Sinclair Inc (SBGI) 2009 Q1 法說會逐字稿

Greetings, and welcome to the first quarter 2009 earnings conference call. 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, David Amy, Executive Vice President and Chief Financial Officer. Thank you. Mr. Amy, you may now begin.

Good morning everyone, and thank you operator. In the room with me today are David Smith, President and CEO, Steve Marks, 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 statements disclaimer.

Thank you, David. 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, such factors have been set forth in the Company's most recent report on Forms 10-Q and 10-K, as filed with the SEC, and included in our first quarter earnings release.

Our earnings release was furnished to the SEC on an 8-K earlier this morning. The Company undertakes no obligation to update these forward-looking statements. The Company regularly uses it's website as a key source of Company information, which can be accessed at www.SBGI.net. In accordance with Reg SD, 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 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 details, 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 statements is provided on our website under Investor Information, Reports and Filings.

Thank you, Lucy. Now turning to our results, net broadcast revenues for the first quarter were $131.3 million, down 18.4%, or 29.6 million versus first quarter of '08. The decrease to last year was primarily the result of a decline in the core business, 2.9 million less in political revenues, and 4.9 million less in Super Bowl revenues. This was offset by 1.5 million in higher retransmission revenues.

Our first quarter results, which called for net broadcast revenues to be down below 20%, came in slightly ahead of our guidance, due to higher local ad sales. Television operating expenses in the first quarter, defined as station production, and station SG&A expenses before barter were 65.9 million, down 10.4% from the first quarter last year. The $7.6 million decline was primarily due to the cost-cutting initiatives we implemented in fourth quarter of '08, as well as lower sales commissions on the lower revenues.

Corporate overhead in the quarter was $6.4 million, and that was $400,000 lower than first quarter last year, primarily due to lower stock-based compensation. In the first quarter, we reported a [$1] million non-cash gain on asset exchanges. We also recorded a $130.1 million impairment charge, or $100.8 million on an after-tax basis, this is associated with the assessment of goodwill and FCC licenses. This is a non-cash charge, which has no impact on our cash flows or our covenants. When excluding this impairment loss, we had operating income in the quarter of $23.4 million, 49.3% lower than last year's first quarter results of $46.2 million.

Net interest expense for the quarter decreased 18.4%, or 4.1 million from first quarter last year, primarily due to a 200 basis point decline in 3 month LIBOR, and due to repurchasing our bonds in the open market with lower cost revolving debt. Our other operating divisions had a $700,000 operating loss, as compared to an $800,000 operating loss in the first quarter of '08. Television broadcast cash flow in the quarter was $43.6 million. That was down 24.6 million, or 36.1% from last year's first quarter BCF, due to the lower revenues and higher film payments, offset in part by lower TV operating expenses.

EBITDA was $36.7 million in the quarter, $25.4 million, or 41% lower than the same period last year, due primarily to the decline in BCF. The broadcast cash flow margin on net broadcast revenues was 33.2%, and the EBITDA margin on total revenues was 23.7% in the quarter. Excluding the impairment charge, we had diluted earnings per common share in the first quarter of $0.19 as compared to diluted earnings per common share of $0.17 in the first quarter last year.

During the quarter, we generated $22.3 million of free cash flow, which was $13.8 million less than first quarter last year, primarily due to the lower EBITDA, offset by savings in interest expense, capital expenditures, and current taxes. Our stock price at March 31st was $1.03 per share, resulting in a free cash flow yield of 178%.

Before we go any further, we feel it is important in the current environment to address the issues of the May 2010 and January 2011 put rights, as they relate to our 3% and 4.875% senior convertible bonds respectively. First, we expect to shortly begin the process of working with the convert holders to reach a mutually beneficial solution. Second, we will not be discussing specifics regarding the anticipated process, or potential solutions available to the parties.

Lastly we will not, going forward, disclose or discuss any of our ongoing discussions or details of the process. Nor will we take questions or respond to questions on this call or afterwards regarding the process. Details or discussions until such time a public disclosure is warranted.

