Sinclair Inc (SBGI) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter Fisher Communications Inc. earnings conference call. My name is Sherell, and I will be your facilitator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-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 today's presentation over to your host for today's call, Ms. Colleen Brown, President and CEO. Please, proceed, ma'am.

Thank you, Sherell.

Welcome to our second quarter 2006 conference call. With me here at our Seattle offices is Jodi Colligan, our VP Finance and Acting Chief Financial Officer. Jodi will provide you with the financial overview in a moment, and we will both be available for questions later in the call. Before we get to that, let me make a few comments.

We completed a strategic plan for the Company at the end of March and began working that plan in second quarter. Our mission is to improve operating performance through revenue and ratings growth, establishing new revenue streams through the internet, retransmission and digital opportunities, and to leverage our assets which include duopolies, synergies and centralization initiatives. There are a number of objectives and strategies we are pursuing to grow Fisher's value in keeping with the strategic plan. We have announced several transactions in the last few months. The sale of our regional radio group, which consists of 24 smaller-market stations spread throughout the Northwest, is an example of that. This deal is expected to close in September. We have also announced the acquisition of stations in Seattle, Portland, and Boise, along with a local marketing agreement in Yakima. These acquisitions establish Univision affiliations for Fisher, aligning Fisher with the fastest-growing population segment in each of our markets and taking advantage of duopoly economics. We are operationally focussed on improving our core business, which includes resulting margin improvements. Margins are up substantially from prior year and TV has surpassed 30% returns. We are looking forward with optimism to Fisher's future growth and continuing to execute our plan.

Now I'll turn the call over to Jodi Colligan.

Thank you, Colleen.

Before we discuss our financial results, let me remind you that comments made during our call today may contain 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 risk and uncertainties, which -- many of which are beyond our control. These risks and uncertainties include those discussed on our quarterly report on Form 10-Q for the quarter ended March 31, 2006, filed in May 2006 under the heading risk factors. We plan to file our second quarter 2006 Form 10-Q within the next few days. Given these risks and uncertainties, you are cautioned not place undue reliance on such forward-looking statements. The forward-looking statements are made only as of today's date. 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 discuss our financial results, beginning with revenue. We issued our quarterly press release earlier today. And as I mentioned, we plan to file our Form 10-Q within the next few days. Those documents include a great deal of information regarding our financial results, so please refer to those resources for additional information.

Let me briefly summarize the sources of our revenue for the first six months of 2006. Television accounted for 69% of total revenue. Our two ABC-affiliated stations located in Seattle and Portland accounted for just over half the Company's total year-to-date 2006 revenue. We also own and operate smaller-market television stations in southern Oregon, Yakima, and the tricities areas of Washington state. And the three markets we serve in Idaho -- Boise, Idaho Falls, and Lewiston. Radio accounted for 25% of total revenue, excluding discontinued operations. As Colleen mentioned, during May 2006, we announced that we'd signed an agreement to sell our 24 small-market radio stations in Montana and eastern Washington for approximately $33.3 million. Accordingly, this group of radio stations has been carved out of the radio segment presentation and is disclosed under the caption Discontinued Operations. The continuing radio operations, Fisher Radio Seattle, accounted for about one-fourth the total revenue. Remember that we have the radio broadcast rights for the Seattle Mariners baseball team, therefore our radio revenue and expense is greatest during the baseball season, the second and third quarters. Fisher Plaza accounted for 6% of total revenue.

