Sinclair Inc (SBGI) 2008 Q2 法說會逐字稿

Welcome to the Sinclair Broadcast Group Inc second 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. In the room with me today are David Smith, President and CEO, Steve Marks, our Chief Operating Officer of our Television Group, and Lucy Rutishauser, Vice President Corporate Finance and 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 10Q and 10K as filed with the SEC and included in our second quarter earnings release which we furnished to the SEC on an 8K 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 website later today and will remain available until our next quarterly earnings release. Redistribution of this call is prohibited without the expressed 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 evaluation of our Company. A reconciliation of the non-GAAP metrics to the GAAP measures in our financial statements is provided on our website, www.sbgi.net under investor information reports and filings.

Thank you, Lucy, and good morning everyone. Before reviewing the financial results, I wanted to share some of our highlights of the second quarter. In June we announced that we entered into a asset purchase agreement with Raycom Media to acquire their CBS affiliate WTVR-TV in Richmond, Virginia for $85 million, representing an approximate 11.25 times EBITDA multiple. To be compliant with the FCC ownership rules, we also announced that we would simultaneously sell the licensed assets of our Fox affiliate, WRLH-TV, also in Richmond for $4.3 million and then provide sales and nonprogramming related services through an outsourcing agreement. After expense efficiencies and revenue enhancements, we expect our pro forma multiple to improve to a 7.5 times. Although our announcement indicated that we expected the transaction to close at the end of the third quarter of this year, we believe that closing will not be any earlier than first quarter of '09.

The purchase agreement allows for a 12 month closing, therefore we have not included the transactions in our '08 outlook provided this morning in our earnings release. In June we also announced that we extended our cable carriage agreement with Insight Communications. The agreement covers four stations in three markets and has a term of three years. While we cannot discuss the economic terms, we can say that the advertising component Insight had been receiving under the prior contract was eliminated. Our Fox affiliate in Des Moines, KDSM-TV, entered into a new share agreement with local TV's NBC affiliate, WHO-TV, which will begin producing a 9:00 p.m. nightly newscast on KDSM beginning this September. KDSM was receiving a weekday news feed from our CBS affiliate in Cedar Rapids.

We invested $35.5 million through our [Keyser Capital and Sinclair Investment Group subsidiaries this quarter, of which $19 million relates to Jefferson Technology Park, developmental land in a suburb of Washington, DC. For the first six months of this year we have invested a net amount of $80.2 million, of which approximately $72.1 million relates to real estate, $2.1million to operating businesses, and $6 million to Patriot Capital, a small business investment company. Including the $48 million invested in '07, our cumulative investments, net of cash distributions, total $128.2 million, of which $108 million was for 15 real estate transactions, $14.2 million was for 3 operating businesses and $6 million for Patriot Capital. Now as we turn to the financial results for the quarter, net broadcast revenues for the second quarter were $163.7 million up 2.8%, or $4.5 million over second quarter of '07.

We believe that this is among the best TV revenue results reported by the industry in this quarter. The over performance compared to our peers came from retransmission revenues, our Cedar Rapids station transaction, which was accounted for under a joint sales agreement last year and our sales efforts. Although our growth performance was about $1 million to $3 million lower than the 3.6% to 4.9% guidance we provided in May, the reason is due to the worsening economic conditions, particularly it's impact on the automotive sector, which is the largest buyer of TV advertising, as well as the economy's impact on the retail sector, which is driven by disposable income. We expect core advertising spending to continue to show weakness for the remainder of '80 and into '09 as a result of the struggling economy. Television operating expenses in the quarter, defined as station production and station SG&A expenses before barter, were $74.4 million up 3% from second quarter last year.