With that, Lucy will take you through the balance sheet and cash flow highlights.

Thank you, Dave. Cash programming payments were $23.7 million in the first quarter, and capital spending was $2.8 million in the first quarter. We had $11.2 million of cash on hand at March 31st, and 1.3328 billion of debt, which includes $57.4 million of non-recourse and variable interest entity debt, that we are required to consolidate on our books.

At March 31st, we had $120.5 million drawn under our revolving line of credit, and approximately $48 million available of our 168.6 million commitment. Leverage of the operating company was 3.08 times at quarter end, on a covenant requirement of 6.5 times. If we had a leverage test at the holding company, it would be estimated at 5.69 times. Our weighted average cost to debt at quarter end was 5.7% .

During the first quarter, we repurchased 1.5 million shares of our Class A common stock, 50.7 million, that is 50.7 million face amount of the 3% converts, and 1 million face amount of our 6% subordinated convertible bonds. Now some of these repurchases, we previously reported to you on our February call, and in our recently filed 10-K.

As discussed previously, the accounting for our 3% senior convertible bonds has changed, pursuant to adopting APB 14-1, which addresses accounting for convertible debt instruments that may be settled in cash upon conversion. Per APB 14-1, companies with convertible securities that can be settled in cash at conversion, must account for this security and it's liability and equity components, thereby recording a debt discount. As a result, non-cash interest expense was increased by approximately $9.9 million in 2008, and 6.4 million in 2007.

We expect to report an additional $12.1 million of non-cash interest expense in 2009, and 4.5 million in 2010, as a result of the discount amortization, assuming the May 2010 put date. Now this is already reflected in the guidance provided in our earnings release this morning. In addition, the 3% states amount carried on the balance sheet at December 31 of 2008, was reduced by a $13.8 million debt discount.

We have included up on our website the reclasses made to our 2008 income statement from adopting APB 14-1, as well as the restatements required pursuant to the adoption of FAS 160, which is accounting for non-controlling interest.

Steve Marks will now take you through our

Thank you Lucy, and good morning everyone. Although we came in slightly ahead of our guidance, the advertising environment continues to be challenging, and visibility continues to be minimal, including political local time sales in the first quarter were down 18.3%, and national was down 31.3%. Excluding political, local was down 17.3%, while national was down 28.8%. Local now makes up approximately 70.5% of our time sales. Approximately 2.6 percentage points of the decline in net broadcast revenues was due to the Super Bowl being aired on NBC, as compared to Fox last year.

As expected, we had declines in just about every category during the first quarter, due to the recession, with the exception of grocery, breakfast food, and travel, which were up an insignificant amount. The automotive category was exceptionally weak, down 46.3%, but in-line with our expectations.

Automotive has now dropped to be our second largest advertising category at 13.7% of time sales. That has been replaced by the Service category, which despite being down 19.2% in the quarter, now represents 16.7% of our time sales. Other categories that were down significantly were movies, fast food, and pharmacy. All affiliations on both and including and excluding political basis were down in the first quarter.

Political revenues were 300,000 in the first quarter, versus 3.2 million in the same period last year. We outperformed the industry, however, in the first quarter, based on the TVB Advertising survey of 750 station's time sales, which were down approximately 28%, versus our time sales performance of down 22.6%. Our stations also grew their total market shares on average, with all but two markets reported, our total share, including political, increased to 18.8%, from 18.4%.

Turning to our second quarter outlook, as I mentioned, visibility continues to be limited, and it is unclear what will happen with the Automotive sector, given Chrysler's bankruptcy, and the possibility of a GM filing as well. With that said, our expectations for second quarter, net broadcast revenues are to be down by high-teen percents, from our second quarter 2008 net broadcast revenues of 163.7 million.

Included in our second quarter guidance is approximately 200,000 for political advertising, as compared to 3.6 million in the second quarter of last year. As expected, we are forecasting for all affiliation groups to be down in the second quarter. We are once again to be expecting the majority of our advertising categories to finish the quarter down, versus second quarter last year. We expect Automotive to finish the second quarter down by about 40 to 45%, and Services to finish the quarter down by low-teen percents.