While 2006 is a political year, we began picking up some initiative-based advertising in Washington and Oregon during the second quarter of 2006. The amounts are only slightly higher in this even-numbered year. We reported total revenue increase of 9% to 40.2 million in the second quarter of 2006 compared to 36.9 million in the second quarter of 2005. For the six months ended June 30th, 2006, we reported revenue of 71.3 million compared to 65.2 million in the comparable six month period in 2005, also a 9% increase. For both the three and six month period comparisons to broadcasting revenue higher in 2006 due to higher national and local advertising as compared to 2005. These increases were complemented by higher revenue at Fisher Plaza as a result of increased occupancy levels. In comparison to the six months ended June of last year, year-to-date 2006 local broadcasting revenue increased at most stations, including the television and radio station group in our largest markets of Seattle and Portland. Spot revenue is up primarily due to better inventory management and more aggressive sales policies. Our radio operations showed improved revenue in a three and six month periods ended June 30th, 2006, as compared to the same periods of 2005, primarily as a result of increased local revenue. Radio revenue from the Seattle Mariners broadcast rights was higher in the three and six month periods June 30th, 2006, as compared to the same periods of 2005 due to a more aggressive sales strategy. KOMO AM's revenue continued its trend of improved performance in the Seattle market over the same periods of 2005.

Total operating expenses decreased 5% to $35.3 million in the three months ended June 30th, 2006, as compared to the three month period ended June 30th, 2005. The decline in the op -- in the second quarter of 2006 was due primarily to lower levels of depreciation as certain assets become fully depreciated as well as somewhat lower accounting expenses in the 2006 period. Operating expenses decreased 7% to 66.2 million in the year-to-date period ended June 30th, 2006, compared to the year-to-date period ended June 30, 2005. The decrease in 2006 was primarily due to decreased syndicated television expenses, lower levels of depreciation, lower employee benefit-related expenses, and reduced accounting fees.

Bottom line, we reported income from continuing operations of $1.8 million in the second quarter of 2006 compared to a loss from continuing operations of 1.5 million in the second quarter of 2005. Including income from discontinued operations, amounting to $476,000, second quarter 2006 consolidated net income was 2.3 million. For the six months end June 30th, 2006, we reported income of $5,000 or break even from continuing operations from compared to a loss of 10.7 million in the comparable period 2005. Including income from discontinued operations amounting to 562,000, year-to-date 2006 consolidated net income was [$570] sic $567,000. We ended our quarter with cash and short-term investments of $8.5 million. Our investment in Safeco stock was valued at 169.2 million as of June 30, 2006. We have no debt outstanding under our 20 million revolving line of credit and the full amount remains available to us.

In May, 2006, we closed the purchase of two Idaho lower power stations -- TV stations for an amount of $1 million and paid 3.5 million in a deposit toward the purchase of two Oregon television stations for $19.3 million. These transactions were initially announced in December 2005. In June 2006, we announced an agreement to purchase the stock of African-American Broadcasting of Bellevue, licensee of television station KWOG in Bellevue, Washington. We purchased 25% of the stock for $4 million in conjunction with the execution of a stock purchase agreement and related LMA with a commencement date contingent upon a certain events. In July 2006, we announced that we enter into an LMA to manage four low powered television stations located in eastern Washington and an option agreement whereby we have the right to acquire the stations until June 30, 2007. The stations currently provide programming to the Yakima-Pasco-Richland-Kennewick television market in Washington through an affiliation with Univision.

As we've done over the past few quarters, I'd like to take a few minutes to go over our operating cash flow as defined under out debt agreement. As defined, and based on a trailing four quarter period ended June 30, 2006, we calculate our operating cash flow to be $25.4 million. The information is derived primarily from our financial reports filed with the SEC. If you choose to perform the calculation yourself, one might -- one way you might approach this is to start with the 2005 annual statements published on our Form 10-K, add relevant data from the six months ended June 30, 2006, from our 10-Q that we plan to file in the next few days, and subtract the relevant figures from the six months ended June 30, 2005, also in that same Form 10-Q. Let me walk through the summarized calculation. Net income for the trailing four quarters was $1.7 million, exclude the effective income taxes, in this case result in a reduction of $4.8 million because we had a tax benefit in the four quarter period. Add back the interest expense for the period then the amount of $13.8 million, add depreciation and non-cash amortization for the four quarter period totaling 14.4 million, add back the net of non-cash program amortization over cash paid for programming, these amounts are found in our statement of cash flows. The amount is an add back of 400,000. This gives us an operating cash flow ratio of 5.9.

