't expect to finish where we are currently pacing. All affiliate groups excluding political are pacing down except our NBCs (ph) due to Olympics and our UPNs.

Categories showing strength are services. While there is weakness in fast foods, telecom and auto. We expect the second half of the year to be driven primarily by our new business initiatives and continued political.

Operator, with that we are ready to take questions.

(OPERATOR INSTRUCTIONS) Victor Miller with Bear Stearns.

Good morning. Thank you for taking the question. Lucy, could you just help me get a sense of all the expense guidance you provided for the entire year now? It looks like you are saying programming payments will be 1095; corporate is 21.5; so what will barter be for the year? It looks like you are saying the TV total expenses are 323 and is there any other -- you do report in other line. Is that encapsulated in what you've provided and if not, could you provide some insight on that expense line? Thanks.

Sure. The corporate expense that we now have guided to is the 21.5 million. And let me just also say, David mentioned that we had reclassed some of our expenses, our corporate overhead from last year back up into the TV expenses. That was about 5.4 million, I believe, and about 7.1 that we are estimating for this year. If you pulled that corporate number out, we are actually running ahead of where we guided you last quarter for corporate overhead. So we're doing better on the corporate overhead lines. When you made the adjustment for the reclass back up to the TV expenses, we are still within the guidance that we provided you for TV expenses last quarter, which was 6 to 8 percent. So just know that that is a reclass and we are still within our expense guidance.

With that said, corporate overhead, again and this is -- we have this detailed in our press release that we filed today, we have about 21.5 million for the year on corporate overhead, and we are looking at 8 percent up for the year for 2003. The last year number after the reclasses are 299.3 million. That would put you this year on a full-year basis, and this is the TV production and TV SG&A in the $323 million range. That does not include barter expense, which is a separate line.

Barter expense we are estimating to be about I believe it is 15. -- about 15.6 million for the quarter. That typically runs, if you look at the history, that has been running in the $15 million range, although it is going to fluctuate as the quarter seasonality also fluctuates. It will probably be a little bit higher in the fourth quarter. And our expense guidance does not include the other non-television divisions, which would be our G1440 Internet division and our Acrodyne division. And their expenses have been running in about the 3 to $4 million range -- it will probably be a little bit higher also in the fourth quarter.

Tim Wallace with UBS.

This would either be for David Amy or David Smith. Would you be able to quantify the incremental revenue that you are receiving from your 2 initiatives, your news central and your direct-mail?

Historical on new initiatives in terms of the direct-mail, incrementally year-over-year it’s about $3.5 million for -- through June. As far as the news central process and the stations, we have not broken that down specifically on our calls or anywhere as far as what the incremental revenues are at this point. So we don't -- haven't been providing a specific number. However, the program itself is a new program. It's new in terms of its presence in the market. So it has lower ratings than some generally speaking as a startup than the entertainment programming that it has replaced. So from a standpoint of incremental, I think the question would be are we comparing that against our entertainment programming. So at this early stage, generally speaking, the revenues are not as high as our entertainment programming was. But it is not a significant number at this point.

Ken Silver with CRT Capital.

Good morning. I just had a question on CapEx. Can you review what you think CapEx is going to be in 2005 and then longer-term what your sense of CapEx is?

Sure. For 2005 the last guidance we've given, Ken, was for 30 million. In 2005 we are still on track for our 47 million for this year. Beyond 2005 we have not provided any kind of guidance. I know in the past we've talked quite a bit about what technology comes up that we could take advantage of. And so at this point I don't think we are quite ready to give any kind of guidance for 2006.

I agree with that Lucy. I would just say generally what we talk about is under the current station structure is about 10 to $15 million annually of maintenance costs to support our television operations and maintain the level of operations as we see. But as Lucy mentioned, going forward there are advances constantly that are coming our way in terms of just technology advances that we look at in ways to reduce our costs, creating different types of hubbing (ph) situations or whatever. So those will be looked at closely going forward and where we can really see a return on our investments. You can expect us to create efficiencies in our operations in that regard.

Sean Butson with Legg Mason.

Just a couple of things. On the new business initiatives that you mentioned in the press release, I just wanted to -- is that just direct-mail, or does that include new centrals (ph) and some other things? Excluding the new -- I don't know if you have numbers with you excluding the new business initiatives how the business is doing year-over-year as well.

The new business is just direct-mail. We're going to be referring to it as new business because again as we talked about in the past, we are really selling TV and the direct-mail pieces as just a way of bringing them over. We don't really look at the business on an ex-new business metric because again, it is all TV. However, we do look at the business on an ex-political metric, which is a seasonal event that takes place.

And again, on an ex-political basis we grew the business 1.1 percent in the second quarter, and the guidance that we've given for the third quarter would also show about a 1 to 1.5 percent growth if you back out all the political. Now Sean, I believe that you look at the metric on a 50 percent incremental basis for the TV industry on an ex-political, ex-Olympic basis. So in that case, third-quarter guidance would actually show the business would be up in the 2 to 3, 3.5 percent range using a 50 percent incremental basis.