The $2.1million increase was primarily due to the addition of Cedar Rapids and higher costs from our news expansions offset in part by lower promotion and G&A expenses. Our television operating costs, however, came in $500,000 lower than our prior guidance of $74.9 million primarily due to lower sales commissions and bonus expenses, as well as lower promotion and music license fee expenses. Corporate overhead in the quarter was $7.5 million, flat to second quart last year but $300,000 lower than our guidance due primarily to lower then forecasted health insurance costs. Operating income in the quarter was $43.3 million, an increase of $1.7 million or 4% over last year's second quarter result of $41.6 million. The primary drivers were our higher revenue and lower program amortization costs, offset in part by the higher TV production costs and an unforecasted $1.6 million noncash goodwill impairment charge related to Acrodyne Communications, our broadcast equipment and transmitter Company.

Net interest expense for the quarter decreased 20% or $4.9 million from second quarter last year, primarily due to the refinancing of the 8% senior subordinated notes with lower cost convertible bonds and a decline in LIBOR. We had diluted earnings per common share in the second quarter of $0.15 as compared to $0.03 in the second quarter last year. Television broadcast cash flow in the quarter was $71 million, $2.4 million or 3.5% higher than second quarter last year's broadcast cash flows and in line with our implied guidance of $70 million to $71.7 million. EBITDA was $65.1 million in the quarter, $3 million or 4.7% higher than the same period last year and in line with a $65 million to $66.8 million range implied by our prior guidance. Our other operating divisions had a $700,000 loss in the quarter as compared to a $600,000 loss last year. This was less than the $1.9 million income we forecasted, primarily due to delayed transmitter sales at Acrodyne.

The broadcast cash flow margin on net broadcast revenues was 43.4% and the EBITDA margin on total revenues was 33.6% in the quarter. Also during the quarter we generated $39.4 million of free cash flow, $4 million less than second quarter last year due primarily to a parent tax provision this quarter versus a benefit last year, higher CapEx as the result of timing, offset in part by lower net interest expense from the refinancings and decline in LIBOR and from higher EBITDA. We exceeded our implied guidance by $8 million, primarily due to a lower than expected current tax provision, lower capital expenditures and $1 million cash received from our equity investees. At quarter end our stock price was $7.60. And our trailing 12 months free cash flow yield on our market cap, was approximately 24.5%, with a 10.5% dividend yield. Lucy will take you through the balance sheet and cash flow highlights.

Thank you, Dave. Cash programming payments were $20.5 million in the quarter and capital spending was $8.7 million. In response to the difficulty economic conditions, we have revised our 2008 capital spending forecast down from $33 million to $27 million. The $6 million savings is coming from news and master control projects that can be deferred into 2009. Over the next several months we will be scrubbing through our 2009 capital budgets to review projects, cost estimates and timing. We had $10.9 million of cash on hand at June 30th, and $1386.9 million of debt, which includes $51 million of non-recourse and variable interest entity debt that we are required to consolidate on our books.

Leverage at the operating Company was 2.61 times at quarter-end. And if we had a leverage test at the holding Company it would be estimated at 5.21 times. That is derived from total debt on the balance sheet, net of cash, less the $51 million of variable interest entity and non-recourse debt and divided by the trailing four quarter EBITDA of $254.1 million. In July we repurchased $6.4 million of our 8% senior subordinated notes. As Steve Marks will take you through our operating performance.

Thank you, Lucy, and good morning, everyone. As Dave pointed out, we grew our net broadcast revenues by 2.8 percent this quarter on higher retransmission revenues, political and the Cedar Rapids stations, which were accounted for under our joint sales agreement last year. When compared to second quarter results posted by other television broadcasters, we believe our performance, given these difficult economic times, was outstanding and among the best television revenue results reported. To give you a sense of our performance, the Television Bureau of Advertising reported that the average local gross time sales for 42 broadcast groups reporting to them were down 7.2% and national time sales were down 8.2% in the second quarter versus second quarter last year. In comparison, our second quarter local time sales were up 3.3%, while national revenues declined only 2.9%.