That concludes the prepared portion of our presentation. At this time, I'll ask the operator to assist us with responding to questions that you may have.

[OPERATOR INSTRUCTIONS]. Bishop Cheen, Wachovia.

Thanks for taking the question. Hi Colleen, hi Jodi.

Hi, Bishop.

On the -- there's a lot of moving parts and I'm not saying that's bad, but stations going all over the place. So in do the LTM OCF calculation of 5.9 times on the 25.4, that is pro forma the discontinued operations of the radio stations being sold to Cherry Creek?

That includes the disc ops. It's combined operations. The sale hasn't closed yet.

Okay. They haven't closed yet, but they're already slated. So in these six month numbers, those numbers are not included in there?

For the [indenture] calculation, discontinued ops is included [inaudible] defined cash flow.

Okay. I -- let me try this another way. What I'm trying to do is just get a feel or maybe have to do it myself for what the radio and TV divisions are going to look like once all the parts are pro forma completed. And normally I would do that with some sort of 8-K that may not have been filed, restating 2005 numbers and backing out discontinued operations. It may not have been filed until these transactions are completed. So the question is, do you plan to file something like that so we can get a feel on an LTM basis of just [to go and concern assets]?

Yes, once the transaction is closed, we will file an 8-K.

Okay.

And that -- the 10-Q that we'll file in a few days includes discontinued ops separately -- broken out separately for the 2005 reporting periods, as well.

Okay. And then secondly, just in terms of the leverage that you would be comfortable with going forward with these new assets, pro forma, the closer to six times leverage which television being a cyclical business tends to be a little more up and down in political verses nonpolitical years. What's your comfort level, Colleen, in terms of the leverage to give you the flexibility you want going forward?

I'm comfortable, Bishop, with where we're going with this sale and transaction and the leverage that it will provide.

So that has -- I mean, you've been as high as high 6s and now as low as mid 5s?

Right.

So somewhere, then, I take it within that range?

Yes. If you're asking specific numbers, yes, I'd say we'll remain somewhere within that range.

Okay. And then last -- and I know I'll probably see details of expectations, but if you could just give us a preview, when do you expect all of the announced transactions -- would these all be completed within calendar 2006? I know a couple of them are still hungover from December '05.

Right. We do anticipate all of them closing by the end of the year.

Okay. I'm going to let somebody else jump in there and I may come back with a follow-up. Thanks very much.

Thanks, Bishop.

Mario Gabelli, Gabelli.

Yes, hi. Got on a little late, Colleen, but what was the cash flow on the radio stations that you just sold or you're selling?

We did not disclose that, Mario.

Well, tell us.

Pardon me?

Tell us now. Were you making any money?

We did not disclose -- that's a great question, we made a little money, but not a lot of money.

I would have made it a little easier for Bishop to go on to another question. Colleen, go to 30,000 feet. You're selling radio, you're buying low-powered television, kind of look out at what your vision is over the next couple of years of how you're going to redo or do a makeover of Fisher?

Well, to clarify, we picked up some low power that came with the acquisition in Portland, which is a full-power. So the strategy here is --

I guess I was looking at African-American --

That's a full power.

Oh, full power -- in Bellevue.

In Seattle at a full power, Portland.

Okay.

Yes. Bellevue just happens to be the city of license, but it is right in the middle of the DMA.

That's why I'm glad I asked. What's the strategy?

Going to the 30,000 foot level, the strategy is the duopoly strategy where we can consolidate and leverage off of our current assets.

Go ahead.

Pardon me?

And tell us what you think the benefit is over the next couple years from doing that.

Duopolies generally return significantly more on the bottom line as an operation, as a margin, however you want to look at it. Also, this allows us to consolidate capital expenditures and limit it to really our biggest market, Seattle and Portland.

