Sinclair Inc (SBGI) 2004 Q4 法說會逐字稿

Good day, Ladies and gentlemen, and welcome to the Q4 2004 Fisher Communications earnings conference call. My name is Candace and I'll 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 towards 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. Ben Tucker, acting President and CEO of Fisher Communications. Please proceed, sir.

Thank you, Candace. Good afternoon, everyone, and welcome to our quarterly conference call. With me here in Seattle today is Rob Bateman, our Chief Financial Officer. Rob is going to provide you with a financial overview in a moment and we will both be available for questions later in the call.

As you can see from the press release that we issued earlier today, we've had a very positive finish to 2004. And we also have a much more simplified financial structure going forward due to the bond offering that we completed in September. We're looking forward with optimism to Fisher's future and we are focused on improving and sustaining our broadcasting business.

Before we get into the call, let me remind you that we may make forward-looking statements during the call today. Therefore, Rob is going to read a paragraph regarding forward-looking statements. Rob?

Thanks, Ben. 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, predict, 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 September 30th, 2004, which we filed on November 9th, 2004 and more specifically 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 of such statements to reflect future events or developments.

Now with that accomplished, let's go ahead and dive into the financial information.

As Ben mentioned, we ended 2004 on a high note. Our revenues were particularly strong in October and into the first few days of November leading up to the election. So let's take a closer look at revenues.

Our total revenues in the fourth quarter of 2004 increased 22.6 percent or 42.3 million compared to 34.5 million in the fourth quarter of 2003. Revenue for the year ended December 31, 2004, increased 11.2 percent to 153.9 million compared to 138.4 million in 2003. The increases in revenue in the 2004 periods were primarily due to strong political advertising and generally improved local advertising, offset somewhat by weaker national television advertising.

As we mentioned in our Q3 2004 conference call, 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 2004 was in a range of 10 to 15 percent of our total broadcasting revenues. Political advertising was stronger for our television operations in Washington and Oregon than in Idaho. We were considered potential swing states in Washington and Oregon for much of the national campaign. And we also had some local and regional political dollars that we were successful in pursuing and obtaining. Over 90 percent of the total political dollars brought into 2004 were derived from our television operation.

A complete breakout of our revenues and expenses by segment will be provided in our 2004 Form 10-K. However, let me provide a few data points. And to do so, I'll refer back to the year-to-date figures through the first nine months of 2004. If you were to go back and look at our form 10-Q here from a few months back, you would note that revenues from television operations accounted for about 63 percent of total revenues. If you look at radio, that was about 35 percent and Fisher Plaza was about 2.5 to 3 percent.

Due primarily to the strength of political revenue for our television stations, the annual segmental figures show television making up a somewhat higher percentage of total revenues, radio, somewhat lower, and Fisher Plaza had about the same percent.

I would also remind you that when you add together the revenues from our three largest broadcasting units, consisting of our ABC-affiliated television station in Seattle, our ABC affiliate in Portland, and our Seattle radio operation, those operations account for approximately 3/4 of consolidated revenues. That being said, we recognize the significant contributions from our small market television stations in southern Oregon, the Tri Cities area of Washington, and three markets we serve in Idaho -- Boise, Idaho Falls, and Lewiston, as well as our radio stations in eastern Washington and Montana.

Those of you who are familiar with our industry know that there has been an industry-wide softness in national advertising. And we have certainly seen that as well, excluding political. However, we continue to focus on those things that we can control, including the quality of our local programming and the effectiveness with which we provide success to our advertisers. Especially in our larger markets in Seattle and Portland, program and audience ratings are very important to our success. We are pleased to note that ABC Television Network programming continues to show strength from the initial positive results we saw in the fall of 2004. Total revenues include the operations of Fisher Plaza, a communications center located near downtown Seattle that houses the Company's Seattle Broadcasting Operation as well as our corporate headquarters. Occupancy commitments at Fisher Plaza reached 89 percent as of December 31, 2004 compared to 70 percent at December 31, 2003. So we have seen some significant improvement there. Fisher companies make up a total 42 percent of the total 300,000 square feet available at Fisher Plaza.