Our performances is also evident in our market shares. With all but two markets reported, we grew our total market share by almost a full percentage point, going from 18.5% of the revenue to 19.3% of the revenue. Nevertheless, even with growing television revenues and increased shares, we are not immune to the impact of the record level oil prices in the slumping economy. As the quarter progressed, we experienced advertising budget cuts and order cancellations by domestic automotive manufacturers and local dealers in response to declining SUV and truck sales. Categories that were up in the quarter were fast food, services, pharmacy and cosmetics, home products and media spending, while automotive, retail, movies, schools and medical were down. Auto, which represented about 20.6% of our time sales, was done 3.7% or $1.1 million. Retail, although only 4.4% of our time sales, was down $1 million or 13.5%.

Services, which is our second largest category representing 14.3% of our time sales, was up 1.2% or $250,000, while fast food, which is 6.6% of our time sales, was up 8.6% or $800,000. From a affiliation breakdown, our Fox stations were up 2.7%, My Network TV stations were up 0.007% and our NBC station was up 1%. Our ABC stations down 5.2%, CW stations down 0.004% and CBS stations on a same station basis were down 1%. Political revenues were $3.6 million in the quarter versus $1.1 million in the same period last year. For the year, we are still expecting record levels of political advertising. Turning to our third quarter outlook. For the third quarter we are forecasting net broadcast revenues before barter to be up between 2% and 3.4% from the $149.4 million reported in third quarter last year. This equates to an increase of $3.1 million to $5.1 million. Included in our guidance is approximately $9.7 million for political advertising as compared to $1.1 million in the third quarter last year.

For the third quarter all station affiliation groups are currently pacing down, mid to high single-digit percents, excluding political revenues. Only our NBC station is currently pacing up mid double-digit percents due to the Olympics. Most of our advertising categories are expected to finish the quarter down from third quarter last year, with the largest expected declines coming from automotive, particularly General Motors. We are expecting auto to finish third quarter down about 14% to 15% or about $4 million to $5 million. Why we should expect some crowding out of certain categories due to the Summer Olympics and the political election, to put this in perspective the last time we had a Summer Olympics and a Presidential election, which was 2004, auto was down 7.7% in the third quarter of that year. On the expense side we are forecasting our TV production and SG&A expenses before barter expenses to be approximately $72.6 million in the quarter, a 4.5% increase to third quarter last year's $69.5 million. The $3.1 million increase is due primarily to the addition of the Cedar Rapids stations and higher news costs.

For the year we are estimating TV operating expenses before barter expenses to be $298.1 million up 3.2%. Third quarter film payments are estimated to be $19.8 million and $82.3 million for the year. Based on guidance as provided in this morning's earnings release, we expect broadcast cash flows to be between $60.5 million and $62.5 million, EBITDA to be between $55.9 million and $57.9 million and free cash flow to be about $30.5 million. Looking to the remainder of 2008 and into 2009, we are not seeing any signs that the economy will improve and are therefore preparing as though advertising spending levels will continue to be soft. In light of that we are reacting accordingly and initially target programs we put in place to help keep our sales force [incentized]. Likewise we are reviewing our expense budgets to look for areas where we can trim or defer costs. None of these initiatives are included in the guidance we provided this morning. With that, I would like to open it up to questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Marcy Ryvicker with Wachovia securities.

Good morning. I have two questions. It sounds like your ABC stations had the worst performance of the group. I just wanted to know if you could elaborate on what happened there. Secondly, also you said that closing on the Richmond transaction has been delayed, can you talk about that?

In terms of the ABC stations, I believe you're correct. But the fact of the matter is the audits that come in were pretty impressive. So although the revenues are down our share of business is extremely competitive on the ABC stations I think one of the biggest concerns that all broadcasters had was coming off of the writer's strike and ABC got hurt a little bit more than the other networks, at least in the markets that where we have ABC stations. So I don't think it was that abnormal and again the audits that we're enjoying for second quarter we talked about a nice share increase overall for the Company and we have ABC stations that are doing just fine.