On the expense side, we are forecasting our TV production and SG&A expenses to be approximately 69.2 million in the second quarter, a 7.1% decrease from the second quarter last year, 74.4 million. The 5.2 million decline is due primarily to lower sales expense, as a result of lower revenue guidance, and the effect of the cost-cutting measures we implemented in the fourth quarter of 2008. For the year, TV operating expenses are estimated to be approximately $272.7 million, down 22.4 million, or 7.6% from 2008's $295.1 million. For Other line item guidance, please refer to our earnings release provided this morning.

With that, I would like to open the field up to questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment please, while we poll for questions. Thank you. Our first question today will be coming from the line of Bishop Cheen from Wachovia Securities. Please go ahead with your question.

Thanks for taking the question. Lucy, could you give us the balances of these three converts, and also tell us in this current Q2 if you have bought back any other securities, beat the converts or bonds, or stock? Thanks.

The 8% notes, there is 224.7 million face amount outstanding. The 4.875% notes, there is 143.5 million face amount. The 3% converts, 294.3 million face, and the 6%, 134 .1 million face, and we have not bought any securities back in the second quarter.

Thank you, Lucy.

Okay.

Thank you. The next question is coming from the line of Aaron watts of Deutsche Bank. Please go ahead with your question, sir.

Morning, everyone. A few quick ones from me. Lucy, how much more flexibility do you have, to use bank debt to buy back the converts?

Well we would be limited, based on the amount of the revolver liquidity. At the end of March, we had about 48 million of revolver available to us.

Okay.

That would just be without going back to the markets.

So between that availability and your free cash flow, you are allowed should you choose to do so, to continue to buy back that holding company debt, or converts? Sorry.

Would we be allowed?

Would you have restricted payment capacity, I guess would be another way to put it? We have the capacity. I will say that. We have the capacity, based on our March 31st. Got you. Okay.

To buy that back.

Okay.

I am not saying that we would or would not, though.

Understood. And then secondly, it looked like you did a little better in cutting costs than what you had guided us to at the end of last quarter. Can you just talk about what might have changed, or if there was just some timing that you got some of the benefit up front here?

We just went back in and took a look at everything we had, every department we had, and obviously the times called for doing so. And we feel we made the cuts without obviously hurting our performance. So we did what was necessary to do.

Okay. And then the last one I had, I was just curious if you could give us some idea, with the changes that are taking place, in with some of your affiliations with the networks, with My Network TV going more toward the syndicated model, CW out yesterday talking about how they are dropping Sunday. What impact is that going to have with you, and the 29 or 30 stations you have affiliated with those guys, in terms of revenues and expenses as we go forward?

I think between the two of them, there are about 24, between CW and My Network. The My Network thing, addressing that, from the beginning 8 to 10 p.m. with My Network has not been what I would call a huge success, and you would expect that there would be a building process with a new network debut. So as the network continued to debut, the fact of the matter is the numbers that we are going up against, and the history of the network from its start, are not numbers that are difficult to match. So at this particular point, as they decide to go forward, the effect of 8 to 10 p.m. will not be that great, based off of the last two years.

In terms of the CW, they've had a pretty good year ratings-wise. Sunday has never been a tent pole for us, in that we garnered a lot of revenue on Sunday, and we will take back that time period with really no loss financially whatsoever. The interesting thing about the two networks, quite frankly, we have had a lot of success surrounding the network with very competitive programming, i.e., 2.5 Men, in most of these markets, where we have My Network and CW affiliates.

The real story is what we are doing with surrounding those particular networks. And as we mentioned in this briefing this morning, it was interesting to note that in a very difficult economy, we had quite a few of our My Network and CW stations actually grow share in the first quarter. So we are confident that we are on the right track with both of those networks.

Okay. Thank you.

Thank you. Our next question will be coming from the line of Marci Ryvicker with Wachovia. Please go ahead with your question.

