Sinclair Inc (SBGI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Fisher Communications financial results conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions).

I will now turn the presentation over to your host for today's conference, Hassan Natha, Vice President and CFO. You may proceed.

Thank you. Good afternoon, everyone, and thank you for joining us today. 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 include 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 may cause actual results to differ materially from those expectations are described in our annual report on the form 10-K and the quarterly reports 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 our website and will be archived in audio form on the website for a limited period.

With that, I will turn the call over to Colleen Brown, our President and Chief Executive Officer.

Thank you, Hassan, and good afternoon. As you will have seen from the press release issued earlier today we are off to a good start in 2011. During the first quarter the Company continued to benefit from its strategy to emerge from the recession as a stronger market competitor.

Our business strategy is working. Fisher is outperforming market revenue growth, improving its market share, diversifying its revenue streams and Internet revenue is growing strongly. All lead Fisher to capture a greater share of the overall local media spend.

Hassan will detail our financial results later in the call, but I would like to begin by reviewing some of the first quarter highlights. Our continued focus on improving the Company's performance resulted in a successful March which capped a strong first quarter for Fisher. Business remained brisk despite concerns surrounding the impact of the Japanese earthquakes and tsunami on the auto business.

While we continued to see advertising orders break late each month, demand was healthy. In short, we experienced good overall results with our strong competitive positions and our bullish rate posture.

For the quarter Fisher's consolidated revenue was $37.9 million, an increase of 7% from the first quarter of 2010. This strong revenue performance was led by a 9.5% increase in television revenue and without political advertising core TV revenue increased 12.3%.

The first quarter television revenue audits underscore the Company's strong performance. Fisher grew 7% while our markets were down half a point. Revenue without political grew 10% at Fisher while our markets were up 2%. This is due in part to last year's Olympics on our NBC competitors and our own stronger ratings and multiplatform selling strategies.

During the quarter, automotive was the number one category in TV with a 27% increase from the prior year. Professional services and telecom were each up 7% and ranked second and fourth in revenue respectively. Retail, the number three category, was essentially flat.

We continue to pull a larger share of the market revenue by delivering nontraditional spot advertising solutions. Television margins were 16% compared to 11.9% last year, and as you know, seasonality in the first quarter typically produces the lowest margins of the year for our broadcaster.

The Japanese earthquake and tsunami were big stories in the Northwest this quarter, which provided another opportunity for Fisher to demonstrate the important role local broadcasters play in their communities. RT, TV and radio stations, along with our Internet sites, began continuous news coverage as the story broke. In addition, our teams pulled together and held a fundraising effort, raising more than $550,000 for the victims of the disaster.

In the February rating period Fisher grew in adults 25-54 in four of our six markets and maintained our strong ranking in the other two markets. Late news was a particularly good day part with all of our ABC and CBS stations increasing audience share over February 2010, and those trends continued into March for our two ABC stations.

The quality of our newscast is being recognized across the industry. In March, KOMO-TV won the 2010 Walter Cronkite Award for Excellence in Political Journalism. Just a few weeks ago, Fisher's news departments collectively earned nearly 80 Emmy nominations and four Edward R. Murrow awards for their strong work in 2010.

In Oregon, the Associated Press honored our stations with 40% of all awards given, and in California, Bakersfield was chosen as one of only two small market stations recognized nationally with a coveted NPPA, or National Press Photography Award. We are seeing our strategies result in higher returns and continue to drive our competitiveness to create shareholder value.

Turning now to our radio business, while Seattle's marketplace was soft, Fisher continued to outperform the market. Our radio group beat market revenue by 30 basis points and grew its share an additional 10 basis points. KOMO AM/FM and KPLZ's first quarter ratings were strong. In the important morning drive period, KOMO was number one in total share and cumulative audience, as well as top five in key adults 25-54.

KPLZ is a top-rated station with its key advertising demo of women 18-49 and 25-54. KVI-AM switched formats in November 2010 from conservative talk to music. The nine-year-old KING-FM joint sales agreement was terminated in first quarter.

Moving on to digital, our developing media business nearly doubled in revenue in the quarter, and it has continued to grow in profitability. In fact, it now represents 5.5% of TV revenue in first quarter, an increase from 3.7% in Q1 2010. Online traffic in the first quarter grew by nearly 60% year-over-year and the number of unique visitors was up 90%.

During the quarter we continued to expand our Internet portfolio with the launch of our targeted lifestyles website. The first vertical, GalTime.com, is localized in over 135 markets around the country after reaching an agreement with the CW Network. Localized markets include Los Angeles, Phoenix and Washington, D.C., to name a few, and just last week we launched our second vertical, HeadDrama.com. We are very pleased with the early results of this initiative.

