Sinclair Inc (SBGI) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Fisher Communications third quarter 2004 earnings conference call. My name is Steven and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Bill Krippaehne, President and CEO of Fisher Communications. Please proceed, sir.

Thank you and welcome to the first Fisher Communications quarterly earnings conference call following the issuance of our note offering in September. With me here at our offices in Seattle is Ben Tucker, President of our Broadcasting Operations; and Rob Bateman, our Chief Financial Officer. Rob will provide you with a financial overview in a moment. And Ben will be available with Rob and me for questions later in the call.

Before getting started, let me remind you of the potential for making forward-looking statements during the call. Consequently, before beginning, Rob will read a paragraph regarding forward-looking statements. Rob?

Thanks Bill. Please be advised that comments made in this presentation may include forward-looking statements. These statements may be identified by the use of forward-looking terminology such as anticipate, believe, continue, could, estimate, expect, intend, may, might, plan, potential, project, should or will or the negative thereof or comparable terminology. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control.

These risks and uncertainties include those discussed in our quarterly report on Form 10-Q for the quarter ended June 30, 2004, filed on August 9, 2004, under the heading "additional factors that may affect our business, financial condition and future results." Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements are made only as of the date hereof; we do not undertake any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.

Now, with that accomplished, let's go ahead and dive into financial information. Starting first with revenue. Our total revenue in the third quarter of 2004 increased 11.1 percent to 40.3 million, compared to 36.2 million in the third quarter of 2003. Revenue for the 9 months ended September 30, 2004 increased 7.4 percent to 111.5 million, compared to 103.9 million in the 9 months ended September 30, 2003. The increases in revenue in the 2004 periods were primarily due to strong candidate and advocacy advertising during the third quarter of 2004.

Now as is our practice, for competitive reasons we do not break out the specific revenue amounts pertaining to political advertising; however, I will note that our total political revenue in the first 9 months of 2004 fell into a range of about 8 to 12 percent of our total revenues.

When we were out visiting with investors for our recent notes offering, we mentioned that there are certain key factors that impact our revenues now and in the future; those being political the cycle, the economy in the Pacific Northwest, and the success of ABC Television Network programming. The ABC prime time lead into our late news is particularly important to us and as a reminder about half of our revenues are derived from our two ABC affiliated television stations in Seattle, Washington and Portland, Oregon.

With regard to the Pacific Northwest economy, we are seeing signs of improvement. For example, the unemployment rate in Washington State has improved from 7.2 percent in September 2003, to 5 percent in September 2004. Certain leading economic indicators for the Northwest are also moving in the right direction.

As far as ABC programming, we have also seen some initial improvement this season though of course it is still early.

Our total revenues include the operations of Fisher Plaza, a communication center located near downtown Seattle that houses our Seattle broadcasting operations and our corporate headquarters. Occupancy commitments at Fisher Plaza reached 87 percent as of September 30, 2004, compared to 70 percent at December 31, 2003. We continue to believe that we will be above 90 percent occupied and committed for occupancy by the end of 2004. Fisher Companies make up a total out 42 percent of the total 300,000 square feet available at Fisher Plaza.

A detailed breakout of segmental revenue information is provided in our Form 10-Q for the third quarter which we plan to file early next week.

Moving to operating expenses. As compared to the same period in 2003, as I mentioned, our revenues have increased; however, total operating expenses decreased in the 2004 period. These overall decreases in operating expenses were attributable in part to certain nonrecurring G&A expenses incurred in 2003 including retention of pension termination expenses, as well as continued tight controls over expenditures. These overall declines in G&A expenses in the 3 and 9 month 2004 period as compared to the same periods of 2003 were offset somewhat by increased expenditures for the Company's compliance with the internal control documentation and testing provision of the Sarbanes-Oxley Act.

Now as many of you know in September 2004, we completed the successful placement of $150 million of 8 5/8 percent Senior Notes. Of the total cash proceeds of 144.5 million, net of transaction cost, about 144 million was used to retire our broadcasting subsidiary's credit facility, our Media Services subsidiary's credit facility, and to settle the outstanding obligations under our variable forward sales transaction and I will come back to the forward transaction in a minute.

In September 2004, we also entered into a new $20 million, 6-year Senior Revolving Credit facility. No amounts were outstanding under that facility at September 30, 2004. As a result of paying off our prior debt facilities, we wrote off deferred loan costs and recognized total extinguishment of debt totaling 5 million in the third quarter of 2004.

