Sinclair Inc (SBGI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Fisher Communications Incorporated financial results conference call. My name is [Anisia] and I will be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session toward the end of the conference. (Operator Instructions) I would like to turn the call over to Mr. Joe Lovejoy, Senior Vice-President and CFO. Please proceed.

Thank you, good afternoon everyone and thank you for joining us. Before we get started, let me remind you that this call contains forward-looking statements relating to the development of the Company's operations, products and services and anticipated future operating results. These forward-looking statements include information preceded by or that includes the words believes, expects, or similar expressions. These statements are based on current information and projections about future events and are necessarily subject to a number of risks and uncertainties, and actual results may differ materially from expectations.

Factors that could cause actual results to differ materially from those expectations are described in our annual report on form 10-K and quarterly reports on Form 10-Q as filed periodically with the Securities and Exchange Commission. The Company undertakes no obligation to update publicly any forward-looking statements due to new information, events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

A webcast of this call is available on the Investor Relations portion of the website, and will be archived in audio form on the website for a limited period. With that, I'll turn the call over to Colleen Brown, our President and Chief Executive Officer.

Good afternoon, everybody and thanks for joining us today. As you will have seen from this morning's press release, Fisher Communications had a very strong second quarter. Joe will go over the details of our financial results later in the call, but I wanted to briefly point out several important highlights for you.

For the second quarter consolidated revenue increased 28%, as as a reminder, this includes TV, radio, digital and real estate, and also I wanted to point out television revenue was up 37%. We are now more then half way through the year and I'm pleased with the progress and performance of the business. This performance reflects the improving advertising environment and our continued focus on the improving operating and financial results while transforming Fisher into a diversified local media company.

Among our key advertising categories in the second quarter, automotive increased a significant 85%, while retail was up 26% and professional services grew by 22%. And for the first half of the year, our television advertising revenue, even without political, was up 20% over the first six months of 2009. Another encouraging development is the pace of political spending in our key markets. During the quarter, we generated $1.5 million from television and political advertising, primarily in California. Looking ahead, we anticipate a robust political season.

As we have done for you periodically over the past several years, I would like to update you on our progress with The Strategic Plan. The Plan, which we implemented in 2006 is built on three core initiatives. Improving our operational and financial performance through ratings, growth and revenue share improvement. Establishing new sources of revenue, primarily through our digital and internet efforts and leveraging our noncore assets. And I am pleased to report that we have consistently made progress in each of these areas, even during the depths of the economic recession. Let me give you a couple of examples.

First ,our television stations continue to increase audience share through quality news and entertainment programming. Additionally, all seven of our ABC and CBS television stations ranked either first or second in the key adult 25 to 54 demographics sign on to sign off in the May ratings period. In radio, our STAR 101.5 adult contemporary station in Seattle continues to dominate ratings in most demographics and in most time periods. And was the number one rated station in June among adults 25 to 54. KOMO radio remains a top five station in its target demographic.

Overall, Fisher's aggregate TV and radio market share for our audited markets increased 180 basis points over the second quarter of 2009. This is an impressive achievement. This performance underscores that viewers, listeners, and advertisers are increasingly turning to Fisher's brands. The growth of our station brands combined with our unwavering commitment to the communities we serve, has enabled us to capture a larger share of the growing advertising market. And through these efforts, we have been able to deliver peer leading revenue growth and improve profit margins. We do recognize that our broadcast margins still have room for improvement. We will continue to implement initiatives aimed at improving the bottom line.

On the expense side, we continue to identify opportunities to reduce costs without jeopardizing our revenue momentum. While we have made strategic investments in programming, and our digital initiative, we also continued to take steps to reduce expenses and improve efficiencies where possible. We recently consolidated all of our human resources and finance functions and have moved corporate headquarters into the KOMO facility to free up leasable space at Fisher plaza. Second, the broadcast to broadband digital initiative is a critical part of our growth. We have continued to grow our on-line audience, page views increased 16% from the second quarter of 2009 to the second quarter of 2010. Our hyper local page views have increased at a 27% compounded monthly growth rate since they began in August of last year.