In addition to our local news websites, more than 120 hyper-local neighborhood sites and our national lifestyle Web presence, we are leveraging social media networks to further engage our viewers to drive audience. For example, during this year's Academy Awards, in one market we hosted a tweet-up with more than 1 million viewers interacting with us and each other on the events of the broadcast. We believe our multiplatform approach to this major event assisted this station in over-indexing the nation's broadcast average by 37%.

Our strategic plan continues to drive innovation, which includes reducing costs and reorganizing our work while remaining competitive. Full-time equivalent employees were reduced 5% from Q1 2010 to Q1 2011. The savings generated over the last few years through shared services, newsroom and production automation, centralization and technology solutions are well established.

Last year we announced a change in our employee vacation policy which requires employees to utilize their accrued vacation balances within each calendar year. While this has put some near-term pressure on our work force levels, the Company expects to realize approximately $2 million in savings in 2011 as a result of this approach.

Now I will turn the call over to our Vice President and CFO, Hassan Natha.

Thank you, Colleen. In addition to this morning's release of our first quarter financial results, we have filed our form 10-Q with the SEC today. Those documents include in-depth information regarding our financial results, so please refer to these sources for additional information.

Today I will be discussing certain non-GAAP financial measures such as TV and radio cash flow and EBITDA. Definitions and reconciliations of these items can be found in our press release and on the Fisher website.

As Colleen mentioned, Fisher benefitted from solid core advertising growth in the first quarter. For the first quarter, consolidated revenue was $37.9 million, an increase of 7% from the first quarter of 2010.

Direct operating costs and selling and administrative costs for the first quarter 2011 increased $2.2 million, or 7%, for the first quarter. The increase in these operating costs included $800,000 related to the ongoing proxy contest conducted by FrontFour Capital in connection with tomorrow's annual shareholder's meeting.

$1.5 million related to severance costs for head count reduction, increased SERP costs, bad debt reserve, increased development of the Internet division, wind-down costs for the KING-FM contract and for the resumption in 2011 of the Company's matching contributions to the 401(k) plan for the employees.

First quarter results also include a $600,000 credit resulting from the Company's revised vacation policy implemented in 2010. Excluding the impact of the above-noted costs, operating costs would have increased 1.7%, or $500,000, compared to the first quarter of 2010. This is a result of our continued and aggressive efforts to streamline costs in our operating model.

EBITDA increased 8.5% to $1.9 million in the first quarter of 2011 compared to $1.7 million during the same period in 2010. The Company reported a net loss of $1.7 million, or $0.20 per share, compared to a loss of $0.25 per share in the first quarter of 2010.

As Colleen noted earlier, we remain focused on improving the bottom line. While our solid revenue growth over last year's first quarter did result in margin expansion in TV, we continue to seek ways to adjust our operating model to lower costs and better reflect the environment in which we now compete.

Maintaining a strong balance sheet has always been and remains one of our priorities. We ended the quarter with $50.3 million in cash and cash equivalents. We continue to strategically use our cash to retire our senior notes. During the first quarter of 2011 we purchased $2.6 million of our notes, which left us with a current balance of $98.8 million at the end of the quarter.

Since then, in the second quarter of 2011, using available cash on hand, we commenced the redemption of an additional $20 million in principal amount of our senior notes, which will further reduce our total debt outstanding to $78.8 million.

As we go through the year our liquidity provides us with financial flexibility and we will remain focused on using our cash in the most effective manner, which may include redeeming additional senior notes.

Our trailing fourth quarter operating cash flow, as defined by senior notes indenture, was $35 million. The details of this calculation can be found on our website. Based on our total debt of $98.8 million at the end of the first quarter, and as a result of improved operating results and our debt reduction strategy, our debt to operating cash flow ratio decreased from 2.9 times at December 31, 2010 to 2.8 times as of March 31, 2011.

And interest expense decreased by approximately $400,000, or 16%, compared to the same period last year. With that, I will now review with you the financial results of our three business segments -- TV, radio, and Fisher Plaza.

For the first quarter, TV revenue increased $2.5 million, or 9.5%, to $29.1 million. Excluding political revenue, net core TV revenue increased 12.3% compared to the first quarter of 2010. This is a result of increases in our key advertising categories, including automotive, professional services and telecom.

Retransmission consent revenue increased 25% or $658,000 from the first quarter of 2010. For the first quarter, TV operating expenses increased by approximately 4%, due primarily to the bad debt reserve, variable commissions and the development of our Internet business. TV cash flow was $4.7 million or an increase of $1.5 million, or 47%, over the first quarter of 2010. TV cash flow margin was 16% compared to 11.9% in the same period in 2010.

Internet revenue, which includes advertising generated on our stations' primary websites and on our hyper-local sites, increased 89% from the same quarter last year. Our Internet business was profitable in the first quarter of 2011.