Let's take a look now at operating expenses. As you know, broadcasters have significant fixed costs. Therefore, we see improvements in rating and audience -- or as we seek improvements in ratings and audience share, and are successful in effectively selling our airtime, a significant portion of the revenue drops to the bottom-line.

Looking at cost of services sold for the three months in annual periods ended December 31, 2004, compared to the same periods in 2003, the amounts have not changed significantly. We have had changes in programming from changes in syndicated programming to successfully launching a 4:00 newscast at KOMO TV in Seattle to changing our Seattle KVI radio station to a Fox News affiliated station. But we have been successful in keeping the overall cost level between the period.

Selling expenses increased in the three-month to twelve-month period ended December 31, 2004 as compared to 2003 as you would expect. Selling expenses include a variable component and increased with increased revenues.

Let's talk for a moment about general and administrative expenses. Our 2004 G&A expenses decreased 5.1 million or 13 percent as compared to 2003. Q4 2004 G&A expenses decreased about 6 percent from the fourth quarter of 2003. These decreases were despite significant costs incurred in 2004 relating to Sarbanes-Oxley internal control compliance. The decreases in expenses were due primarily to certain nonrecurring general and administrative expenses incurred in 2003, including retention in pension termination expenses as well as continued tight controls over expenditures in 2004.

As many of you know, our historical operating results include gains and losses from derivative instruments related directly to prior corporate borrowing agreements. These borrowing agreements were refinanced in the second half of 2004 through $150 million placement of senior notes. As a result of the refinancing, our debt structure was significantly simplified. Debt that was nearing maturity was extended to 2014, and we no longer have any derivative instruments outstanding. However, derivative instruments had a significant impact on our operating results in 2004 and 2003. We recognized a gain of 0.6 million on derivative instruments in the fourth quarter of 2004 and that was actually from the period September 30th, 2004 through the date that we terminated that forward transaction in early November. That compares to a loss of 7.4 million in the fourth quarter 2003.

For the year ended December 31, 2004, we recognized a loss of 12.7 million on derivative instruments compared to a loss on derivative instruments of 6.9 million in 2003. We paid a cash termination fee of 16.1 million in November 2004, to terminate the forward sales transaction that I alluded to. And we no longer have any derivative instruments outstanding. We reported net income of 4.5 million in the fourth quarter of 2004 compared to a loss from continuing operations of 6 million even in the fourth quarter of the prior year.

Please note that we did not have any discontinued operations in the fourth quarter of 2004. In fact, the only discontinued operations that you see reflected in our P&L in 2004 was a small amount totaling 132,000 after-tax that we recorded in the first quarter of 2004. And that actually related to a purchase price adjustment on the sale of our Georgia television stations that occurred in late 2003. The significant improvement from 2003 was primarily the result of strong candidates in advocacy advertising leading up to the November 2004 election. Including income from 2003 asset sales classified within discontinued operations, we reported net income of 19.8 million in the fourth quarter of 2003.

Loss from continuing operations for the year ended December 31, 2004, was 11.8 million compared to a loss from continuing operations of 14.8 million in 2003. Net loss for the year ended December 31, 2004, was 12 million. And if you include income from 2003 asset sales classified within discontinued operations, we reported net income of 8.2 million for the full year ended December 31, 2003. These net figures, of course, include the effects of the significant derivative losses I mentioned previously, as well as non-cash losses on the extinguishment of debt when we completed our refinancing in September 2004. For example, the 12 million net loss for the year ended December 31, 2004 includes after-tax losses at about 11.5 million relating to derivatives and extinguishment of debt.

You can pull that number directly off of the press release figures. Simply add the derivative losses and the loss from extinguishment of debt and assume a 35 percent tax rate.

