Sinclair Inc (SBGI) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2005 Fisher Communications Inc. earnings conference call. My name is Jenn and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's 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 conference, Mr. Ben Tucker, acting President and Chief Executive Officer. Sir, please proceed.

Thank you, Jenn. Good afternoon, everybody, and welcome to our second quarter 2005 conference call. With me here at our Seattle offices is Rob Bateman, our Chief Financial Officer. Rob's going to provide you with a financial overview in a moment, and we will both be available for questions later on in the call. Before we get to that, let me provide a few comments.

After several months of negotiations, in May 2005 we signed agreements to continue our affiliation with the ABC Television Network for our two largest stations, KOMO TV in Seattle and KATU in Portland. The agreements extend our affiliation with ABC through August 2009. ABC has provided improved programming over this past season and we've had some success as well over this summer with certain ABC shows. If any of you have seen Dancing with the Stars, that would be probably the highest rated one. We look forward optimistically to the fall programming lineup.

Our eight remaining television stations are affiliated with CBS, and we've just recently begun discussions with CBS regarding the renewals of those affiliation agreements, which are due to expire in February of 2006.

We continue to look for ways in which we can be more efficient in our operations. For example, we are currently consolidating our Seattle business and HR functions. In the past, we have had separate organizational structures to support KOMO TV, Seattle Radio, Fisher Plaza and our corporate office. We are now combining those structures into a more efficient structure to serve our Seattle-based needs. These changes bring operating efficiencies and also decrease the internal control documentation and testing requirements under the Sarbanes-Oxley act.

Another example is that we are implementing an integrated HR and payroll function. This likewise is expected to bring greater efficiencies and reduce internal control costs. On the revenue side, we've just reorganized our sales structure for our Seattle Radio operations. We expect to see that help us and be a catalyst for improved share growth with our Seattle Radio operations.

We are looking forward with optimism to Fisher's future and for the next six months and we continue to focus on improving and sustaining our broadcasting business. Now, Rob, I'm going to turn it over to you.

Thanks, Ben. Before we discuss our financial results, let's me remind our audience that comments made during our call today 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, intent, may, might, plan, potential, predict, should or will or the negative thereof are 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 March 31, 2005 filed in May 2005 under the heading "Additional factors that may affect our business financial condition and future results." We plan to file our second quarter 2005 Form 10-Q next week with an updated listing of these factors.

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.

With that accomplished, let's now discuss our financial results. We issued our quarterly press release earlier today, about an hour or so ago, and as I mentioned, we plan to file our Form 10-Q early next week. Those documents include a great deal of information regarding our financial results, so please refer to those information sources, as well as what we'll talk about today on this call.

We reported total revenue of 40.1 million in the second quarter of 2005 compared to 40.4 million in the second quarter of 2004. For the six months ended June 30th, 2005 we reported revenue of 71.1 million compared to 71.3 million in the comparable six-month period in 2004. For both the three and six-month period comparisons, broadcasting revenue was somewhat lower in 2005 due primarily to lower political advertising as compared to 2004. These declines were offset by higher revenue at Fisher Plaza, primarily as a result of increased occupancy levels.

To be more specific, broadcasting revenue was lower by approximately 2.1 million year-to-date June 30th, 2005 as compared to year-to-date June 30th, 2004, and Fisher Plaza revenue increased by about 2 million in the same period so the amounts offset each other to result in a relatively flat comparison. We issued a press release earlier this week in which we announced that we have signed an additional lease that brings Fisher Plaza occupancy to over 90%.

Television revenue decreased in the three and six month periods ended June 30th, 2005 as compared to the same periods in 2004. As I mentioned, primarily due to lower political advertising in 2005, offset somewhat by improved local advertising in most of our markets. Remember that 2004 was a national election year and political campaigns began spending on broadcast advertising in certain of our markets toward the end of the first quarter of 2004.

We also have lower network compensation revenue in the first six months of 2005, as compared to the same period in 2004. As Ben mentioned, in May 2005 we signed agreements with ABC to renew the affiliation agreements at KOMO TV and KATU through 2009. The terms of the renewal include decreasing network compensation, and we are recognizing network compensation revenue on a straight-line basis over the term of the agreement. KOMO TV in Seattle and KATU in Portland are our two largest television stations, together accounting for 45% of our total revenue through the first half of 2005, and about three-fourths of our television revenue.