Good. Terrific. Now take that strategy of duopoly and then take the extra capability you have with the digital spectrum with you're going to receive. How does that work and tie together?

Well, at the very beginning, I indicated that we had built a strategic plan and with that strategic plan, we have identified our mission as obviously the most basic thing is to improve our operating performance, which we can and will do. But it also includes establishing new revenue streams whether or not it's monetizing the internet, which we have a great opportunity to do here. But also retransmission and digital opportunities. So obviously if you combine full power assets in Seattle and Portland, there's a lot of digital opportunities to monetize, whether or not it's additional content or subscriber fees or whatever.

Okay. A bit -- you talked about a multiple of six times. I must have had the wrong 10-Q because I see with the Safeco stock and the debt are about equal. What's your tax basis on Safeco?

It's a small -- I'm sorry it's a small amount.

And do you -- just -- I don't have the K in front of me, what's your NOLs? Do you have any left over?

Not --

We do have some left over.

After the radio station sales?

Yes.

How much is some? Unfortunately, I can't read my analyst handwriting. It sounds like you said there was a hundred and odd million dollars, but I can't see whether it's two years ago or--

For the NOL?

Yes.

Well, we disclosed that in our 2005 Form 10-K --

Right.

-- but there has -- there won't be an update until our 2006 --

What was the number in the '05 10-K because I don't have it in front of me? I'll let you do the work.

You have to look it up.

Yes. I'll have to look that up.

You don't have it in front of you? Wow.

Well, she can start digging, but it's going to take a moment.

Well, I'll be delighted to have a wait because I can't get my calls back sometimes, Jodi. Thanks.

I don't want to hold up --

No problem. You can -- I'll --

We'll get it, Mario, and we'll come back.

Okay. But -- but let's go back to Safeco. Why wouldn't you consider taking the deferred tax or taking a cash tax -- there's obviously some logistical reasons or family reasons or any others not to sell it?

Well, as we stated, Mario, we've worked on our strategic plan and we're working that plan with the Board.

When -- when do you think the shareholders will get an insight into that?

I don't think that there's necessarily an insight one way or the other, other than we're working the strategic plan and the Board is certainly on board with that.

What is the plan that the Board is on since our clients own a fairly significant part of the stock and it's very hard to do this under rule FD without talking to you on these calls?

Well, obviously, I'm not going to give any forward-looking statements at this time, and we don't provide any guidance. But as far as the strategic plan, I think that we're getting results and I think that we'll continue working this plan at the direction of the Board.

So you don't want to give any guidance as to what the outline of that plan is? Okay. I'll -- let me listen in to the rest of the call.

Okay. Thanks, Mario.

Peter [Sharm], Tocqueville Asset Management.

Hi. Thank you. Following up on Mario's question. Can you maybe articulate for us why the Company still owns the Safeco shares? And related to that, is there anything in the indenture that prevents you from using the Safeco shares perhaps in exchange for the bonds if you can't sell them and use the proceeds to buy them back?

First of all, as far as why the Company owns Safeco shares, they were original investors. There is a large tax base in the Safeco shares. Just something to keep in mind. Second of all, as far as where we go with those Safeco shares or the philosophy behind the Safeco shares, obviously the indenture is public information, and essentially we'd have to redeploy those assets within 12 months. So it's no big secret there.

Well, but redeploying those assets, can you figure out a way to redeem the bonds? I mean -- or is it impossible to do so? Even without consent?

Certainly, we have done the due diligence, the analysis, and I do not believe that it makes sense at this time to redeem the bonds. That doesn't mean there wouldn't be a point at some point in the future, but right now that does not make economic sense.

I mean, theoretically, if you redeemed the bonds, would you be able to buy back stock or pay dividends? I mean, if you look at the Safeco shares, they're at basically an all-time high whereas your share are closer to an all-time low. And there are 20-some odd analysts out there with published research on Safeco of whom 16 -- or rather 19 have either holds or strong sells. And it just seems like with your stock at a low and their stock at a high that there would be sort of a natural arbitrage there.

