Sinclair Inc (SBGI) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sinclair Broadcast Group first quarter 2008 earnings release.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Amy Thank you, Mr. Amy, you may begin.

Thank you, Operator, and good morning, everyone. In the room with me today are David Smith, President and CEO, Steve Marks, Chief Operating Officer of our Television Group, and Lucy Rutishauser, Treasurer.

Before we begin, Lucy will make our forward-looking statement disclaimer.

Thank you, Dave, and good morning, everyone.

Certain matters discussed on this call may include forward-looking statements regarding among other things future operating results. Such statements are subject to a number of risks and uncertainties.

Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors as set forth in the Company's most recent reports on Forms 10-Q and 10-K as filed with the SEC and included in our first quarter earnings release which we furnished to the SEC on an 8-K earlier this morning. The Company undertakes no obligation to update these forward-looking statements.

In accordance with Reg FD, this call is being made available to the public. A webcast replay will be available on our Web site later today and will remain available until our next quarterly earnings release. Redistribution of this call is prohibited without the express written consent of the Company.

Included on the call will be a discussion of non-GAAP metrics, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements but are provided as supplemental detail to assist the public in their analysis and valuation of our company. A reconciliation of the non-GAAP metrics to the GAAP measures in our financial statement is provided on our Web site, www.sbgi.net under Investor Information, Reports and Filings.

Thank you, Lucy.

Turning to the financial results. Net broadcast revenues for the first quarter were $160.9 million, up 8.5%, or $12.6 million over first quarter '07 and in line with our prior guidance. The increase was driven by growth in both our local and national core time sales, $2.6 million in higher political revenues and higher revenues from multi-video programming distributors.

Television operating expenses in the quarter, defined as station production and station SG&A expenses before barter, were $73.5 million, up 6.2% from first quarter last year. The increase was primarily due to additional news programming and higher sales cost. Our television operating costs came in lower than our prior guidance of $75 million due to lower bad debt expense and production costs.

Corporate overhead in the quarter was $6.7 million, an $800,000 increase as compared to the first quarter of last year due to increased salary costs, but slightly lower than our prior guidance due to lower worker's compensation and insurance expenses.

Operating income in the quarter was $46.2 million, an increase of $8.6 million from last year's first quarter results of $37.6 million. The primary driver was our higher revenue offset in part by the higher television operating expenses as explained earlier. Film payments for the quarter were $20.9 million.

Net interest for the expense for the quarter decreased 23%, or $6 million from first quarter last year due to the refinancing of the 8% notes with lower cost bank debt and convertible bonds, as well as higher free cash flow generation. We had diluted earnings per common share in the first quarter of $0.19 as compared to a $0.03 diluted loss in the first quarter last year.

Television broadcast cash flow in the quarter was $68.1 million, $7.8 million, or 13% higher than first quarter last year's BCF and exceeding the $64.4 million to $66.7 million range implied by our February guidance.

EBITDA was $62.1 million in the quarter, $8.1 million, or 15% higher than the same period last year and exceeding the 58.2 to $60.5 million range implied by our prior guidance. The BCF margin on our net broadcast revenue was 42.3%, and the EBITDA margin on total revenues was 33.3% in the quarter.

During the quarter we generated $36.2 million of free cash flow, a $10.9 million increase over first quarter last year. At our quarter ending stock price of $8.91 per share, our trailing 12-month free cash flow yield on our market cap was an impressive 21% with another 9% in dividend yield.

Lucy will now take you to the balance sheet and cash flow highlights.

Thank you, Dave.

Capital spending was $5.9 million in the quarter and cash programming payments were $20.9 million. We had $12.6 million of cash on hand at March 31st and $1,370.1 million of debt and that includes $46.1 million of nonrecourse and VIE debt which we are required to consolidate on our books and that will need to be excluded for your leverage calculation purposes.

In March, the counterparty to $300 million of notional amount of interest rate swaps that hedged our 8% bonds exercised its option to terminate the swap. The effect of early termination is to increase our 2008 interest expense guidance as the swaps were in the money to us and therefore favorable to our interest expense. As part of the termination, the counterparty paid us an early termination fee of $8 million in cash.

It is noteworthy to mention that during the past six years that these swaps were in place, they netted us over $46 million in cash interest savings and that is before the $8 million termination payment.

During the first quarter we repurchased $15.4 million par value of our 8% senior subordinated notes in the open market, bringing the outstanding balance down to $248 million.