Our operating results include gains and losses from derivative instruments related directly to our prior borrowing agreements. We previously maintained an interest rate swap agreement under a prior debt facility. This interest rate swap terminated in the first quarter of 2004. We have considered the possibility of an interest rate swap for a portion of the $150 million Senior Notes; however, we are not currently pursuing such a hedging strategy.

Let me get back to the forward transaction. We entered into this agreement in March of 2002. Initially collateralized by 3 million shares of Safeco Corporation common stock owned by us. As we have planned to do, and as we communicated to many of you as we visited with you in September, we have now terminated all remaining traunches of this forward transaction having completed that a little bit earlier this week.

In connection with termination, we paid a cash termination fee of 16.1 million, which eliminated the accrued loss liability of 16.7 million we had recorded on our balance sheet as of September 30, 2004. As a result of this termination, all shares of Safeco Corporation common stock owned by us are now unencumbered. These shares had a market value of 137.1 million as of September 30, 2004.

Now as you know these derivative instruments have had a significant impact on our bottom line. We've recognized a loss of 2.7 million on derivative instruments in the third quarter of 2004, compared to a gain of 49,000 in the first quarter of 2003.

For the 9 months ended September 30, 2004, we recognized a loss of 13.2 million on derivative instruments compared to a gain of 460,000 for the same period in 2003.

Net loss for the 3 months ended September 30, 2004 was 5.2 million compared to a net loss of 4.3 million in the 3 months ended September 30, 2003. Net loss for the 9 months ended September 30, 2004, was 16.5 million compared to a net loss of 11.5 million in the same period in 2003.

Now these net figures of course include the effects of the significant derivative losses as well as the extinguishment of debt previously mentioned. For example, the 16.5 million net loss for the 9 months ended September 30, 2004, includes after-tax losses of about $12 million related to derivatives and extinguishment of debt.

Now looking at cash flow and liquidity, with the completion of our refinancing, the establishment of our $20 million revolver and the additional security of our significant investment in marketable securities, which will remain unencumbered, we believe that we have solid liquidity. I should mention that our termination of the forward transaction was accomplished through the use of existing cash and again as I mentioned, the 20 million revolver remains unused as of today.

I believe some of you may be interested to know our operating cash flow as defined under our new credit agreement. As defined in those agreements, and based on the trailing 4 quarter period, we calculate our operating cash flow to be 19.4 million.

That concludes the prepared portion of our presentation today. At this time, Bill, Ben and I are available for questions and I will ask the operator to assist us with responding. Stephen?

(OPERATOR INSTRUCTIONS) Jeff Brunswick (ph) of RBC Investment Management.

This is Jeff Brunswick from RBC, but who's counting? Gentlemen, good afternoon I believe or good morning. Could you maybe talk on a big picture basis of what is your guess-timate or any sort of changes you see on an FCC level with the existing administration, any changes or anything coming up over the next year that may or may not be on the docket that would affect radio and television consolidation, etc?

Thank you. I am going to have Ben Tucker, the President of our Broadcasting Operations give you some color on that question.

That is a very good question, Jeff. Now that we are through the election and we know that we are going to have a Republican administration which anticipated that Michael Powell will be leaving the FCC. Some of the -- there’s some conjecture that Martin might move up to that post as FCC Chairman. This is a personal view. I think we would find him a little more broadcast friendly than Michael Powell has been. Having said that, I don't expect there to be substantial changes in the ownership rules and the third circuit as ruled just recently in Philadelphia so we are still encumbered by those rules and there is still a strong focus on localism and a lot of activity that surrounds what stations are doing at the local area.

If you followed it in the trades, there have been some challenges to licenses and I think some of the antics of the last couple of weeks by Sinclair (ph) and Pathis (ph) in the broadcast sector during the election will cause some even further scrutiny. So I think the DPT (ph) transition has bode the FCC and Congress very focused on trying to make that as uncomplicated as possible and it's very complicated. So I think there's going to be a lot of attention spent there and time spent there. And I really can't say that I think there's going to be a lot of relief in the ownership area right now. It all depends on who we get in as Chairman and what the administration might allow them to do.

I would also add, there is some additional speculation that the media newspaper cross-ownership rule will be relaxed. However, at the same time, there is going to be continued FCC scrutiny over basic elements of license maintenance like children's programming, and local reaction to community issues. That means that ascertainment and public files are going to become elements of additional scrutiny by the staff.

The second question would be, you are pointing to a better local environment in your markets, and looking out 2 to 3 years, is there any reason that you don't think you can achieve industry margins either in your radio and television business, which I would describe in the 30s would be certainly comfortable within a range. Would you be disappointed 2 years from now if you weren't there?

I'm going to let Rob Bateman address that.