And that really puts us in the pack of where most of the companies that have reported so far on an ex-political, ex-Olympic basis are and I think that is actually pretty good given the ratings challenges on the WBs and ABCs that we have right now.

Lee Westerfield with Harris Nesbitt.

Actually 3 quick questions. First, at the FCC, did JSA review effect you in any way at all, and if so how? The CapEx projects for the remainder of the year, in the past you've outlined where those are occurring. Can you update us as to the status in specific markets? And then -- this is more a subjective question. When you look at the national spot sales that you guys are conducting or have conducted for you, what effect to do you think the Olympics is having on your non-NBC stations on the WBs, on the FOXs and our weak seeing a skewing away in August and back in September, or what is the effect of the Olympics as you perceive it?

I will take the first 2 and then David, you can take the JSA. The CapEx, as I mentioned -- we are still on track for this year for the 47 million, and that is broken down to 18 for digital, about 8 for news and about 21 for building, maintenance and tower projects. That is the same guidance that we've given on the last call. Everything is on track with CapEx.

On the Olympics, clearly and you saw it when David talked about the current pacings, where August is pacing down about 3.5 percent, and that is clearly the advertisers waiting on the sidelines, doing those 2, 2.5 weeks of Olympic coverage. We are seeing a little bit in the current pacings, ex political of August coming back into the positive range, but there is no question that right now if you don't have a lot of NBC stations, you are having -- seeing an impact from the Olympics on how much advertising dollars are being spent on your stations.

I think with regard to the JSA question, I don't know how to characterize this in anything other than kind of characteristically of what the FCC does. They want to start a probe, and they start soliciting data listing data and one thing or another from the public in the broadcast industry. And years in years and years go by, and people get involved in it and ultimately they may or may not do something. At this point in time all I can suggest to you is that JSAs and LMAs and things of that nature have been talked about for years and years and years -- as long as we've been doing it. So I don't expect that's going to change. I think it is more about politics than it is anything else. Sometime years away from now maybe the subject will become relevant. But I don't have any particular concern about it short-term or long-term as it relates to us.

(inaudible) as it is comparative to the radio industry as well, but what I found interesting about the announcement was that they were facing their inquiry around the eight-voices test, which we already know has been remanded (ph) back to them not only once, but now again by the Philadelphia court. So how is it that they are building their inquiry around an eight-voices test that has already been pretty much thrown out as a basis for anything?

I think the other issue, the other sidebar on the whole thing is that the radio is a much more concentrated media than the television is. It is a much more monopolistic industry as opposed to television. I don't need to tell you that when we look at our industry there is typically 6 television stations representing the networks and there is Spanish and there is religious and there's shopping and there is whatever else there is, and then there's 300 cable channels, all spewing television. We don't have that in radio. If you go into a marketplace in radio, you've got typically 3 hunters in the market anymore. Any one of those hunters might have 50 percent of the marketplace and you may have 3 JSAs, and (indiscernible) 7. So that is kind of a different issue than what we have in the context of television today.

Marcy Revaker (ph) with Wachovia.

In terms of your direct-mail growth to date and going forward, are there any bottlenecks or any potential surges that might cause lumpiness to the ramp up? And also in terms of your incremental revenue, we got the change from year-to-year but how much of this is truly new advertising? Is it 100 percent, or are some traditional advertisers being displaced?

I would tell you the bottleneck certainly is not inventory. The bottleneck, as you can imagine always is and I wouldn't characterize it as a bottleneck as much as a situation we just have to deal with long-term. And that is the skill sets of people involved in selling television historically have really been involved in dealing with agency businesses which is really more transactional type business as opposed to knocking on doors and asking people to shift the money from one pot to another. We've really never done that historically as a business. The vast majority of our business has always come from agencies. So I think if there is any challenge for us is the challenge of causing people long-term to knock on doors as opposed to deal with agencies. And I think that really is our biggest challenge. And again, that is just something that boils down to a people issue.

Having the right salespeople who aren't infected, if you will, with the 20 year, 50 year history on calling on agencies where by definition, they're going to get a share of the business. And the only thing they negotiate is the rate. That is a completely different business than cold calling businesses who spend money in any form of print and have their entire career -- a different kind of business. The biggest challenge for us is finding a different type of sales individual, one who can do both or wants to do both and individuals who know nothing about television, could care less about television and are really interested in just pure sales. It is a full-time internal effort for us to find those types of people and integrate them into our sales organizations. And my guess is it's not going to stop. It is a forever challenge, as sales is.

I was just going to say there is no question about the size and magnitude of the direct-mail businesses as we are calling it and the inroads that we are making into that business are quite important. And it is going to be clearly a growing segment for us and as far as your question is -- is it new business is it incremental, it is still such a small part of our revenue number that I don't believe that you would see any of the direct-mail competitors like the (indiscernible) even suggesting to you that they see our presence at this point. But at the same token, the monies that are coming in are from advertisers that have not been on TV and the majority of the money is in that regard.