Thank you. Good morning. I have a couple of questions. David, you mentioned on the local side in the first quarter, it was a little bit better than expected. Which categories were stronger than you had originally thought?

I don't know that we could point to anything, and say it was stronger than we originally thought. From a local standpoint, the focus on new business, and the continued effort by Steve and the stations to generate local revenues, has just been just a great result. And relatively speaking to what we thought. So that is really it. I don't know, Steve. Can you add anything?

Yes. On a local basis, we actually finished first quarter up 15% on new business, which is just an out of the ballpark number, considering the economy. So the efforts came on a local level, and most of it through new business initiatives.

When you say 'new business,' what exactly are you talking about?

People who have not been on our air for at least a 12-month period.

Do you know where those advertisers are coming from?

Just knocking on doors on the streets. All different categories.

Okay. And then I guess what prompted the impairment charge? Because usually we see goodwill being appraised or evaluated towards the end of the year, unless an event occurs, like a sale. Is there anything going on that prompted you to evaluate your goodwill?

Yes. The catalyst for that occurred during the first quarter, as both the pricing of our equity dropped from about $3 down to about $1, just to an optional value, and then the bonds and the converts also diminished quite a bit in public trading value. So those two elements require, under the impairment GAAP rules, to reappraise our valuations. Those were the catalysts. So as a result of the market coming down, we had to go back, reappraise, by following the rules, we incurred the impairment.

Okay. And my last question is, what is your exposure to Chrysler?

All-in, and counting both manufacturing and dealers right now, our receivables are about 1.5 million, just sort of a round number. We have, in the numbers for our projections internally, are estimating the total exposure, Town and Chrysler and GM could be as high as 1.5 million. So certainly a number of the dealers out there will be paying their bills. So that should be our total exposure when you add them both together. And that is we think a very conservative way to look at it.

And Marci, that number is built into our second quarter expense guidance.

Okay. Great. Thank you.

Thank you. (Operator Instructions). Our next question is coming from the line of Avi Steiner, JPMorgan. Please go ahead with your question, sir.

Thank you very much. A couple of things here. One, can you give us just a little bit more color on the expense side? It looks like Q1 you were down a little over 10% station OpEx and SG&A, yet your full-year guidance is more in the 7% range. And then, secondly, can you just confirm that there is a 500 million incremental [car VAT] under the credit agreement that could potentially be used as well, if you are in covenant compliance? Thank you.

Yes, Avi. Some of the things you will see, first quarter we didn't have a lot of promotion expense in there, whereas for the May and November we will be promoting those. You will also see costs as the year goes on for the removal, the analog equipment, to take that down.

I think he asked about the 500 million car VAT that exists within the present agreement. Avi, I wasn't sure what your --

I apologize. I just want to make sure that I am reading it right, that there is a 500 million incremental on the credit facility, that could be used for the converts or something else as well, as long as you are in covenant compliance?

Yes. We have talked about that in the past. It is still there.

That would have to be syndicated. That is not an available commitment to us. Operator?

Thank you. Our next question will be coming from the line of Michael Meltz of JPMorgan. Please go ahead with your question, sir.

Thank you. I have three questions. What is your current thinking on on the investment spending for the year? I know you outlined what you did in the quarter. What are your mandatory payments? And then I have two follow-ups.

Well, mandatory payments made, what we call mandatory, are a couple of trailing items within the fourth quarter. We had estimated about $27 million of investments that we would be making, and since that time, we have been with wrapping up, I guess you might think of it that way, in terms of with the economy where it is, some of the projects that were in process. We had a couple of them that took place, that you will be seeing in our report here.

One was about $3 million for a project that was started about two years ago. And there may be another couple million on that project later this year, and there is an investment that we have on the Virginia eastern shore, where we picked up another 25% of the equity of that particular piece, for about $5 million. That has been appraised at somewhere in the $120 million range. So net purchase certainly was opportunistic for us. The terms on that, we payed $2 million in the first quarter. You will see another 3 million of payments that will come later this year.