We certainly see things moving back towards more of an industry norm over time, as I think people recognize in the Northwest we were hit much harder than many other parts of the country with regards to just the economic recession. We're starting to see some signs that that is improving. Likewise, as I mentioned in my prepared remarks, our two ABC affiliated stations really are drivers for us significantly and ABC programming has not done over the last few years.

And so we've got some factors that are outside of our control that we would like to see some improvement on. And of course that's because we have such significant fixed costs as do all broadcasters if those improvements would drop to the bottom line. And we certainly see ourselves improving significantly we hope over the next few years.

Thanks guys.

Joe Rodbar (ph) of Nomura (ph).

Hi guys. Nice quarter. I was just wondering in light of the recent success of ABC and the stronger lead into your evening news, first of all if you could quantify what percentage of your TV revenue comes from news? And then secondly, if you could quantify the incremental cash flow from the stronger ABC ratings?

Joe, let me try to answer that and give you some general kind of templates for news revenues. First of all, and I want to clarify something, ABC's improvement really has not -- even though they've had some primetime improvement and there have been some headlines that have spoken to that. There really hasn't been the lead-in improvement to our late news that we would anticipate. They've improved early Sunday evening and some Wednesday improvement but the late news improvement across the board hasn't occurred yet.

So we're happy, we're happy to see some shows pop out of being the top 25 for a change, but we still have plenty of work to do and they are not really on the critical selling night. So we have some issues with that as well. But it's better. Believe me, it's a lot better.

Overall news revenues in a market are going to be -- and we follow the same thing, somewhere in the 30 to 40 percent total revenues. So we've got our revenues are going to be right in that same range. And I focus on ABC, but our CBS affiliated stations are enjoying the fact that CBS is having a lot of success this year, too. And in those markets, we are enjoying better lead-ins to our late news. So we anticipate some incremental growth in those markets. Again, with the number of hours in news that we have, somewhere in that 30 to 40 percent range is about the revenue that we generate from local news.

With regard to the cash flow question we're still really early on on that. I think Ben really addressed that with his comments on ABC and the time spots where they are at.

Also, if you could quantify the year-over-year change in TV revenue ex political? I understand they don't break out the political separately but if you could give us a sense to what the gains were say less half of the political since it's not entirely incremental.

Well, we'll be filing our 10-Q early next week and we have all the segmental data in that, and then I would encourage people to look at that data and they can apply to somewhat tight range percentagewise that we provided of 8 to 12 percent of our revenues in 2004, year-to-date. And I think you would be able to come up with some figures you could use for your own analysis.

All right, thank you.

Andrew Finkelstein of Lehman Brothers.

It's actually Brad Rogoff (ph) for Andrew. I was hoping you guys could give us a little bit on the Seattle and Portland markets. Obviously you said the economy is better but maybe what the television market did as a whole in the quarter or the radio market obviously in Seattle? So we could have something to reference versus your numbers? Thanks.

I think Ben Tucker can give some general color on that.

Andrew, I got those numbers all in my offices as far as the markets, both markets are up overall compared to '03 obviously. But what I will tell you is that local business has remained pretty strong throughout the year; national is soft; and then political has pushed the markets up, up, up considerably. We have actually paced very well with the markets in terms of overall share of market growth and we made some improvements in both Seattle and Portland in the third quarter. We did that really by focusing on the moneys that were available knowing that we were in a quarter where our ABC prime numbers were very soft. We needed to focus on stronger share of political dollars that we thought were available to us, so we did that and it actually picked our overall share of business up in both of those markets.

Then just one other question if you guys wouldn't mind going over exactly how the OCS calculation is, as defined by the agreement.

I think Rob will respond to that.

I will give you the overall parameters. The specific calculation is as defined the documents indenture as well as the 20 million revolver and those agreements are probably the FCC. The specific steps would take 30 minutes to go through so I'll just say that the main adback (ph) is interested, there's a lot of different pieces that go into that. We provided the number, 19.4 million. It's all -- you can derive all of the pieces from the financial statements that are out there and because the documents are filed and you can get the information from the publicly available files, I could go over that with you I think off line and I would be fine with that, because we are just looking at publicly available information. So if you would like me to help you through that, I certainly can off line.

No that's fine. Do you guys actually have it in the quarter with the OCS list?

For the quarter, we did not do that calculation. It's a 4 quarter rolling average and so that is how it is defined and that is how we calculated it.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Bishop Cheen with Wachovia Securities.

Good afternoon Bill, Ben and Rob. A couple of housekeeping things. The unencumbered Safeco Stock, how many shares does Fisher have now?