We now have more than 120 hyper local websites across our markets that provide local consumers with the best source of information about their communities, all delivered through our multi-platform capabilities. Importantly, these sites offer an advertising solution that enables us to gather and parse the data that is critical to driving results for local data. As a result, we have attracted more than 1600 local advertisers to these sites, most of whom are first-time advertisers with Fisher. When you combine our digital advertising efforts with our traditional broadcast efforts, Fisher is now able to offer price points at virtually all levels of the ad marketplace, from the $35 per month ad on our neighborhood site, up to $50,000-plus spots on our TV stations. Our ability to provide value-driven advertising solutions in the local markets we serve to all advertisers, is unique to Fisher, particularly as marketing executives and business owners evaluate how to spend their advertising dollars wisely by aligning with a local brand they know, trust, and enjoy every day. Looking ahead, we are optimistic about the digital growth of our business.

Third, we remain focused on leveraging our assets and maintaining a strong balance sheet. Our outstanding debt is now just below $105 million, and we continue to maintain a strong cash position, $37 million at the end of the quarter. In addition, maximizing cash flow in the value for Fisher Plaza is a priority. In fact, we have recently signed several new tenant leases in addition to several lease renewals, and we expect to complete the insurance adjustment process for the reimbursement of our 2009 electrical fire costs soon. And with that, I'll turn the call back over to Joe.

Thanks, Colleen. In addition to this morning's release of our quarterly financial results, we also filed our form 10-Q with the SEC earlier today. Those documents include in-depth information regarding our financial results, so please refer to those sources for additional information. Today, I will be discussing certain non-GAAP financial measures such as TV and radio broadcast cash flow and EBITDA. Definitions and reconciliations of these terms can be found in our press release.

To summarize our second quarter results, consolidated revenue was $40.8 million, an increase of 28% from the second quarter of 2009. Net income was $328,000, or $0.04 per share, and EBITDA was $5.5 million, compared to $1.2 million during the same period in 2009. We ended the quarter with $37.4 million in cash, and cash equivalents. Our strong cash position has enabled us to take advantage of the favorable market conditions and strategically repurchase a portion of our outstanding senior notes. In the second quarter, we repurchased $17.4 million of senior notes for $17.2 million.

Our trailing four quarter operating cash flow, as defined by our senior notes and denture, was $15.4 million. The details of this calculation can be found on the website. Based on our total debt of $104.7 million at the end of the second quarter, our total debt to trailing four quarter operating cash flow ratio was 6.8. With that, I'll now review with you the financial results for our three business segments, TV, radio, and Fisher Plaza.

For the second quarter, TV net revenue increased 37%, as $31.1 million. The increase was primarily due to stronger advertising revenue and a $2.5 million increase in retransmission consent revenue. Our nonpolitical broadcast ad revenue increased 20% compared to the second quarter of 2009, led by an 85% increase in our automotive category. Political revenue increased $1.3 million to $1.5 million in the second quarter, largely a result of strong political advertising on our Bakersfield, California stations.

For the second quarter, TV operating expenses increased by approximately 8%, this reflected higher commissions and rep fees from higher revenue, and increased programming fees. TV BCF was $6.4 million, an increase of $5.3 million over the second quarter of 2009. BCF margin was 21% compared to 5% in the same period in 2009. Internet revenue, which primarily includes advertising generated on our station's primary websites, our hyperlocal initiative and convergent sales more than doubled from the same quarter last year and represented 4.1% of TV revenue in the second quarter. In our radio segment, revenue increased $492,000 to $6.4 million in the second quarter of 2010. Radio BCF was $1.1 million, and BCF margin was 17%.

Turning now to our Fisher Plaza segment. In the second quarter, Plaza revenue increased 1% over the same period in 2009 to $3.5 million. Plaza EBITDA increased 6% over the second quarter of 2009 to $2.2 million. Occupancy remained at 95% at the end of the second quarter. With respect to the July 2009 electrical fire at Fisher Plaza, we expect to conclude the insurance claim process very soon. To date, we've received approximately $3 million in insurance reimbursements, about half our claim. We will update you on this as appropriate.

Now I would like to briefly update you on several of the key metrics that we use to evaluate ourselves. We started this review several calls ago in our continuing effort to improve our transparency to you. Colleen already shared a couple of our second quarter rating highlights with you. Our ratings momentum continues to translate into higher market shares of revenue. In our audited TV and radio markets, our aggregate market share of revenue improved 100 basis points -- 180 basis points from the second quarter of 2009 to the second quarter of 2010. Even more impressive than the 130 basis point improvement we reported last quarter.