Leverage at the operating company was 2.61 times at quarter end. If we had a leverage test at the holding company, it would be estimated at 5.22 times, and that is derived from total debt on the balance sheet net of cash, excluding the $46.1 million of VIE and nonrecourse debt, and divided by the trailing four quarter EBITDA of $251.1 million.

Steve Marks will now take you now through our operating performance.

Thank you, Lucy.

As Dave pointed out, we grew our net broadcast revenues by 8.5% this quarter on the strength of our FOX stations, the Super Bowl, political revenues and payments from multi-video program distributors. Local revenues were up 6.1%. National revenues grew 6.4%.

To give you a sense of how good these numbers are, we were able to grow our total market share by a full percentage point going from 18.3% to 19.3% share of revenue. This was driven by increased spending by the automotive media and service categories offset in part by lower spending by retail and paid programming.

Auto, which represents about 20% of our time sales, was up 2.6% in the quarter primarily due to the Super Bowl. The Super Bowl, which aired on 20 of our FOX stations, generated almost $5 million in incremental revenues for us as compared to last year when it aired on just two of our CBS stations.

Our FOX stations were up 15.4% due to the Super Bowl and strength of our local news and network programming. Our ABC stations were down 3.3% in the quarter due primarily to the writer's strike, which caused the network to pull some of their programs that were gaining momentum.

We are confident that as the shows return, the stations will improve. Our MyNetworkTVs were basically flat and our CWs were down a minimal 1.6%.

Political revenues were $3.2 million in the quarter versus $600,000 in the same period last year. We are still expecting record levels of political spending for the year.

Turning to our second quarter outlook, we are seeing strength in travel and leisure and foreign auto dealerships but weakness in domestic auto dealer, retail and schools. Second quarter 2008 political revenues are estimated to be $3.7 million versus $1.1 million in the same period last year, with almost half of that amount coming from our North Carolina stations.

Our FOX, CW, CBS and NBC stations are basing up. Our MyNetworkTVs are flat and our ABCs are down.

For the second quarter, we are forecasting [net] broadcast revenues to be up between 3.6% and 4.9% from second quarter's last year's $159.2 million. This equates to an increase of 5.8 to $7.8 million.

On the expense side, we are forecasting our TV production and SG&A expenses to be approximately $74.9 million in the quarter, a 3.6% increase. The second quarter is last year's $72.3 million. The increase is due primarily to higher news and sales costs.

For the year we were estimating TV operating expenses to be $302.5 million including the Cedar Rapids stations. Second quarter film payments are estimated to be $20.7 million and $81.2 million for the year.

For other expense guidance for the second quarter and full-year, please refer to our earnings release which we issued this morning.

With that, I would like to open it up for questions.

Operator, before we open it up for questions, I understand there's several people that are trying to dial in but are unable to get in or are getting static on the line so maybe you guys can do a check of that for us.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Victor Miller with Bear Stearns. Please go ahead with your question.

I'm very struck by the ability of you to grow the revenue as strongly as did you in the first quarter relative to what we've heard from the rest of the industry which has been fairly dower, especially at your CBS and NBC stations.

Can you talk about what you're seeing in the mid markets, Steve, and whether you think it's just a better positioning being a media company in the midmarkets with your duopoly presence as opposed to the pressure we may be seeing especially on the national side in the larger markets? It does seem like there's a difference between the midmarket and large market performance.

Secondly, David Amy, with a 21% free cash flow yield, 9% dividend yield, et cetera, is there any -- at what point given the stock at $9 and given how you're doing relative to the rest of the industry, at what point does the conversation come to actually reigniting your repurchase program instead of maybe putting it into -- in other operations that this point? Thanks.

Well, Victor, in terms of the sales performance and your reference to the mid markets, what's interesting is our biggest market, Columbus, has been soft, actually, even though our revenue shares of what's available to go after has been enormous. Being a FOX affiliate in first quarter having the Super Bowl and then also having some of the college championship games, which we enjoy the year previous, really boosted us, but when you take a look at this performance which, clearly, we hit it out of the ballpark, we have shows that are just really, really performing.

"Two and a Half Men", for argument sake, in syndication and "Family Guy" are two shows that we did not have at this time last year and they're both legitimate hits. We have not seen a sitcom hit probably in eight years and these two shows are just huge home runs for us. That will allow us to increase our revenue shares throughout the remainder of the year.

FOX in particular just put out a piece this morning that for the 17th week in a row they have won the adults 18-49 contest. Obviously we're very top heavy with FOX stations, but we're also not only enjoying being a FOX affiliate, as I mentioned, our syndicated product is also doing very well. So we're fortified for the remainder of the year to grow our revenue shares.