Our radio operations showed slightly decreased revenue in the first six months of 2005 compared to the first six months of 2004, as a result of decreased national revenue, which was partially offset by increased local spot revenue in our smaller market stations, as well KOMO A.M.'s increased performance in the Seattle market. Excluding revenue, specifically attributable to Seattle Radio's agreement with the Seattle Mariners, KOMO A.M.'s revenues increased 14.8% in the first half of 2005 compared to the first half of 2004. We attribute the increase primarily to the synergistic effect of the Seattle Mariners programming, combined with the all news format on this station, and we are now in the third year of these changes.

Revenue from our Seattle Radio operations comprised approximately three-fourths of our total radio revenue in the six months ended June 30th, 2005. Our complete breakout of our revenues and expenses by segment will be provided in our second quarter Form 10-Q, and by segment, I'm referring specifically to by television, radio, Fisher Plaza and then we have a bucket for the remaining pieces, corporate and other.

I would also remind you that when you add together the revenues from our three largest broadcasting units consisting of our two ABC affiliated television stations in Seattle and Portland, and our Seattle Radio operations, these operations account for approximately 75% of consolidated revenue. That being said, we recognize the significant contributions from our small market television stations in Southern Oregon, Yakima, and the Tri-Cities areas of Washington State, and three markets we serve in Idaho, Boise, Idaho Falls and Lewiston, as well as our radio stations in Montana and Eastern Washington.

Let's take a look at operating expenses. The increasing cost of services sold in the three and six month periods of 2005 as compared to the same periods in 2004 is primarily the result of higher television syndication costs, as well as certain increased talent and labor costs. We also had somewhat higher cost of services sold at Fisher Plaza in the 2005 period, primarily attributable to higher third-party tenant occupancy costs.

Let's talk for a moment about general and administrative expenses, total expenses in this category decreased in both the year-to-date and quarter-to-quarter comparisons of 2005 to 2004, though the decrease in the year-to-date period was quite small. Our corporate group actually incurred higher expenses in the first half of 2005 as compared to the first half of 2004, primarily as a result of severance expenses totaling approximately 1 million for the company's former Chief Executive Officer, a pension curtailment loss of 451,000 that we incurred in the second quarter of 2005, as well as higher audit and accounting expenses to complete testing procedures under Section 404 of the Sarbanes-Oxley Act. These expenses were offset by reductions in other expenses. For example, the second quarter of 2004 included severance expenses totaling nearly $500,000 incurred for the retirement of the company's former Chief Financial Officer.

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 a $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 periods prior to 2005 including the two periods of 2004 that we're comparing our year-to-date results to.

We reported a net loss of 1.1 million in the second quarter of 2005 compared to a net loss of 1.4 million in the second quarter of 2004. For the six months ended June 30th, 2005 we reported a net loss of 6.2 million compared to a net loss of 11.3 million in the comparable period in 2004. As I mentioned, we had no derivative instruments during the first half of 2005, however we had pre-tax losses on derivative instruments of 1.4 million in the second quarter of 2004. That would be an after-tax loss of just under a million, 0.9 million and 10.5 million pre-tax loss on derivatives in the six months ended June 30th, 2004. That 10.5 million would translate into an after-tax amount of 6.9 million.

Turning now to cash and liquidity. With the completion of our refinancing last year, the establishment of a $20 million revolver and our additional significant investment in marketable securities, we have solid liquidity. I should mention that the revolving line of credit remains unused. We ended the quarter with cash in short-term investments of 10.5 million. Our investment in Safeco stock was valued at 163.1 million as of June 30th, 2005.

Now I believe some of you, in particular, those of you who are bond holders may be interested to know our operating cash flow as defined under your debt agreement and as defined and based on a trailing four quarter period ended June 30th, 2005 we calculate the operating cash flow to be 24.5 million. I'm going to take just a minute and walk through the summarized calculation. If I go through this a little bit too fast you can ask in the Q&A or you can listen to the replay.