I would just add a little bit to that Marci, that say in Ohio. We have been talking about the difficulties of Ohio and couple of our really important ABC affiliates, one in Columbus and the other in Dayton, are really faced with the toughness that the Ohio economy is continuing to face from last year into this year. Like Steve says, we are gaining share but those markets are having some real tough times. As far as the Richmond delay, it's just simply a matter of going through the regulatory process and review right now . We are under review by the Justice Department based on what Raycom had met when they first bought the NBC affiliate there. They had entered into a agreement with Justice Department as far as their sale of the CBS affiliate, so that is currently being reviewed and these things take time. So we are looking for that to go through that course and so our expectations right now would be that we wouldn't be able to close any sooner than first quarter of next

Thank you very much.

Our next question comes from the line of Bishop Cheen with Wachovia Securities.

Given the earnings challenge, Lucy, David, how do you think you can best use your balance sheet to enhance your stock?

Well, it's been -- that's a great question, Bishop, in a sense that when you reflect on what we have done and what we have accomplished in terms of improving our stock and in the past that's a question that I don't know that there is an easy answer to. You look at valuations and where they are heading from a public market standpoint , the negative sentiment that exists out there and certainly we have a focus on where the stock price has gone. And we scratch our heads in one hand just because the valuations don't really make a whole lot of sense to us. But then on the other side, we appreciate how Wall Street reacts to sort of the economic conditions and the sentiment that becomes prevalent within the market.

So it does pose in our mind an opportunity and we have to consider that and whether or not we will be aggressive or not is something that we have to consider and think about in regards to, really, the rest of our objectives. And our primary objective, and I think we have been clear on this, is really growing our free cash flows. What do we do to grow our free cash flow and how do we provide dividend return to our shareholders. We continue to do that. As I mentioned earlier, we are seeing now in excess of 10% return on our equity, common stock. So from that standpoint, it could get better or it could go down. We are going to continue to be focused on those two objectives, growing our free cash flow and providing a dividend yield in return to our

Thanks, that is helpful. Also, did you mention how much auto was down either in Q2 or the first half?

Q2 was down less than 4%.

But you expect the big slip in Q3? Yes, correct.

Thank you.

Our next question comes from the line of Edward Atorino with Benchmark.

Good morning. Got two questions. Could you discuss ad categories going forward, where you see the biggest weakness other than auto, which everybody is complaining about. And second, could you review the Acrodyne, was it Acrodyne that lost money instead of making money and sort of review the non-broadcasting pieces and how they performed, it's sort of always a mystery.

Really the biggest concern, Ed, what is obviously the automotive category. The other categories, quite frankly, are not performing really all that bad. Obviously the biggest concern is the automotive, it makes up the bigger share of our revenue. We are telecommunications, which in the las two or three years has really become a hugh catagory for us, continues to show growth. The biggest concern really is just one category and eventually that category, like everything else history shows, will recycle itself and come back to life in the not too distant future, it's just a question of when.

Take a look at auto and think about what is going on.

It is no mystery that dealers are struggling, General Motors is going out of business it's tough.

General Motors is going out of business.

I'm being a little facetious, but you never know.

It's the reality of how difficult it is today as they face this whole transition from the type of product they've been producing and selling to a whole new product line that they really need to come out with in face of the higher gasoline costs. You're seeing the unit sales drop significantly. We entered into the year with about a $15 million unit estimate. That's dropped, some folks are saying, it could be a low as 12 million units this year. It's a significant --

That is a lower number than I've heard.

I'm not saying that's the right number. I've heard some comments like that in some of the auto trades that we try to keep up here in terms of what is going on in the business. It's a tough situation for them. But there is always the silver lining that you have to think about and over time that number is going to grow from closer to 20 million units a year, because people are not going to stop driving, they are just going to find -- they want to find better ways to and more economical ways to get themselves around town. Those unit sales will grow and they will grow significantly and it's always been proven time and time again that the best way to improve your auto sales is through television. So there is no question in any of our minds that as tough as what we are seeing today is just an economic cycle and that we will come out of this and a lot of money will be coming back to us in terms of auto advertising in the future.