So other than that, there is a little bit here or there, but I'm sorry. Go ahead.

So you did 6 million in the first quarter, you were saying. As of right now, you anticipate another 6 million for the full year?

Yes. Somewhere in that neighborhood.

Okay. Two questions. On auto, can you just talk a little bit about what you are hearing from dealers, of late? I know you gave your guidance. Are you hearing that the dealers are feeling slightly better about their business, or any kind of qualitative statements you can make there? And separately, your answer to the prior question on Chrysler exposure. I don't think I understood the answer when you said $1.5 million. That is your receivable. I guess what is the actual, I guess, revenue exposure, if you can outline that for us, please?

Well the first part of the question and what we are hearing from the dealers, obviously they are still waiting to hear back information, as there could be some consolidation. Certainly everybody has heard that talk. We are still waiting like everybody else to hear at the end of the day, where all of this winds up. Obviously there will be some consolidation and there will be some local dealers that perhaps are at risk, and all of that will probably evolve over the next six or seven months.

In terms of Chrysler going forward, I believe you are correct in terms of the receivables. Once that is taken care of, we will be able to book business under obviously restricted conditions, but we expect that Chrysler will be back in the market, and they will be buying time and they will be an advertiser.

Yes. I think we give you that view of about 40 to 45% down for auto. Right now, that is about as accurate as we can get it.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question is coming from the line of Andrew Finkelstein with Barclays Capital. Please go ahead with your question.

Hey, guys. In past recessions, we have heard advertisers cutting their budgets back in the market, and maybe buying the top three, instead of the top five. Your results this quarter look on par better than some of the other guys we have seen. Can you talk about if that trend has sort of occurred out there in your markets? And then also another question on cost-cutting, have you looked to reduce your news programming in any of your markets as part of your cost cuts?

In terms of the three, I mean obviously on the national level moreso than local, where the budgets are more robust, as a negotiating tool, it is not unusual for agencies to say they are going to buy three stations, or go two to three deep. So we have experienced that. So has everybody else that we compete against. As I mentioned in our briefing, what is the interesting thing about our performance in the first quarter, as tough as the economy has been, everyone should keep in mind, we aired 16 less Super Bowls than we had in 2008.

Plus we didn't have Ohio State in the Championship College Football game this year. Even with all of that up against us, we still grew share by 0.4 of a revenue share point. So under extreme conditions, we managed to grow our revenue share. As it pertains to, as I said, the My Network and CW stations, we actually had in markets interestingly enough, like Birmingham and Las Vegas and Milwaukee, where we had both My Networks and CWs in the same market, both of those properties in all three markets, all six stations, grew share, both political included and political excluded. That was quite a performance. The fact that they are going two or three is true, but the bottom line is you have got to sell the spots, and obviously the performance shows that we did that.

As far as news, yes, we continue to look at all of our expense lines, including the news, and as Steven mentioned earlier, we have been as a company very focused on every dollar day to day, we have always had a reputation of being very cost conscious, and very focused on our expense controls. But certainly the events that we are seeing here, the recession that we are in the middle of, has really sharpened our focus for any kind of inefficiencies that we might see.

So in that regard, it has been a healthy exercise, in regards to looking across our platform, and seeing what some stations are doing very well, versus some stations that are not doing so well, and implementing improvements where we can, and we are starting to see and enjoy some of those benefits, in regards to improved expenses.

Operator?

Thank you. Our next question is from the line of Aaron Watts from Deutsche Bank. Please go ahead with your question, sir.

Hi. Thanks for the follow-up. David, I think this one might be for you, but running it by you in the past, just your thoughts with regard to online, the network showing their programming online, with [HOOLOU] and other sites picking up a little steam here in terms of partners, just would be curious your updated thoughts on how that affects your business model and your viewership?

I think we have been consistent in our thinking, that any kind of distribution in any form of additional viewing of television programming is a positive to us. Certainly that is the overall macro way to think of it for us. And certainly, if you can watch a show without having to be there all the time, that helps quite a bit, when it comes to watching it as scheduled. So primarily, what we are seeing is a benefit in that regard on an overall basis.