If you choose to perform the calculation yourself in the future or simply want to understand what we're talking about, one way you might approach this is to start with the 2004 annual financial statements published in our Form 10-K. Add the six months ended June 30th, 2005 from our 10-Q that we plan to file next week and subtract relevant figures from the six months ended June 30th, 2004. You'll also find those comparative figures in the 10-Q that we intend to file next week.

So running through that, net loss for the four quarters was 6.8 million, add that the effects of the derivative losses totaling 2.1 million, exclude the effect of income taxes, and in this case that results in a reduction of 5.9 million because we had a tax benefit in the four-quarter period. Add back interest expense in the amount of 12.8 million. Add depreciation for the four-quarter period totaling 15.5 million. Add back a $5 million loss from extinguishment of debt that we incurred in the third quarter of 2004. This is a non-cash charge against earnings. And then add back the net of non-cash program amortization over cash paid for programming. These specific amounts are found in our statements of cash flow. When I'm talking about the program amortization and cash paid, and if you net those two figures, the amount is an add back of 1.8 million. If you add all those different pieces together, you come up with 24.5 million and that's the cash flow figure as defined.

That concludes the prepared portion of our presentation today. At this time, I would ask the operator to assist us with responding to any questions that you may have. Jenn, could you help us out here?

Yes, sir. [OPERATOR INSTRUCTIONS] Your first question comes from Bishop Cheen with Wachovia Securities.

Top of the afternoon to you, Rob. Ben, how are you doing?

Good, Bishop, how are you?

I'm good, man. Okay. I have some EBITDA calculation, as always is a good mental exercise on a Friday afternoon. Do you -- given you were up against a tough political comparable, and it sounds like you're trying to do all the things to help minimize the absence of political dollars and the high margin dollars, et cetera, do you think for working capital needs you will need to get into that undrawn revolver as we get deeper into the back half of this year?

Bishop, I don't see us needing to do that at this point. The reason we have that is to provide for seasonal fluctuations, seasonal cash needs, but we haven't had to use it yet. As I mentioned in my prepared remarks, we have a little over 10 million in cash at the end of June. As we look at our cash projections going forward, at this point we don't believe we'll need it. However, it's there for our use in the event we do. So at this point, I'd say no.

Okay. And then Plaza, it's great that you're certainly at or maybe even ahead of your expectations for occupancy of over 90% now, and of course, getting the new tenants in, there's a certain lag factor, let's say a discount factor in the first few months' rent, et cetera. I noticed that you didn't talk about the compensation for the loss of revenue that was there last year being Fisher. So where are we on that? Is Fisher at budget? Ahead of budget? Is it picking up some of the slack?

Bishop, are you talking about Fisher Plaza?

Yes, Fisher Plaza, I'm sorry.

Yes, Fisher Plaza, this year in comparison to where we thought we'd be, we're right on track, so we've been pleased with how that's been coming along. Being over 90% occupancy is certainly a milestone for us. We'd like to get it up. There's always going to be a little bit of transitional type of vacancy, but we believe that we're in good shape right now. You're right, though, once we get the remaining pieces filled, there is a lag. One thing I would note is currently in the market we're not offering any free periods of rent, but that's kind of on a deal-specific basis. You alluded to that, that's something we've done historically, it's not something that's on the table right now.

Okay. And then I guess it would depend on the discount, but how long in general, if there is such a thing, does it take for those discounts to churn through so that you're -- the tenants are no longer paying discounts, they're paying retail for the -- or rate card for the rent?

Okay. I think I understand your question better. In a lot of our agreements, there are varying levels of rent. A lot of times it's increasing type of rent. Or even if we were to offer a free period, under the accounting rules we actually straight line any of those types of variances in payments, so the amount that we recognize is on a straight-line basis and it evens out any of those bumps, either free rental periods that we might offer in the future or increasing rents, so people pay at market based on the complete agreement that we have with them because that's -- we negotiate with them, something that we're willing to accept or they're willing to accept and it is at market. It may start off either lower, typically lower, although in a few cases, higher, and then it works into an average rate over the term of the agreement.