Whether that's middle of '09 or '10, who knows the answer to that question, we certainly don't know. As far as Acrodyne, you're familiar with what we do is provide transmitters, digital transmitters to the industry and in that process, we are giving up our analog signal in February. A lot of transmitter orders needed to be placed and built this year and our expectation was that we would see with the order flow that was coming in, we thought we could see more orders closed and shipped in the second quarter. And what's happened is (inaudible) with the toughness in the economic climate, credit markets. et cetera. a number of broadcasters simply had to hold off on taking their orders into the third quarter. So it's a primarily a timing issue from a standpoint of our forecast.

What was it a loss of $700,000 versus an estimated profit was it.

Yes, exactly.

Will that swing around in the second half?

Yes. It should improve significantly for us at Acrodyne in the second half.

Anything else in that non-broadcasting area of significance worth noting?

Yes, there are but we are a little bit premature to say anything. We are seeing some real good signs in a number of areas in terms of valuation and growth in that regard. Nothing that we can put numbers to today, but we are very encouraged by a number of things that we are seeing. Certainly the other side of it, when we talk about real estate and the values that we are seeing, the opportunities are continue to be significant in relationship to where the values have gone just in the last 18 months in that regard, so some patient money and opportunity is there. You will be hearing more and more as they appear but it just takes time.

Our next question comes from the line of Michael Morris with UBS, please proceed with your question.

Hi, thank you. A lot of focus right now is, of course, on the cyclical weakness and the economic weakness that you're facing, understandably so. Can you give some insight, I guess, on how you're viewing the longer term trends based on your relationships and how you're seeing the competitive environment for advertisers who are pulling back in this environment, do you feel comfortable that they would return in a better environment and also how are you viewing, I guess, the competitive dynamic going forward for your national advertising relative to your local advertising, that would be helpful, thanks.

When you take a look at our performance as we talk to -- the interesting thing about our Company over the last year and specifically much more so over the last two quarters, we are growing our share of available dollars. We just reported we grew share by just about a full point. We did likewise in first quarter. We are actually in these tough economic times in a very good position, because if the budgets are reduced regardless of whatever category it may be, we have increased ratings and better shows on the air, so we're obviously garnering a larger share of those advertising budgets that are available. From a competitive standpoint, history will show that the people that are backing out, they come back.

Clearly there is a track record 50 years long that suggests that people do come back and spend thir money. So we're really not concerned about that, the advertisers eventually will come back once the cycle takes it's correction. So the way we are going about it is very simple, we are putting bigger shows with bigger ratings on the air and we are garnering larger shares and that's why we are able to put these numbers up that we are enjoying.

What about, do you see increase competition from other media outside of your broadcast competitors, particularly is there difference in terms of national, what national advertisers are looking for, perhaps they are more interested in the internet, for example, than local advertisers. Amy thoughts kind of on that (inaudible)

I think that game has been played now for at least three or four or five years and I think it is pretty much -- it is what it is. Certainly categories have gone into the internet. I don't really sit here today and worry about the internet taking much more than what they are presently taking. It's obvious to us that the two go hand in hand. Most of what we see in terms of the internet, you have to have the television schedule to drive people to the site, so the two go hand in hand for us. And as far as national advertisers, taking their money and putting it in to the internet, I think they have already addressed that and it's pretty much leveled itself out. Great, thank you.

Thank you.

Thank you, our next question comes from the line of Andrew Finkelstein with Lehman brothers.