So it is new business, and it is money that we wouldn't have seen otherwise if we didn't have this initiative in place.

Dave I was going to add, too, that if you look at what we've done to date, we've added almost 2100 new advertisers. As Dave said, that had never been on our TV stations before, 2100 through this initiative.

And just appreciate, that 2100 is across all of our markets, and it really represents just a footnote in terms of the scale of the people out there who have no appreciation for how simple it is to be on television, and you really can't appreciate something of the scale until you've been to some of these meetings where we bring in 100, 150 people who have never been on television and you put them in a room and you ask them some very fundamental questions about their spending habits for advertising -- it is phenomenal and shocking to see how inefficient they spend their money today to reach an audience. It is absolutely incredible.

And when they hear about how simple it is to be on television, it is shocking to them to think that they have been doing what they been doing their entire professional career and didn't know this. And all that speaks to is that our business historically has made so much money in dealing with agencies, that we've really never felt compelled to go knock on other people's doors to generate revenue because we make so much in agency business. So that's an evolving model. The agency world as a function of the way that's evolving nationally more so than locally -- that's why we're tending to spend an awful lot of effort in time creating this process of converting people, which we think only benefits the industry.

(OPERATOR INSTRUCTIONS) Paul Sweeney with Credit Suisse First Boston.

It is Sean Filly (ph) stepping in for Paul. David, can you talk a little bit about 2005 expenses and how we should think about the incremental if any from the new business initiatives? And specifically the news initiative? And also just give us an update on what the status of the affiliate agreements, just in the wake of the Dayton (ph) switch?

As far as the news initiative goes, Sean, we are signing on a news operation in Buffalo here in the next couple of days. It's imminent. So incrementally we will have 1 more property next year where we're really not looking to add many more properties into the pipeline. There is a possibility, but we are really the only markets of size that we haven't added are Minneapolis and St. Louis at this point. But we don't have those on the drawing board at this point. We may do that next year, we may hold off for a while. That remains to be seen. We're still trying to evaluate the profitability of those initiatives.

Drew Marcus with Deutsche Bank.

Good morning. Just a quick question. How much leverage are you guys willing to move up to to increase your dividends and to buy back more stocks?

That was a timely piece that you put out on the LBOs for both radio and television so it certainly goes to our balance sheet, and we've always been aggressive in terms of using our balance sheet to do what we think is opportunistic and has value. Certainly looking at our equity and the valuation that we see today motivates us to go out and borrow more and buy up our equity because when you look at the cost differential from a capital cost versus a borrowing cost, it is substantial. So I don't think we are going to back off from the market in terms of being aggressive buying our stock if the market continues to sort of have a negative attitude towards television stocks and Sinclair, in particular.

I think the issue of dividends is certainly something we look at and will continue to look at on a quarterly basis. I think the collective street has done enough long-term analysis on us to be able to look at our free cash flow going forward for x number of years, and the numbers just keep getting larger and larger and larger year after year after year as we delever this thing, and the business continues to move. So I think the biggest challenge for us is going to find out -- is to find out what to do with all the money that we're going to generate, and yes you can pay down debt with it, yes you can do dividends. If there's a thing to buy, then yes you are going to pay down debt and yes you're going to dividends. And I guess you have to make an argument somewhere along the line is that the dividends have no place to go but up.

The rate at which they incline is going to be determined as we go forward. But that clearly is something that we're looking at as a viable alternative to return the equity to the shareholders of the Company. We think it is a long-term good thing.

Marcy Revaker (ph) with Wachovia.

A really quickly, can you tell me how much of your capital expenditure in the second quarter was related to your digital conversion and also what your current tax expense was?

Sure. On the CapEx, it was about 6 million of the 14, that related to digital. The current portion is running a couple hundred thousand in payments, and that's really on the state side. Again, we are not a federal taxpayer and won't be for the few more years. And we're running at about a 40 percent tax rate.

Ken Silver with CRT Capital.

Can you just tell us how large your restricted payments basket is under the bond indentures?

That's actually a pretty large basket; it's upwards towards about a $1 billion. That is a basket just to put in perspective, that was put in place probably about 11 years ago, and has grown with all the equity issuance that the Company has done. So it is a cumulative basket which is why it is so large. We do have those for our bondholders. There are some restrictions in our bank deal as far as what can be -- how much money the operating company can be sent upstairs to the holding company for dividends and stock repurchases. And that's running at about $160 million of what the basket is that you can send up there. We also have a current requirement on our operating company leverage where we can’t spend the last 0.25 turns of our operating company leverage for stock repurchases. But with that said, there is capacity there to buy in more of our equity.

There are no further questions at this time. I will now turn the conference back over to your host to conclude.

Thank you, everybody. If anybody who has any questions that they missed or didn't get in today, please feel free to give us a buzz off line. Otherwise we will see you at the end of the third quarter. Have a nice day.

Thank you. This concludes today’s conference. Thank you all for your participation.