I appreciate what you're saying and certainly I know our Board is aware of what you are saying.

Okay. All right. Thank you.

You're welcome.

[Brian Corvere], [Mentor Partners].

Afternoon.

Hi, Brian.

How are you?

I'm good. How are you?

Good. Looks like a pretty good quarter.

Yes.

The -- you mentioned in the prepared remarks on political revenue that there was some in the quarter, but not materially more than a year ago, is that right?

Correct.

Okay. So -- but I assume that looks solid for the balance of the year?

We're not giving guidance on that, but political in Oregon and Washington, it is no secret that it has yet to come in.

Right. And also, the Idaho station that you closed on in May. Was there any -- was there any revenue contribution in the quarter from that station?

No.

No. And I guess Mario and the guys kind of stole a little bit of my thunder. I was going to ask about -- whether or not the plans that you have discussed with the Board related to strategy have included non-core assets like Safeco. Sounds like it has.

Obviously, we've -- we've considered all of our alternatives.

Very good. Well, thanks very much, and congratulations on the quarter.

Thanks, Brian.

Tom Kerr, Reed Conner.

Hi, guys. Just to clarify again on the Safeco question that's being asked. Can you tell us what the capital gains tax rate would be for those of us that don't know corporate taxation, encompassing both federal taxes and state taxes?

I don't know that off the top of my head, but I know that I can get that information.

Okay. And lastly, I'll just put in my opinion that any cash proceeds, even after a big tax hit would significantly exceed $100 million and your market cap's about $350 million.

Right.

And I would think you guys could do something pretty smart with that. That's my question and comment.

Thank you.

Thank you.

Bishop Cheen, Wachovia.

Bishop, are you still there?

Yes, I am. Something refreshing, I'm not going to ask you about Safeco stock.

Thank you.

Although, there's certainly no lack of interest on the line about it. What a surprise. Let me go to two things. One, Fisher occupancy and average rate. We've been watching the trend line over the last four or five quarters the occupancy inching up and the blended rate or rental rate getting better -- lease rate. Is that still the trend line? Can you give us any color on that?

Yes. Our occupancy rate has increased to 96%.

Okay.

And that increased from 91% at the end of the year is all in data center space, which includes feeds for electrical infrastructure and both that are a substantially higher per square foot rate than just office space. So we're making gain on the average rental rate here at Fisher Plaza.

Okay. And are we churning out those -- as usual, significant discounts when somebody inks a three or four year, or year, or whatever it is lease? We might get a discount on the first six months or a year. And are those discounts good for -- put in place churning out now?

Yes. To answer your first -- the first part of that question. We've given no lease incentives since 2004. And the lease incentives that we did -- we did give when we were first filling out Fisher Plaza, we are -- we are running on the tail of those. So we do have some that are still at lower rates currently, and we should be through that by 2007.

Okay. And now for something completely new. Remind me, please, of the Seattle Mariners' contract renewal date or expiration date.

The expiration is 2008.

Okay. And is that -- on a cash basis have an escalator in it? In other words, are you paying rights-wise the average -- the same each year or is it escalating?

It escalates, Bishop.

Okay. Any -- can you give us any -- any numbers on that?

No, we've never broken that out.

Okay. Well, that's the end of my grand inquisition. Thank you, Colleen.

You're welcome. Thank you, Bishop.

I do want to follow-up on Mario's question on that net operating loss carried forward. For the end of 2005, it was at $10.3 million tax effective.

So if, Mario, you're still with us, hopefully that answers your question.

At this time, ladies and gentlemen, I show no further questions. I would now like to turn the call over to your hosts for any final remarks.

All right. Thank you, everyone. It's obvious on the call that Safeco stock is of great interest, and I also wanted to thank Bishop for his nice comments about our second quarter performance. We hope to continue the same. So we'll be talking again. Thank you very much.

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