In our radio segment, revenue declined 1% to $5.2 million in the first quarter of 2011. Excluding political revenue, radio revenues were flat compared to the same period last year. Revenues for the radio segment were impacted by the reformat change at KVI and the wind-down of KING-FM. Radio cash flow was $304,000 compared to $356,000 in the first quarter of 2010.

Radio cash flow margin decreased to 5.8% in the first quarter of 2011 compared to 6.8% in the same period last year. During the first quarter of 2011 we spent almost $200,000 in competitive advertising for our radio stations and incurred some wind-down costs related to the termination of the KING-FM contract. We did not incur similar expenses in the same period last year.

Excluding the impact of the competitive advertising in Q1 2011, other radio expenses decreased 6% compared to the same period last year. During the quarter we also terminated our KING-FM contract, effective May 1, 2011, and anticipate annualized cash flow in excess of $1 million from this contract termination.

Turning now to the Fisher Plaza segment, in the first quarter Plaza revenue was $3.7 million or an increase of 5.1% over the same period in 2010. Plaza EBITDA was $2.2 million, an increase of 13.7% over the first quarter of 2010.

Plaza operating expenses decreased 24%, or $305,000, compared to the same period last year. This is due simply to the timing of some R&M costs. Occupancy remained at 96% at the end of the first quarter.

And with that, I'll turn the call back to Colleen.

Thanks, Hassan. Before we open the call up to your questions, I would like to conclude with a few final comments. With our television, radio and digital presence, Fisher provides a full range of multiplatform advertising solutions that are driving a larger share of audience and revenue to our Company. We believe our strategy creates shareholder value by establishing a unique, competitive edge. Our top local content, delivered on more local platforms to more advertisers at a variety of price points positions Fisher for sustainable success.

We are very pleased with our first quarter performance, which is reflective of the momentum that we have steadily built over the past five years. Through the successful execution of the strategic plan we are proactively transforming Fisher to meet the changing industry dynamics and shifting advertising trends.

Finally, I would like to remind everybody today this call is to discuss our financial results and performance of first quarter and as such we will not comment on any matters related to our annual shareholders' meeting tomorrow other than to say that we look forward to seeing those of our shareholders who will be attending.

And with that, I believe we're ready for questions. Operator?

(Operator Instructions).

Your first question comes from the line of Bishop Cheen of Fisher.

Hi, Colleen, Hassan, how are you?

Fine, how are you doing, Bishop?

Good, how are you, Bishop?

Good. As usual, very informative and detailed and we appreciate it. So look, everybody in the television business is getting subjected to the same kind of questions involving auto, how bad does the slowdown feel in the current Q2, do you think it'll last to Q3, are the domestic automakers stepping up. I think you've probably heard this by now.

Then the other thing I wanted to ask you about was a little more clarification about KING-FM and radio and the unwind and if I got that right, once it's unwound it's going to create a million more in probably less expense and more cash flow.

And then the last thing I just want to ask you is any update on what you want to do with Plaza. It looks like occupancy is back, things are rocking, the numbers are moving in the right direction. So just kind of a feel for what you think about monetizing Plaza.

Wow, that's a boatload of questions, Bishop.

It is, and I don't mean to take everyone's time, and you can pick and choose and I can circle back for follow-ups.

Well, they're actually good questions. I'll try to be succinct. The auto situation, in general, we tend to be more of a foreign auto marketplaces on the West Coast in general. We are seeing and have seen pretty consistently speculation that the whole industry is going to experience some slowdown in the third quarter.

We haven't seen a great deal of that, certainly not in the first quarter. There's a lot of conversation about where one make or brand might be short on cars, another one is interested in stepping in and making up the difference. So we're not seeing anything right now to react to or be concerned about, although we do monitor extremely closely, as you can imagine.

On the KING-FM, that's a nine-year-old contract. It was signed in 2002. It's a JSA contract. This company had been selling this classical radio station for nine years. We are finally just able to get out of it. It was to end this year but we were able to get out a little bit early and there were some costs associated with winding that up, as well as a great challenge in doing anything to maintain momentum when you're selling something that everybody knows you're closing down.

So we did wrap that up and that has not been a profitable venture for this company, at least not since I've been here, so I'm very -- I'm not sure if it ever was, but we're very much looking forward to operating our radio division without this drain on our cash flow.

I don't know, Hassan, if you want to say anything else on that.

That's great, no. I think, Bishop, the $1 million cash flow savings that we spoke about is an annualized number, so we have terminated this contract effective May 1 of this year so you'll start seeing the future results being impacted by it.

Okay.

And then on -- oops.

Just color on the building?