Okay. So it is amortized over the life of the lease.

That's correct.

Okay, very good. I'll move aside and let someone else take a shot at you.

Okay.

Thanks, Bishop.

Your next question is from Shannon Ward with AIG.

Hi, just a couple of quick questions. On your renewal of the affiliation agreement with ABC, can you tell me how much the decline in annual network comp was?

Sure. For the first six months, it was more than half a million. It was about $600,000 if you compare year-over-year type of basis, so if you're to project that out, it's going to be for the year more than $1 million decline. And again, as I mentioned in my remarks, we are recognizing the -- it's kind of a step-down type of a deal. We're recognizing that on a straight-line basis over the five-year term of the agreement. It's kind of similar to Bishop's question about how we account for the real estate leases. We're doing a similar thing with our agreement with ABC where there's a step-down approach, but we recognize revenues straight line.

Okay. And what was it before? What are we comparing off? It will be 1 million less this year. What was it last year? Or, I guess, not fully this year because you just signed the new deal in May, right?

Well, we signed it in May, but it really is a deal that went retroactive back to the beginning of the year. So, we recognize that revenue net of amounts that we paid back to them and I don't have that handy. Ben, what do you think? That's about --

It stayed soft about $1 million compared to where it's been.

Yes.

So it's off 1 million, but we don't know what it was before?

I just don't have that figure here, because we've got --.

Yes, as Rob said, it's a gross and net figure. I think, Shannon, it was probably about $2.5 million.

Okay. And did they give you anything in return, any increased inventory to sell or anything like that?

No. They really didn't. What we have in our deal is a step down in what we pay them for Monday night football and some prime inventory, as well as some other services. As this thing -- as the agreement goes to zero, actually, we will never go to net -- negative network comp.

So just understanding it, let's say it was 2.5 million, it's down 1 million this year, it will continue to go down?

No, no, no. Well, the agreement continues to go down, but we're recognizing the revenue on a straight-line basis, so the decrease we're recognizing this year will be the decrease if you were to establish 2004 as kind of a baseline, the decrease that we see in 2005 is going to be flat line from here throughout the end of the agreement. Now that's for ABC. We've got the CBS agreements coming up here that need to be renewed by February of 2006.

Okay. How much network comp are you getting from CBS?

We have not previously disclosed that, and I don't have that handy here, maybe we can go on to some questions. I can come back to it if I can find if here quickly. The challenge is, I have it in total, but I've got to find it by the ABC versus CBS agreement.

Okay. While you're looking for that, how much political did you do in '04?

In '04, we did not announce the exact amount, but if you look at the entire 2004, it was between 10 and 15%. That's the boundary that we provided, the public disclosure that we made, but we did not provide a specific dollar amount for the year, but it was between 10 and 15%.

10 to 15% of your total TV revenue?

Total broadcasting revenue.

And how much was that?

Well, we had -- last year -- I'm never going to find this other number.

I'm sorry.

That's all right. Let me just go to the segmental section of our MD&A last year. Stick with me here for a minute.

Thanks.

So last year we did 154 million in revenue. And broadcasting revenue was 149.3. So 10 to 15% of our broadcasting revenue was political.

Okay. And is it your expectation that that will be made up if some of it was displaced, for example, or do you think it's going to be a challenge to make up any of that, call it $15 or so million?

No, we're going to make up a substantial portion of it, better than half, Shannon.

Okay.

Okay. Here's the comparables, for ABC last year, year-to-date, we had about 700,000 in the year-to-date period June 30th, 2006, so that would have been about -- if you're talking for the year, that would have been 1.4, 1.5 million. Now that's an amount -- that's not a gross figure, that's a net figure after amounts then that we owe back to them, and so it's a little bit confusing looking at it from that perspective. And what we're saying is of that then, call it, $1.5 million, we're going to be down to about 500,000, excuse me, we'll be down about $1 million to about $500,000.

Okay. And then you were looking for it for CBS or no?

Well, that's harder because we've got eight CBS affiliates and I can't do the math that quickly.

Okay. Are all eight up for renewal in '06?