With regard to cash and liquidity, with the completion of our refinancing in September 2004, the establishment of our $20 million revolver and the additional security of our significant investment in marketable securities, which will remain unencumbered, we have solid liquidity. I should mention that the 20 million revolver remains unused as of today. We ended the year with cash and short-term investments of 16 million. As a reminder, we paid a cash termination fee of 16.1 million in November to straddle and terminate the forward transaction. So in spite of that significant cash payment, we ended the year in a strong position.

I would also note that our investment in Safeco stock was valued at 157.1 million as of December 31, 2004. It's come down just a little bit since then, but certainly a significant aspect of our overall liquidity.

I believe some of you may be interested to know our operating cash flow as defined under the senior notes and the 20 million revolver. As defined, we calculate operating cash flow to be approximately 26.5 million. And let me walk you through that calculation. (technical difficulty) fielding some calls afterwards I think. I put the most relevant information in this little walk-through. And most of the information -- all but one piece -- is pulled directly from the P&L that we put in the press release earlier today. You use a trailing four-quarter timeframe for the calculation. So that encompasses all four quarters for 2004. You start with net loss for the year prior to discontinued operations; that was 11.8 million. Add back the effects of the derivative losses totaling 12.7 million. Exclude the effect of income taxes. In this case, that results in reduction of 7.8 million because we had a debt tax benefit for the year. Add back interest expense for the year in the amount of 11.8 million. Again, that's right off of the P&L. Add depreciation for the year, totaling 16 million in 2004, right off the P&L. And then add back the 5 million in losses from extinguishment of debt. This is a non-cash charge also that you see identified specifically in the P&L and the press release.

Now the one piece that you don't see in the press release is that you need to add back the net of non-cash program amortization or for cash paid for programming. You'll see both of those numbers in the statement of cash flows when we issue 10-K. But that amount is an add-back of about 0.7 million for 2004. If you add all that up, you come up with about 26.5, 26.6 million.

I know I went through that fast, so maybe you can listen to the replay. Or if you have specific questions, you can talk with me later.

That concludes the prepared portion of our presentation today. At this time, I'll ask Candace, if you would please assist us with the Q&A session.

(Operator Instructions). Bishop Cheen with Wachovia Securities.

Good afternoon, Ben and Rob. Just a couple of questions because you gave us so many details. The 26.6 of the operating cash flow, that would count to the -- I guess the pro forma 2003 to 12.1? Or was that 12.1 before extraordinary items that were added back?

I believe -- so you're pulling the number out of what we used in our operating memoranda?

Yes.

Right.

So that's the way we should look at this -- apples-to-apples 26.6 versus 12.1?

You know, Bishop, I'd have to go back and look at that specifically. But we certainly had just a very, very strong fourth quarter and a significant improvement in cash flow, as is indicated by the cash flow numbers that I presented. I'd have to go back and look specifically at how we came up with that.

Okay. Well let me do this. Without walking through all of the math, because I don't want to wear anyone out, Q4 operating cash flow would come in -- the Q4 operating cash flow, the two six-six (ph) is for the full year?

That's for the full year. That's right.

Do you have handy the Q4?

I don't. It's done on a four-quarter basis. And that's how we calculate it, was for the full year.

All right. The CapEx for the year and for the quarter?

For the year, I can give you. I don't have the quarter with me. We invested a total of 6.7 million in the purchase of fixed assets. Now that still was a split between broadcasting and the completion of Fisher Plaza. We're doing the last tenant improvements -- the last significant tenant improvements in Fisher Plaza here in the first quarter of 2005.

As I noted in my prepared remarks, we really significantly increased the level of occupancy here, which is certainly a positive thing for us. So in 2005, we'll still have, in the first quarter, the last significant expenditures for Fisher Plaza that we anticipate. And then we do anticipate that we'll put some additional investments into the broadcasting facilities for fixed assets, not leaps and bounds from where we've been in the past, but some additional investment.

Can you give us any indication of the magnitude of the CapEx that you think you'll be looking for for 2005?