What about at some of the CBS and NBC are having particularly, that's not normally where you normally see "Family Guy" or "Two and a Half Men."

We only have a couple of those stations, and CBS in particular, if you took a look at our ratings, we've grown that news operation substantially over the last 12 months. We were always a competitor, a strong competitor in news, but if you take a look at our ratings success, specifically in areas that generate the most money and areas that we have most direct control over like news specifically in Portland, Maine, we've grown those news numbers substantially and that's where you see the increase from.

Is MyNetworkTV and CW feel that's finally bottomed out?

Yes, I do and I think although both networks continue to try to find prime time programming that is more competitive than what they have on the air now, our success, again, has been on the programs that surround the network. Most of our MyNetwork and CW stations have been lucky enough to run "Family Guy" or "Two and a Half Men" and in some instances run both.

And we've taken time periods that were literally doing next to nothing between 5 and 7 and 6 and 8 p.m. to rating that are extremely competitive in those time periods, literally going from 0.5s to 3s. So by instance, we'll take an average unit rate that may have been $100 and every time we sell a spot now we're getting $300.

So as the announcement spoke to, we've grown our revenue share by a full point. And that's with having 17 MyNetwork stations and seven CW stations. That's quite an accomplishment.

Congratulations. And then David?

Thank you, Victor.

That's a question that comes up all the time and I really think and I believe the Company believes that the best course of action in terms of creating shareholder value is exactly what you're seeing here in terms of the performance of our operations. There's just no doubt about it in terms of the percentage returns that you're seeing on the free cash flow that the -- that anybody that's looking at the Sinclair stock today would have to say there's a tremendous amount of value that they can see in investment.

So from our standpoint, you know, it breaks down into a couple of different areas. Certainly going private is a discussion that we've had or buying back our shares has been discussed over the last two and three years simply because for whatever reason, the valuations just don't show up from a market standpoint in our equity.

Hopefully that'll change over time and we'll start getting more and more credit for the results that we're producing, but, you know, that all remains to be seen. And, you know, the best way that we can take that free cash flow in regards to returning to our shareholders has been through our dividend policy and you can see that cash is coming back to you from your investment.

You're looking at a 9% return today in that regard so it's a very, very strong statement on our part as to how we want to treat our shareholders.

And finally, as far as any kind of move that we would make, if we wanted, we have spent the last five, six years really building a very strong balance sheet and that is so important us to as far as continuing the strength of our balance sheet and not taking any unnecessary risks that would at all create a problem for us in that regard. And, of course, we're all familiar with the situation with the credit markets today, so even if we wanted to that make that kind of move, today's market is just -- the cost to go into the market and to get financing to make these kind of moves are just about -- they really become uninviting, I guess, is the best way to think of it.

Okay. Thank you.

Our next question comes from the line of Marci Ryvicker with Wachovia Securities. Please go ahead with your question.

Thank you.

I just wanted to dig a little deep near the auto segment for the second quarter. I think, Steve, you said domestic is down but foreign is up. Can you give us what the overall pacing are and can you talk about the different tiers in terms of the manufacturers, the dealer associations and local dealerships?

Yes, first of all, for first quarter on the strength of the Super Bowl, as we mentioned, we were successful in growing the auto category in first quarter. Second quarter, it looks like we're going to be down slightly and some of that, quite frankly, is because of the tremendous volume in certain markets that we're getting on the political end, knocking out some of our advertisers, but we're a little bit light -- lighter on the national side than we are on the local side, so the local side of our automotive business for second quarter is actually doing quite well, whereas the national side of our business is not doing well.

As far as the foreign auto stuff, makers like Honda, Suzuki, BMW, Audi, which is not really the largest of spenders but they're showing substantial increases, which is offsetting General Motors, which is probably the biggest culprit in terms of our declines.

Okay. Then I have one question. Any update on the open mobile coalition?

Yes, I think, Marci, I think we're nearing the end the technical analysis process, and my sense is that some time in the immediate future the coalition will pick a standard and then forward it to the ATSC Standards Committee for further technical review and adoption over time. I think everything is on track to do what we've been talking about for quite a while and it just needs to move along, which it is.

Great.

I think once we are done, I think then we'll be ready to go to the marketplace and talk about business models.

Thank you.

Our next question comes from the line of Bishop Cheen with Wachovia Securities. Please go ahead with your question.

Hi. Thanks for taking the question.