While our markets experienced 12% growth in the second quarter from last year's second quarter, our stations grew at nearly twice that rate, or 24%. This explains in part our peer leading revenue growth for the first two quarters of this year. Finally, we remain focused on improving the bottom line. Our strong revenue growth over last year's second quarter did result in significant margin expansion, yet we're not satisfied. We will continue to seek ways to adjust our operating model to lower costs and better reflect the environment in which we now operate.

While we constantly endeavorer to strike the right balance between revenue growth, cost containment and margin expansion, we will continue to selectively invest in our new initiatives where we see compelling potential returns. We will also continue to invest in quality programming where there is a meaningful return on investment. As you've heard, our recent investments in this area have paid off with the form of higher ratings and revenue share. With that, I'll turn the call back over to Colleen.

Thanks, Joe. Before we open the call for questions, I would like to conclude with some final comments on the quarter in our outlook for the business. While there is still is a great deal of uncertainty in the macroeconomic environment, our performance this quarter and over the first half of the year, is very promising.

Throughout the past several years we have been transforming Fisher to compete and win in today's broadcasting environment, by leveraging our inherent broadcast strength, namely our brand recognition, mass audience, and our established news gathering force. We are building digital solutions that enable us to meet the growing demand for more localized broadcast and broadband content. As we move forward, our focus remains on identifying new opportunities to distribute our content across multiple platforms as well as creating new advertising solutions that enable us to monetize the value we deliver to our advertisers and our community. There is no doubt that our industry continues to evolve and that more change is ahead, however, I believe the power and the reach or our television and radio brands provides us an unmatched competitive edge as Fisher is positioning for the digital future. And with that, we'll now open the call for your questions. Operator?

(Operator Instructions) And the first question comes from the line of Bishop Cheen with Wells Fargo Securities. Please proceed.

Hi, everyone. Thank you for the update. I think we're supposed to say nice quarter. Certainly a big rebound, and I know you must be happy to report these kind of results. So, taking nothing away from the quarter at all, I just have a few questions that always seem to pop up. When I look on your website and you do the LTM comparisons, and we're sort of about $1.5 million behind on an LTM basis of where we were in mid-2009, is it -- do you think that there can be some, you know, catching up, some momentum? Do you feel the wind at your back? And was it just such a tough Q1 and Q2 that put you a $1.5 million behind?

I'm not --

Bishop, you were talking about EBITDA, I assume?

Yes, I'm sorry, EBITDA.

EBITDA.

Because LTM mid-2010 versus LTM mid-2009. It's like whatever the number was that I --

Yes, those are difficult comparisons. There's so many ins and outs. The LTM 2009 included some pretty heavy political in the back half of '08.

Okay. Which you hope to get, you know, certainly there is a political back half of 2010, but I don't know in your market if it's going to match up.

Well, if I'm understanding your question about momentum, we're seeing and expecting a pretty robust political market in the upcoming two quarters. You know, there's nothing to indicate otherwise, and so it's just a matter of, you know, whatever you're comparing -- which quarters you're comparing to. I'm not sure if you're referring to the non-GAAP EBITDA. I assume that's what he's talking about.

Yes, I'm just comparing apples to apples, and while it's not the greatest comparison, in a vacuum, one reaches for, you know, what one has. On your website, trailing 12 months OCF, $15.4 million mid-2010 versus LTM mid-2009 $16.9 million. That's all I'm saying. Just apples to apples. Granted, it is not the greatest comparison, but it is a logical one.

Yes, I think that's fair.

Okay.

I think that's fair.

Yes, I think it's pretty close, Bishop. I mean, there are so many ins and outs. I'm looking at the spread sheet now. There are so many ins and outs that you can look at it either way. I do believe that, you know, we're through -- I can't promise, certainly, but do I believe we're through the worst of it, and now we're going to be seeing more normalized activity on the balance sheet.

Okay.

And one of those ins and outs, Bishop, is the trailing part of that last part of the Mariners contract showed on little bit in the first two months of the LTM '09 calculation, so that's one of those oddities.