No, in the past -- the last few years for broadcasting, we've been in a range of about 3 to 3.5 million -- something of that range. We're not going to double it, but we are going to invest significantly beyond that level we've had in the past. That -- there is -- or there has been -- as we went and looked at this in particular the last few months, some level of deferred and delayed capital spending that we think actually can provide some efficiencies for us going forward. And it really has been a focus for us to look for ways in which we can leverage our capital investments to improve operating performance. And so while that may be a little bit higher than you might anticipate, we believe that there's some savings for at least some of those expenditures that will come back to us.

Okay. Very good. All right. And then the last question I have and then I'll pass it on. Clearly it's very positive to see that occupancy. But in many similar type ventures, the occupancy might come initially with some discounted rental agreements. Will the follow-through on the revenues come from the higher occupancy be immediately noticed? Or is there going to be a lag because of some discounted agreements?

There certainly is a lag. The way that those agreements are discounted, which is typical in the real estate industry, is some of the tenants start off with a certain number of free months without having to pay rent. And that may range from a couple of months to four or five months, but certainly not beyond that type of a time frame. And with Fisher Plaza, we look at that more by cash flow generation. It certainly is -- we certainly expect it to be a cash flow generator for us in 2005. Again, the strongest indicator there being that we have the occupancy percentage up to where it really -- we're nearly fully occupied.

Okay. Very good. Thank you, Rob.

(Operator Instructions). Shannon Ward of AIG.

Hi. Can you tell us if there's been any meaningful M&A in any of your markets?

Well, Shannon, as you asked the questions, let me think. I haven't seen anything significant in any of the markets in the last year -- not since we really sold our radio stations in Portland over at Entercom.

Okay good. Can you update us on your revenue market share in Seattle and Portland?

Shannon, we don't really provide that kind of information.

Okay. Maybe just tell us if you think that it's unchanged, or has there been a meaningful change?

It's pretty much unchanged in the last year. We actually think that with ABC's improvement, we're just now starting to feel the impact of that in prime and starting to see shows that we finally can sell more aggressively. So we anticipate there being a nice change throughout '05.

Okay. You said that you think the plaza is essentially fully occupied. Has there been any change since the year end? You reported 89 percent. Is that essentially where it is today?

We have a number of remaining deals that are -- that we believe we will close soon. However, we haven't announced any of those. So we remain very optimistic that we will reach what we believe to be a stable occupancy rate. And we're very close to that right now. So movement beyond the 89, 90 percent range -- I won't say it's crazy. But we anticipate it will go up. And once you get up to about 95 percent, in that range, we're really fully occupied.

Okay. So you say your sort of target -- best case target is around 95 percent?

Yes. And then maybe you won't want to give this out, but at what point -- what EBITDA level do you think the Plaza will be at that point when it's 95 percent occupied?

You know, we really haven't provided that information. As you look at Fisher Plaza now as we look at it, you have to consider that not only do we obtain cash flow from third-party tenants, but because we occupy 42 percent of it, if not for the fact that we own the facility, we'd be paying a couple million bucks a year in rent. And so we look at it from both perspectives and see it as a significant investment from both sides.

Right. I understand. And is the Seattle vacancy rate still in the 15 percent number?

Yes, overall. We're seeing some additional strengthening in the market there, but it's still a high level of --

Vacancy.

Vacancy, that's the word.

Okay. Thanks. And then the Safeco dividend -- is that unchanged?

Yes, it's 22 cents a share. It went up; I think they last announced it in August. And unless I'm horribly mistaken, it's still at 22 cents, which represents for us -- we own about 3 million shares. So it's about 2.6 million a year.

And is that the bulk of this other income that you report?

Yes.

What's the remainder?

Miscellaneous items. That's -- if you look at that, what is it, 3 something -- so almost --

3.4.

Yes, the lion's share of that is Safeco.

I'm sorry. You said that was how much, 2.5?

2.6.

2.6.

On an annual basis, 3 million shares at 22 cents paid per quarter.

Okay. And that got (ph) added into your EBITDA number, correct?

Yes, it is. By definition -- and I wouldn't necessarily call it EBITDA -- that's close to EBITDA, but it's as defined in the indenture.