Yes, February of '06.

Okay. And then lastly, I know that the CEO severance was in the first quarter of '05, that $1 million. You just mentioned some CFO severance. When did that appear and how much was that?

That was $471,000 and it was the second quarter of 2004. The reason that I mentioned it was it just helps to explain the three months ended June 30th, 2005 to three months ended June 30th, 2004 comparison. Because we had some stuff going on -- going both ways. And so we had this largish type of expense last year in that second quarter that we didn't have this year.

All right. So if we choose to add back for the trailing twelve months any such severance costs, it would be $1 million, since I guess the CFO severance would have fallen off this quarter?

True, true.

Great. Thanks so much, gentlemen. I appreciate it.

You're welcome.

You're next question comes from Tom Carr with Reed, Connor.

Hi, there. In advance of the 10-Q filing, can you give us any further discussions on segment margins, radio versus TV? And are they at least heading in the right direction towards industry margins, excluding the Mariners issue and that type of stuff.

We're going to file the 10-Q. The deadline is Tuesday, so the information will be out there. From an overall color commentary standpoint, Ben, do you want to comment on that?

Yes, Tom, obviously our Seattle and Portland margins are starting to inch up right now. The ABC improvement is helping. That's not going to be fully realized until later this year and it's always easy to get out in front of that thinking that with a couple of shows it's moved everything. It's just made it better. We actually get on buys now so we see that starting to pick up. Our CBS margins and we've got -- one of our CBS markets is going through a very difficult time right now so the market is off considerably. So that margin won't improve. And we've got the other three are doing better. So we're going to see some improvement inching up in those.

Based on your scale, is this possible to do a loan or would you ever consider partnerships or joint agreements or something to that effect with other stations or other markets?

I'm not sure of the question with regard to the loan. Help us understand what you mean by doing a loan with another station.

No, I'm saying in partnership with other stations, joint sales agreements.

We've looked at some opportunities with those where they might be available in several of our markets, we haven't been able to get anyone to kind of roll over or work with us in that regard at this point in time.

Okay, thanks.

Your next question is a follow-up question from Bishop Cheen with Wachovia Securities

I'm just wondering, in terms of any retrans fees from your close and good friends the satellite operators, are you in any negotiations or experiencing any of that blessing?

Well, we certainly do receive fees there, as all broadcasters, we'd like to receive more, but --

Bishop, we actually -- our satellite deals are up -- I think it's the middle of next year. We're just starting to look at those. Our cable retrans deals are up next year as well, so we're starting to develop that strategy. We're actually up before the end of the year, so we actually have a preliminary meeting with Comcast next week. We think there's an opportunity.

Obviously, there's some risk with all of those as you try to get some consideration for what we provide in the marketplace. We've got some other ventures where we would like to have -- where we would like to partner with the MSOs so we've got a couple of things to present in that way, and then we also have some guaranteed revenue in terms of ad dollars that we get as a result of our current deal. So we're kind of attacking those agreements in several different ways. We do expect when we talk with the satellite providers to have another slight increase when we renew there.

Now, your cable deals, those are not left over from the mid '90s, right? You had a renegotiation somewhere in between?

Oh, yes, we had a renegotiation three years ago.

Right, okay. So those tend to be three-year deals in general?

That's right.

With the MSOs?

Yes.

Okay. And your satellite deals are also three-year or longer?

They're three-year deals as well. They're almost coincidental. I think there's a six-month lag or difference in when we renew those.

Okay. And so most of that, it's in '06? Most of them are in mid-2006?

That's correct. Depending upon what we do strategically, it might be late '06, whether we want to lead or follow, if that makes sense to you. We might let some other bigger operators kind of lead the way and kind of try to --

Oh, yes, it's always safer to be in the middle of the pack.

Exactly.

Okay. Thank you, Ben.

[OPERATOR INSTRUCTIONS] Gentlemen, we have no further questions at this time. You may proceed to your concluding remarks.

Well, we'd like to thank you all for being with us today and let you know that we really think that the rest of the year is going to be strong for us, and we look forward to meeting with you again at the end of the next quarter.

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