We have 3 million shares of stock just, over 3 million shares. Those are now unencumbered and will remain unencumbered.

Right. Ben spoke certainly about the term and texture of what you are seeing in the TV market. Can you give us a little more color on what you're seeing and feeling in radio as well?

Great question, Bishop.

The radio markets, the Seattle radio market overall for the quarter was about flat, just about flat to a year-ago. We actually did a little bit better than that. We have been growing share in the market. We are on track to have what looks to be a pretty good year if we can keep up what we are doing. But the quarter ended up very, very flat to a year-ago.

And in your other radio markets, is there any general observation? I know each market tends to be certainly its own market? But --?

They do, Bishop. Our smaller markets we continue to do very well. We have grown our share in each of those markets and we continued that through third quarter. Actually we probably had 68 months in a row that that group has made their cash flow target and their share of market target. In markets that are relatively flat we've increased our business and are up over '03.

Bishop, I think it is important to note that in those smaller markets that our not formally measured, our success is really a consequence of not only our programming locally, but the effectiveness of our sales force in achieving relationship sales. Everything that we have experienced historically continues to hold that we have very solid relationships with the local business community and advertisers. We have solid connections with the community that has continued to support us and also lead us to expectations of further regional sales as we continue to exploit our relationship with the Mariners programming.

That is helpful. You're going to get your at bat so to speak. In Q1 of '05, when Mariners network gears up again?

That will be -- we will start formal spring training broadcast in late Q1 but we've actually begun interim programming with what we call the Hot Stove League in Seattle to further focus the audience that has been moving from the former rights holder to our station. And we have seen our cume (ph) grow significantly, and right now we are really focusing on off-season news through the baseball news through our Hot Stove League and we kicked that off just the night before last, and that is going to be continuing right up until spring training starts again in the early spring.

Care to speculate on whether there will be major fear in Beantown from the Mariners this year?

I think it's a little premature to speculate on that.

Thanks gentlemen.

David Brecht (ph) of Columbia Management.

I had just had a question about the ABC affiliates. I just was wondering where are you in the renewal process for the 2 ABC stations?

I'll let Ben address that. We have some current news on that.

That's a good question. As you remember, when we were on the roadshow we had talked about having an extension through October and right now we have -- we're working on a 2 week extension at this particular point in time. We are still having very open and good negotiations. They've extended all of the groups that had expired contracts of the same amount. So I know and I have talked with some other group heads that they all received 2 week extensions just as we did.

My concern, and I've said this to ABC, was that I don't think we're going to get done in 2 weeks and they said well, we want to keep it to 2 week periods so that there is a clear focus on trying to get to the end of this. So we agreed to that and we are working with them. I really don't think we will have something done next week. I think we will probably be on another extension and the big issue still is the pipe that we talked about, the digital pipe, we've got language going back and forth about what they're going to need and what they'd like to have. We're not going to give them what they'd like to have without without having some idea of how we share in their use of that midstream (ph). That's pretty much the focal point for the other groups as well as far as I know.

Is the stronger programming this year having any effect on the negotiations or is that just -- is it really more the kind of digital issue.

It's really the digital issue. They'd like to make the stronger programming be more of a better lever point for them.

That's what I mean.

We’ve told them that we are obviously happy with that but we're also coming off of a 4 years in a row of real decline in prime time ratings. So until we start to see -- able to start to recapture some of that share prime time revenue that we've lost, we're not going to be totally happy. But we are happy -- but we're happier than we have been in the past.

I think it's also important to note as Ben did earlier in has remarks, that the prime time improvement of ABC are not in segments that give us significant lift in our late night news. If programming changed Thursday night through Saturday, I think there would be more weight behind their argument that they are bringing substantial improvement to our revenues.

But basically the other groups are all kind of in the same stage as you are? You're all kind of in the same place?

We're all in the same place.

Great, thank you.

Tom Care (ph) of RBC.

Can you go over your NOL situation again and what level of cash taxes you might be paying in the next few years?

We were actually in a taxpaying situation for 2003 because of the sales that we had in the fourth quarter of 2003 in which we completed the sale of our last two commercial properties. We sold our two Fox affiliated stations in Georgia and we sold our AM/FM combo in Portland, Oregon. So that put us into a tax paying situation. We don't have any NOLs other than those we may be generating in the current year; however, we do have tax basis goodwill that we continue to amortize. We don't have of course, amortization under the current accounting rules for book purposes. We do not anticipate in the next couple of years that we're going to be in a tax paying situation.

Okay, thanks.

There are no further questions at this time, sir.

All right. Thank you Steven and thank you for participating in this call. That will terminate this session.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.