David Amy, I think you touched on it when talking about the strength of your balance sheet being so important. When I see 21% free cash flow yield I have to think it's not because of this one quarter but years of Sinclair arbitraging its balance sheet.

You bought back $15 million of bonds in the market. Do you think you're going to be, given the conditions now, do you think you're going to be able to keep arbitraging it up to a point where you might just take out the whole issue? Is that cost arbitrage fair in this market?

That's a challenging question, Bishop, but it's, you know, we kind of answer that with a general, we remain opportunistic in that regard and the cost, like I mentioned, in terms of financing today to go in and say let's just take out the remaining balance of the 8s right at the moment is really, there's really no advantage to us relative to what it would cost to go into the market and open up our bank deal and issue new bonds to replace what's out there. So generally speaking, I'd say that time is, you know, what we'll have to wait this out and see how things move in regards to the credit markets.

That makes sense. One follow-up.

You continue to increase your local share. Where do you think your, I think it's tickling 67% of advertising revenue. Where do you think your local share could and should cap out?

Well, we just grew on first quarter local share, overall we grew 1 point. Local grew more than 1 point. We have a tremendous amount of emphasis on local because that's where the business is going.

Obviously the national spot business continues to decline. We've made a conscious effort for five years now to take a look at our local efforts and that's where primarily in our operation we make the most of our concentration. So we haven't bottomed out, we've got room to grow obviously under the MyNetwork and CW side assuming that they enjoy more success in prime time you're going to see continued revenue share growth on the MyNetwork and CW stuff.

We've grown the FOX stations over the last five years by a huge amount, especially on news operations which have gone from third and fourth-rated stations in their respective markets to, in some cases, one and two on the strength of the network. So we have very much focused on the local end over the last five years knowing that the national business is going in the wrong direction and it's a big reason why we're successful and we have not bottomed out in terms of increasing our local share. There's still upside and I believe as we go forward, we'll realize that upside as CW and MyNetwork continue to develop.

All right. Thanks a lot.

Just one thing, Bishop, that we'd like to say is that at some point national will stop its decline. You know, right now the dynamics are local.

It continues to grow as national continues to decline, but at some point national will not continue to decline, it'll bottom out and we'll see an inflection point there where national should start to grow again. So it's all theoretical at this point, but certainly it makes sense to us here that that lies in the future, not just for us but for all television broadcasters.

From your lips, David.

Yes.

Our next question comes from the line of Lee Westerfield with BMO Capital Markets. Please go ahead with your question.

Thank you very much. Thank you, everyone.

I really have two areas of questions. The first, if I can get a little more detail in the sources of revenue growth in the first quarter and as we peer into the second quarter on your guidance.

What were re-transmission and network compensation as factors to the first quarter in terms of revenue growth? In the past year you've outlined some detail in that area. I wonder if you can help us with a better understanding so we can drill down into the time sales performance in the quarter.

The second question relates to investments in the quarter. I appreciate that you outlined $44 million of investments in the quarter, $6 million to Patriot to roughly $38 million to real estate consisting of equity and loans. What fraction of that were loans and to what assets? Thank you.

Yes. The network cost number, we were about $2 million in the first quarter last year and that was about $1.4 million this year. Some of the other --

Well, again, Lee, in terms of the spot. The most impressive thing was, obviously, having a lot of Super Bowls, but we clearly did better than we had anticipated.

Sorry to interrupt but there's a major component that wasn't mentioned there, re-transmission fees this, the last quarter versus the prior year.

We're going to come to that one, Lee.

Oh, pardon me.

Just pulling that number.

Thank you. Sorry, Lucy, and pardon me.

No problem. Basically, again, if you take a look at the overall make-up of our markets and the growth that we enjoyed in first quarter came really two-fold, Super Bowl, "Two and a Half Men", "Family Guy" and, quite frankly, we just outsold everybody as we do most of the time, quite frankly, if you take a look at our performance.

To grow the revenue share, as I made mention, with having 17 MyNetwork and 7 CW stations is a tribute of what we're doing here. Basically just outsold everybody. We had the ratings. We had the shows. We asked for the money.

As far as the re-trans, Lee, what we had was an increase in the overall re-trans from about $11 million first quarter of '07, it was $10.9 million and total in the first quarter of '08 all-in is about 19.7.

And, sorry, should I be treating the re-transmission as a portion of your time sales in your broadcast revenue? Because that would seem to be implied in the calculations of growth in the first quarter.