Hi, guys, good morning. A couple of questions. First, just looking at your free cash flow and the leverage target, maybe for Lucy, after the dividend and the investments and then the Richmond purchase, you're spending, I think, even through the free cash flow, can you tell how you're going to finance all the different things you're doing. And then just further on the investments, $35 million in the quarter, can you give us a feel for what that pipeline looks like for the rest of the year and then sort of wrapping it all up, leverage in the lows 5s has been pretty conservative relative to some of the other broadcasters certainly that I look at, can you give us a feel for where you want to take that leverage ratio? Thanks.

Andrew, just a couple of data points for you. We announced that our total leverage at the end the second quarter through the holding Company was 5.21 times and again we do not have a covenant requirement at that level. The covenant is down at the operating Company and the covenant requirement was 6.75 times, we were at 2.61 times at the operating Company. So from a leverage standpoint, there is a lot of capacity there. As far as the financings, we have $175 million revolver available to us, we had $51 million outstanding at the end of the second quarter. We are going into the back half of the year with political, so that should drive our cash flow. We also have a $500 million incremental term loan facility that is available to us in our existing credit facility. With the guidance that we have out there today for the full year expense and the third quarter revenue, we would expect our year-end leverage through the holding Company to be down in the low five times.

I think we are in real good position here in terms of being able to take advantage of the situation in regards to the credit markets, if you -- when I say take advantage of it is that we are not faced with having to go out and make deals at some of these really high rates right now. You saw some of the broadcasters that had to do -- some of the bridge preferreds that they had to put in place and some of the prices, we're not looking at anything like that, we have plenty of capacity within our bank credit agreement to move forward and finance any of the acquisitions or opportunities that we see coming forward. Certainly in saying that we need to be prudent in regards to the cost that we run into and like you say we are conservative in that regard. We are certainly looking at, as we add additional financing, the cost of that additional financing and just how little it will effect the returns on any of the acquisitions or investments that we would be making.

Should we expect the acquisitions and noncore, or for that matter on the television side, to continue at the pace we have kind of seen in the first half.

Yes, I think that's a fair way to look at it. We see this as a real opportunity today, where values have come way down. And what will happen over the next couple of years, if history is any indication of what will happen, is that the returns that we will see will enjoy significant return and that will other investors that are on the sidelines today will come back and say, look at the returns that you can produce in these areas and those values will start to go up. And so now is a great time to be in as a contrarian to take advantage of that. So we are going to continue to be looking for and making deals where we think it makes a lot of sense.

Okay. It sounds like funding would come from incremental bank debt and free cash flow and then you guys, just not to put words in your mouth, but you are viewing the leverage targets to stay in, is that where you guys are looking to keep it or are you willing to take total leverage higher than the low fives area?

You're right as far as that -- we're not really looking to push the total leverage much beyond that, but we haven't set a limit where we said okay, well, can't go beyond five in the quarter, it can't go beyond five and a half, anything like that. If it makes sense, like you say, our personality is a conservative personality. We are not going to get aggressive. We are not going to -- it will put ourselves in a position where we would be really jeopardizing a lot of the court activities that we are involved in and certainly what drives our view is going to be the television performance. And we are right on top of that, looking at that all the time to make sure that we have that in mind in regards to anything we do. So we don't find ourselves in an unenviable position of saying how did we get to this point on our balance sheet. Our balance sheet and the strength of our balance sheet is very important to us and it is absolutely supported by the performance of our television business.

Thanks.

(OPERATOR INSTRUCTIONS)

All right operator, we can just wrap it up then and I just wanted to say in closing that I wanted to leave you with a few thoughts regarding Sinclair. Just to remind you we generate over 10% annual dividend yield. About 10% of our net broadcast revenues through retrans are currently under contract and uneffected by the economy or advertising cycle. And again we have about $125 million of hidden value from our investments that is not reflected at all in our enterprise value or our stock price. I just wanted to remind you at some of the real advantages that Sinclair offers you. And as always, we thank you for participating on our call this morning. If anyone has any questions, just feel free to contact us and we will talk to you next time. So long.

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