Okay. And I know that there was kind of baseball in the mid-2009 LTM period, too, which sort of brings me to my next question -- brings me to my next question on radio. Revenue up and the cash flow down, is there anything in particular that created that anomaly?

There were some higher marketing costs, Bishop, but there were some -- in '09, there were some reversals of some accruals that added up a little bit, to create a little bigger, you know, comp increase than we would see without those credits in '09, so that did account for part of that.

Okay. And for those kinds of anomalies, were they pretty much isolated to Q2, or might we see some choppy anomalies ahead in the back half of --

No, I think they're through.

Okay. And in terms of capital events, is there anything new to report in terms of certainly Plaza's earnings look to be heading the right direction, you mentioned your leases. But at one time you were talking about monetizing Plaza. And, also, with the -- I think there's half a dozen radio stations still that you retain ownership of that were to be sold or discontinued operations.

Right. As far as the Plaza goes, I don't think we've made any secret, Bishop, about our intention in the market is healthy and capital returns into the marketplace, you know, we would consider remarketing the building. We haven't seen a strong enough rebound in, you know, strong real estate, especially COLO, or data center space, we have not seen strong enough rebound in that. There are certainly specialists tout there looking for an incredible deal, if you will, but we don't feel we're in that position to need an incredible deal and discount The Plaza just to move it off the balance sheet. We do feel that the markets will strengthen at some point and there will be a time for that kind of move. And we are open to that.

As far as the radio stations go, as you know, the radio marketplace has been extremely challenging and difficult, and especially as those who might be interested have tried get capital. We've continued to have some interest, but as that interest is expressed, almost simultaneously, they tell us, oh, and I cannot get the capital I need. So, as far as we're not out marketing those stations. We're happy to be running them. We're running them better than ever. But, you do get those occasional inquiries that we will certainly entertain if somebody is interested, but we're not marketing those station at this time.

Got it. Tha was articulated very efficiently. All right. And then last, can you remind us again, there is a certain chunk of insurance money, net insurance proceeds that you are looking to collect. Is that correct?

Yes, as I just mentioned, we've collected about $3 million, which is about half of what we've claimed.

Okay. So, that's what I missed, is the half. So, $3 million is in already on the books, and we would be looking for to roughly another $3 million?

That's about right.

Okay. And then -- would you dare to venture a time frame on when you might see that?

Well, I would love to venture a time frame, but, as you know, with insurance companies, you continue to work through it until you're done, and we are in that stage. I don't see anything concerning at this point, but we continue to work with the insurance companies, and it does take time, amazing amounts of time, to finish up everything, but there's nothing due on our part any longer. There's nothing now, it's just sitting in the hands of the various insurers to argue over who is responsible for what and we should know soon. That's my take on it. And I see we have a long list of questions, Bishop, so I tonight want to cut you off.

Thank you very much.

All right, Bishop, thank you.

And the next question comes from the line of Sam Yake with BGB Securities. Please proceed.

Yes, hello. Thanks for taking my question.

Sure.

I just have one question. When we talk about BCF margins, I'm wondering if you could help me clear up one issue that I've been wondering about. And that is, you occupy a large percent of the Fisher Plaza with your operations, and do you impute interest against your broadcast operations there that show up in your results, or do you just ignore that?

Well, I don't know about ignore, but they're not included in those BCF numbers, to make them more comparable to peers.

That's what I'm wondering, so it kind of seems to me like you should actually have sort of a built-in advantage when I look at a peer group for BCF, because almost all the other companies are leasing their space, I believe.

No, that's not correct, Sam, most everybody else own their buildings.

They own their buildings. So, you don't think there's much of an advantage that you have that would make an apples to apples comparison?

This is the apples to apples comparison.

Okay. I see. Okay. Thank you very much.

You're welcome.

Thanks, Sam.

And the next question comes from the line of Michael Schechter with Mentor. Please proceed.

Good afternoon.

Hi, Michael.