Yes, there's part of the re-trans is included in our time sales. And the question that's come up in the past is the re-trans cash or is there barter or whatever, and I just want to be clear here that all of our re-trans is cash.

Part of it is advertising that is being purchased by the MVPDs and the other part is the whole grouping of whatever category you want to put, call it whether it's videos, On-Demand or what have you, but there's a number of other categories that that falls into, that would not to be considered by us as time sales.

Okay. Fair enough. Thank you, David.

And, sorry, to better understand the investments in the quarter, the real estate in particular?

Yes, we had a really terrific investment that we made during the quarter. It was a resort that we acquired in the eastern shore of Virginia. And it was a terrific investment because we were able to strategize throughout this process.

It took us a number of months to get there, but we were able to work through and get this taken care of at tremendous discount to where the real value, where we see the real values are in that location. So that was our biggest move and that was about $35 million that we put into that particular investment during the first quarter.

And, sorry, do you own a consolidated stake in that eastern shore resort?

Yes, we own about 50%.

Thank you. Okay. Gentlemen and Lucy, thank you all very much.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Edward Atorino with Benchmark. Please go ahead with your question.

Hi. A couple of questions.

On the other, the non-broadcast revenues, $11 million and change, whatever it was, just remind me sort of what's in there. And there's another expense line. Is that sort of the offset to the other revenues? Number one.

Number two, talk about "Idol" what that mean to you. I know it's a network station but it's got to having a terrific impact on your adjacencies.

Third, you mentioned news on the FOX stations. Can you discuss the trend of your news ratings sort of across the group?

I'll take the first one, Ed.

To what companies are in the other operating division is G1440, Acrodyne, Triangle Sign and Service, the Commercial Warehouse, the Commercial Building, the Alarm Funding, and the resort that Dave just talked about. So you'll see all those companies roll up into the line called other operating division revenue.

Right.

The expenses associate with those companies is the other operating division expense line. That's what I thought. In terms of forecasting, just use 1Q run rate. Is there any way to forecast that? We have an EBITDA number in the press release that we've given to you, but we haven't broken that out on the revenue and the expense side.

Okay.

But, you know, if you want -- I don't want to give guidance as to what rate you should use, but you should look to our guidance. (overlapping speakers)

I'll go, I'll find that. Thanks.

Okay.

Ed, in terms of "Idol" and the news, I'll take the news first by example and I think I can best illustrate it by using this example. In Columbus, Ohio, our FOX affiliate, WTTE, for the first time in the history of us owning that television station, we actually have more viewers watching our 10:00 news than the dispatch, WBNS, has viewing their 11:00 news. For me to make that statement, that's an incredible achievement.

It really is.

If anybody knows the history of Columbus, Ohio and the strength of WBNS and the dispatch, they're now in second place.

That's amazing.

Sinclair is in first to give you an idea of how strong the news has become. And that story is not unlike other stories that have propelled us at 10:00 and 9:00 depending on what time zone you're in.

We're enjoying huge gains in our late news efforts, especially on the FOX stations. And you could only imagine what that means to us in terms of revenue in a political season as, obviously, the politicians like to go into the newscasts. We'll be increasing our shares on political advertising quite a bit because of the strength and success of these news operations growing ratings.

In firms of "Idol" itself, you may be reading in the trades that the show is down year-to-year, make no mistake it's still the most powerful show on television and people are still watching it in droves and it literally is making stations stand up if you have a FOX affiliation and take notice.

And obviously it's helped those newscasts tremendously. It's brought new viewers into those newscasts. And people like our product and they're staying which is evident by our ratings.

So "Idol" has really turned around quite a few FOX affiliates and Sinclair, which is so deep in FOX affiliates, has really benefited by that show over the last handful of years and continue to benefit from it.

Can you talk about some of the other ad categories? You talked about auto and I think you said travel, sort of, not to spend a lot of time but where are sort of the plus and minuses?

We had a big first quarter on the finance end, a lot of insurance companies. Nationwide Insurance, for argument sake, came in and dropped just a busload of cash on us in first quarter that did not take place the year previous. So that category in particular was up quite a bit.

Retail?

Not bad. I mean, not bad.

Okay. Thanks.

I just wanted to make a point of clarification here in regards to our FOX affiliate WPTE as we call it in Columbus, Ohio. We don't actually own that station. It's under an LMA. Just as a point of clarification for you.

Thanks a lot.

There are no further questions in the queue. I'd like to hand it back over to management for closing comments.

All right. Well, thank you, operator, and thank you, everyone, for joining our call. See you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.