All right. When will you be filing your 10-K?

It is due on March 16. And we certainly plan to file it by March 16th.

Okay. And do you anticipate that the sort of I don't know the auditor's material weakness that was found in '03, do you think that will be eliminated in '04?

Well, a different set of rules this year. Under Sarbane's Internal Control Act that we've all been working on -- all public companies -- we addressed what was found and deemed to be a material error -- a material weakness rather -- in 2003. So we addressed that really early on in 2004 and throughout 2004 by primarily strengthening our finance department here at corporate. And as with all public companies, we're going through the last stages. We can't remediate anything anymore because we had to be effective as of 12/31/04. So we're just working with our auditors to complete the testing and get ready to be able to provide management's opinion as well as having PricewaterhouseCoopers provide their opinion. So all of that is not done yet because the testing is not fully completed.

Okay. And then I know you gave us your cash balance at year end of 16 million. What is that today?

I have not provided that information. I don't have that information here handy rolled up.

Okay. All right. Thanks, gentlemen.

David Brecht (ph) with Colombia Management.

Hi, Ben and Rob. Just had a couple of questions. First, is there any severance associated with Bill's departure?

David, yes, there is. That's not -- hasn't been finalized yet.

But that will be in the K?

No -- well it will be disclosed because we're required to disclose it. However, it's not a 2004 expense, a 2005 expense, speaking just from a financial statement disclosure standpoint. But our understanding is once a document is filed or is finalized, that we'll be obliged to file that publicly.

Okay. Okay. Do you have any kind of sense right now about what the ball-park number is or --?

No, we really don't have anything that we can share right now.

Okay. And secondly, is there a search for a permanent CEO at this point?

Yes, I guess I'm the one who should answer that question. Yes, I would say that our Board feels like as a part of their diligence that that's a necessary step that they take. And in the process, I guess I get a free audition and have that opportunity. I'm going to be having some further discussions with them over the next couple of months. But they really do feel an obligation to make sure that they have the best qualified person around in charge of the Company.

But one way or the other, in the next quarter or two, you'll be resolved to at least make interim turn into permanent?

You know, the time frame has not been solidified. Actually, our Board of Directors -- the committee of the Board of Directors -- is involved with that. And so I have not seen that we have publicly announced a specific time frame. So we really wouldn't be able to provide that.

Okay. And then finally, one final thing also is just as far as the ABC -- I'm not sure if those -- that agreement has been resolved at this point. Where are you with that?

David, we just --- we have an interim agreement, term sheets that have gone back and forth. And as typical in an instance like this, we're waiting for the final contracts. We anticipate there being some fine tuning that will be required. But we basically have that agreement in principle.

I'm sorry, just say that last part again.

Agreement in principle.

Okay. You have one right now -- an agreement in principle?

Right. Right.

Okay. So you would have that probably resolved in the next month or so or --?

I would think so.

Okay. Thanks, guys.

(Operator Instructions). Bishop Cheen of Wachovia Securities.

Thanks. Ben, I don't want you to get nervous, but I heard that Michael Eisner might be available too.

I actually heard the same thing.

Yes, who knows. But, you were kind enough to give us a range of the political -- in a hot political year. In a hammock year, could you do the same and give us kind of a range of what political constitutes of the total revenue?

You're looking out to '06 now?

Well, we're in a hammock year right now, let's say '05 where political is not expected to be as robust. You know, it's going to be deeply down from let's say the '04s and the '06s.

Bishop, I would say -- and I don't have anything in front of me -- but less than 5 percent, probably in that 2 to 4 percent range, would be more accurate.

That is very helpful. Thank you.

There are no further questions at this time. Please proceed to your closing remarks.

Well, I'd just like to thank everyone for joining us on the call today. And as I said earlier, we're looking forward to '05 being a very good year for us. We're focused on improving our operations and providing an increased value to our shareholders. That's our total focus in the Company. Rob?

Just thanks for joining us and we'll see you next call.

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