I want to know, let's take a step back and look at this, this quarter's BCF in margin in television versus let's go back to '08, so we eliminate '09, we're in even years politically. And your broadcast margin is 20% versus 29%, yet your revenue is slightly more than it was back in '08, and we continually hear discussion about cutting costs and saving yet -- prudent investments, yet we're not dropping anything to the bottom line, and over the last three weeks, we've had numerous broadcasters, radio stations, billboard companies, all report, and last year they cut to the bone and they've all had rebounds in revenue, and they've maintained and brought more to the bottom line than they did back in '08, and I just don't understand why we are so far off field.

Yes, a couple of things, and we're very aware of the margins and are continuing to see improvements, even though it doesn't seem that way to you. I will say that, number one, part of the reason we've been investing is to improve the revenue performance, which you're seeing on the top line. And you will see improvement on the bottom line as that continues to grow, number one. Number two, what our numbers do reflect is a fully loaded programming schedule that not everybody has hit yet, and that is, you know, what programming costs that we have incurred with ABC in the renewal of our network contracts, and they will be running into that, depending on their mix of affiliates, and depending on timing of their contracts, and in part that set us behind.

In addition, one of the things that we struggle with and we've explained before on these calls is the size of our markets. If you compare our markets, apples to apples, to our peer group, the markets we participate in underperformed. So, the markets of Seattle and the markets of Portland significantly underperform by as much as 10 revenue ranks. So, if you were to apply our market chair to the market revenue, if it were normalized, it would absolutely be on track on the profit margins. We don't have that luxury. We have to --

Okay. Let's -- okay.

So, my point is that we compete in these northwest markets that are underperforming market revenue according to their peers, and so as a result, we don't have the balance of the rest of the country, geographically. That's not to say, however, that we are not very aware of improving our margins and our desire to continually reduce costs and grow the returns to the share holders, which we are working on.

Okay. The three points that you mentioned, the fully loaded programming costs, the revenue growth and the size of your market. Your revenue growth is -- I'm comparing yourself in '08 to now. You're revenue was greater than it was in '08, the margins were less. It has nothing to do with growth, you're just not bringing it to the bottom line.

Yes. We are comparing our revenue growth to our peers in this environment.

And I'm comparing you to yourself in '08, and you didn't cut enough costs and bring it to the bottom line. If you're going to invest for growth revenue and you get some growth in revenue and you're back to where you were in '08, there's no reason you shouldn't have the same margin.

As far as the fully loaded programs and costs, according to your cue, $2.4 million of your SG&A costs is because you're now paying to ABC as opposed to receiving money. If I add that back in, it brings you to a 24.5% margin versus 29.3%. Also, if you look at the amortization of program rights versus what you're paying for program rights, there's probably another 100 basis points there, and if I back in the depreciation and amortization, which is $300,000 grand more than it was in '08, that's another 100. So, now we're up to 26.5% versus 29.3%. It still doesn't add. You're not bringing enough to the bottom line.

The three things you just laid out to me don't count, and as far as your own market versus others, '08 versus now, it's yourself against yourself. The issue of your market versus others doesn't count under that scenario.

Well, I appreciate your observations, and we certainly live and breathe these numbers, and we can run all sorts of scenarios that create all sorts of numbers and results, but in the fact of the matter, when the you know run these markets and you run these stations, there's a long, long history of this market not performing or these assets not performing market-wise. Now, I agree with you, we should be improving, and we are improving, but the reality is, we are dealing with the hand we are dealt and we are trying to improve on that hand.

With all due respect, you're certainly on point with many of your observations, but the numbers are not exactly what you pointed out. So, as a result, we work on these numbers daily, this team is very close to what we need to do, and we understand what the challenge is. And, in addition, I do want to point out, we don't do duopolies, as a result, we're not competing at the same level as some of our peers. That's not an excuse. That's my concern about answering you. I don't want it to be an excuse. We are striving to improve our margins every day, and we are seeing improvements, and I can guarantee you we would not be where we are if we had not invested in the programming we did invest in.

So, as a result, we're little further ahead than we might have been, had we just sat still and not found a way to grow these revenues. But again, I do expect us to do better. That is something we're working on. We're very aware of our margins and its something that is our core focus, however not just margins, but total return.

But explain to me two things. One, how I'm wrong in the numbers I just gave you, because I've taken you from the press releases you gave us today, and the press releases of '08 and the quarterlies. So, if I don't have the numbers, you've got to give us more. And, two, just explain to me why in 2008, you had a 29% operating margin, and two years later after doing some heavy cost cutting as you said, you have a 20% margin?