Secondarily, when you start breaking it down into specific viewing, what we see is that there is probably 150 hours a month of overall television viewing. It averages out across all the demos that the average television viewer is watching 150 hours of television per month, whereas online viewing, HOOLOU, et cetera, is just a couple three hours per month. I think that points toward the fact that there is value there certainly, but that it is used to supplement the overall television viewing experience.

It is certainly not a replacement to broadcast television. The Nielsen reports even come back and say that what they find in regards to viewership, is that viewers will move towards the best viewing experience. So with our high-definition broadcast, whether it's a 42-inch screen or 60-inch screen or what have you, that kind of viewing experience is unparalleled, in regards to what you would pick or get off of an Internet, or off of a web viewing.

And it was interesting, NAB was just, a week ago, one of the comments in one of the panels that I was listening to is that, the efforts to provide a viewing experience and big events, the example was last year's US Open, when Tiger and Rocco went into the playoffs on Monday, that ESPN had quite a bit of difficulty in delivering that picture to their web viewers. It was just a point to point issue, where the demand for that was greater than what they could handle. And certainly for us as over-the-air broadcasters, that would be a very simple solution to us, to be able to handle that kind of demand.

Okay. Thank you.

Thank you. (Operator Instructions). Our next question is a follow-up from the line of Bishop Cheen with Wachovia. Please go ahead with your question.

Thanks for taking it I just wanted to ask, any comments on mobile, and also to make sure I have this right about other investments. I thought you said the guidance was 27ish, you did 6.4 in Q1, and did you say, maybe for the rest of the year, there might be 6 more of outside investments?

I said we have about 3 million more on the Bay Creek. There may be another few million.

Yes. And Bishop, tonight forget the 27 was the guidance for fourth quarter of 2008, and we spent about 11 million of it in that quarter.

Okay. So of the 27, 11 came in the fourth quarter, 6.4 in this quarter and then, 6ish more maybe for the rest of the year.

Right.

And then, on mobile, is there any significant update which you can give us or, the tenor or the tone on what you are seeing on that?

I think the update on that, Bishop, is that it is getting closer and closer to an absolute reality, so much so, that you may have seen this in the trades recently, that Dell Computers is now offering or about to offer, based on the show, small laptop computers that will have television receivers in them, to be able to watch over-the-air local television on a live rolling basis. So that is just kind of the tip of the iceberg of what is coming, from the standpoint of different times of devices, that will likely all be affordable devices, whether they are phones or GPS devices, or laptop computers, or what have you.

It seems unstoppable now that in the next, probably the next year you will see just a plethora of devices that are going to be offering local television. The great opportunity for us is recognizing that there will clearly be more and more people watching over-the-air television on a mobile basis. Or a portable basis, is to learn how to monetize that on a going-forward basis. That is the real big opportunity. Irrespective of anything else that goes on, it is the notion of being able to drop ads in for specific devices in specific locations for specific advertisers, is what we think is the great game going forward.

Are there any particular hurdles out there, either on a regulatory or technical standards basis, that still have to be overcome before this thing can seek it's own level?

I don't see any regulatory issues that are in the way. There are always technical issues, but my sense is that they will be dealt with on kind of a rolling basis. The technology is clearly getting better, and better, and better. Every generation is an incremental improvement that makes it more usable and more user friendly.

So I think while it will never be perfect, like nothing is, certainly I think, when it comes time to enter the marketplace, we will be substantially better, than the original cell phone structures when they were put in place. And I think over time, as we go into what I would just characterize as a gap filling mode, it is very conceivable that we will be just like a telephone operation, from the standpoint of receivability. That is kind of the ultimate objective.

Well, from your lips, thank you, Dave.

Thank you. (Operator Instructions). We will pause a brief moment to poll for questions. Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

All right. Well, thank you all operator, and thank you everyone. We thank you for participating on our earnings call this morning, and if anyone has any additional questions, feel free to give us a call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.