Going back to your point about giving you more, we have made it -- an extreme effort here to increase our transparency and we have made vast improvements in the transparency. As far as running through the numbers. We're happy to do that. Joe will certainly run through the numbers with you to get to whatever details you want to know that we've already disclosed.

I don't think it's appropriate to go through every last detail on this telephone call. However, I do believe that the cuts that we have made have been significant. The ad backs, there's no doubt we've tried to avoid, but they are a fact of life, and we continue to compete in this environment, in this current environment, and we are seeing improved margins. Are they the same as our peers who run duopoly? Who run full sets of radio stations and operate in markets that are healthier than these markets? No, so we are operating on that set of circumstances.

But, but you did the Univison deals to create the duopolies, so you have that, and again I'm not comparing you to your peers. I'm comparing your margin versus your margin in '08 and I don't understand why after cost cutting, you're, you know, 30% lower your margin.

Michael, I think we need to take this offline. There's too many ins and outs, and parts of expenses that are related to program and may not be directly in program. There's a lot of ins and outs that's beyond the scope of this call.

Except it goes back to the point that, you know, it's constant discussion about, you know, some cost saving and investing, and the revenue is back to where it was in '08. It's not more than '08, it's not less than '08. It's slightly more, but the margins aren't there.

They're different categories -- but they're different categories. On the core side we're not back to where we were. There's been strong Internet growth thats that help us offset that, but there's different margins and different sides of the business.

I do think we need to move on because we have a number of calls after you, but we are more happy to take this offline and try to get to the bottom of your concern.

And the next question comes from line of Barry Lucas with Gabelli and company. Please proceed.

Good afternoon Colleen and Joe. A couple of quick ones. Maybe you could get back to the revenue discussion and throughout the back half of the year. What are you seeing in July and August, and how did Q2 progress?

You know, that's a great question. We saw second quarter stronger than first quarter. I don't think as an industry we're seeing anything different. If not, we're seeing a stronger third and fourth quarter, so I think that we're in for some strong performance here. I would say fourth quarter is probably the first quarter our core advertising will be competing against what I would consider improved performance in 2009. So, our comparables won't be as favorable, but do I expect that political and our regular to advertising is going to continue to pace well.

Okay. Do you care to throw a dart at political? I think -- was it two years ago you did 19 and change?

You know, we're not out there with that number, but I can tell you that what we're seeing is very, very strong.

Okay. Two more quick items and then I'm jump back into queue. But you've made an investment, or now you're partial owner in the Daily Buzz. What are your plans for that, and how does that really help?

Yes, that's a great question. Thanks for noticing that. That is a really small initiative on our part, but big hopefully in where we see it going. We believe that content is king and that we need more content in order to make hyperlocal strong in our company and across the country hyperlocal needs to have more content, and in general, our internet sites have to have more vertical content.

The Buzz is a precursor to that. It allows us to tap into three hours of television programming, further developing the franchises within that three hours at a very targeted demographic, since as you know, that Arizona CW predominantly across the United States. It's also getting some play on the dot 2s, beyond that. But why it becomes very exciting for us is it's in a demographic that's young women, basically 18 to 24, which we have not been able to address for many years, since my early days in the business. So, we're excited about developing the content off of that, and that's what we're focused on.

Okay. Last item before I jump back. But going to Bishops question on the marketing of Fisher Plaza. I think the book value of the real estate was around $110 million, $112 million at the end of the year. What would the tax basis be?

It's slightly lower. Just slightly.

Okay.

But I think -- to update your number, it's around $100 million, is the book basis.

Okay. So book and tax are roughly comparable?

Roughly.

Okay. Thanks. I'll pass the baton.

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to hand the call over to Miss Colleen Brown for any closing remarks.

Thank you operator and thank you for joining us today. I know these are tough times, and tough questions, and we do try to answer your questions as thoroughly as we can. We do have a team that is very committed to excellence, and we are seeing improvements and again, if you have any questions, feel free to follow up offline. We are more than happy to try to track down exactly the points that you're raising, and we will continue to improve and deliver as we are allowed within these competitive arrangements. So, thanks, everybody.

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