Yes, and on Plaza, in finishing that question, we're a good ways into the process of marketing the building. There's been a lot of interest, healthy interest and great dialogue and we're moving forward. We're still open to either financing or selling the building and if that works out to be a great deal for the shareholders we're going to pursue that and then we'll be able to get on with the broadcasting business.

Okay. Thank you very much for your time. I will pass it on.

Thank you, Bishop.

Thank you, Bishop.

Your next question comes from the line of Barry Lucas of Gabelli & Company.

Thanks very much and good afternoon. Great segue, actually, into potential use of proceeds, so let me ask a multi-part question, if I may, Colleen. Long-term, how do you see the business. That's either spectrum allocation or the core business. When you are able to either use the balance sheet just in cash or whatever proceeds there may be from the Plaza, where do you see those funds going, back into the business, back to shareholders, some combination?

Yes, Barry, good afternoon. So why don't I tackle the long-term aspects of the business regarding spectrum and the core business?

I've been a pretty strong proponent that local media companies have a very important role to be played in enabling local commerce, and obviously there's a great deal of pressure in the local space as national competitors are interested in tapping into the local marketplace. They found it pretty difficult to do in many different ways. Some ways they've been very successful and other ways they have not.

Obviously we have brands that are just universally understood and known in the marketplace. Any broadcaster does, and especially if you're number one or number two in your marketplace you can have a much better ability to leverage that brand into something broader and more, and that's certainly what we've found as we tapped into the business-to-business sale that we did with our hyper-local sales process.

I do believe that those broadcasters that find their way to leverage their brands into more local media, whether or not it's tapping into directories or tapping into the hyper-local or tapping into mobile, there's going to be a good amount of money made in the local media business.

So having said that regarding spectrum, I think it's a huge asset. I believe anybody who is using the spectrum and using it wisely is going to have a great future in monetizing that spectrum. I do believe that the FCC will pursue or try at least to pursue some coordination of the spectrum, but in a voluntary fashion, and I think that spectrum is hugely valuable and the initiatives, one way or the other, with mobile DTV or taking our local broadcasting ability that we are rolling out with Mobile 500, for example, that business dovetails perfectly into mobility, and mobility is the number one drive among consumers right now.

So we're very interested and very excited about tapping into that marketplace which the experts are saying it's going to be a billion-dollar marketplace. So I think the spectrum's extremely valuable. I think those broadcasters who use it wisely are making more money than they get by auctioning it and actually can lever it into a much more purposeful use for consumers as we walk into this whole mobility direction that consumers are pursuing.

The core business, I think, is much more complex than it was even 10 years ago. The core business is all about solving advertisers and helping advertisers move product and finding ways to tap into our brand to accelerate their ability to get the word out in the marketplace is just critical.

So that sounds like a complicated way of answering the question, but the reality is you've got your core local brand with your television station, then you've got some Dot 2's, whatever any company puts their Dot 2's on, what product they put on their Dot 2's, and then on top of that you've got radio within Fisher. In addition, you've got Internet sites, you've got your mobile products, you've got your hyper-local products, and now we've got social media, which we've had some incredible success with.

So you add that all together and these are all ways to solve and address local clients' interest in reaching out to the marketplace.

And as far as where the funds go, I think first and foremost we are interested in buying down our senior notes. They have covenants that restrict us from doing pretty much anything else but buying debt down or redeploying, so we're interested in buying our notes down. Obviously, we don't want to count our chickens before we actually have them in-house and hatched, so we don't want to get excited about finding a way to buy out those notes until we know what the valuation on the Plaza's going to be, but the reality is the notes are a little more expensive than they need to be and they've got covenants attached.

If we can take those out, that would be a good thing, and then we can assess where to go from there.

Great. Thank you very much.

You're welcome.

Your next question is a follow-up question from the line of Bishop Cheen of Fisher.

Hi. Okay, so perfect segue too as you are always consistent and you've always tried to take the notes down because they are by definition confining. So my question is, do you know if they have a feature, a critical mass feature, so that if outstanding falls below a certain level, do all the covenants fall away? Is there a magic critical mass where the notes no longer have covenant power?

No, Bishop, there's no tipping point, in a sense, where the covenants go away. We have to go down to zero, in a sense, for the covenants to go away.

I thought so, as I mind the indenture, but, you know, you never know, and I figured you guys have. So thank you.

Thank you, Bishop.

You have a follow-up question from the line of Barry Lucas.

Hi. It sounds like it's our show this afternoon.

You guys are just quicker on the dial.

Okay. Thanks, Colleen. I'm looking at kind of the audience reach or households covered and it's still around 4 million, I think, is the number. So maybe you could address the issue of critical mass. Is 4 million sufficient? Do you need to be bigger to scale some of these other projects like the hyper-local initiatives or do you need to get bigger in this world [so you don't] have to consolidate?

Yes, that's a great question. I would say that we're a local business and as such we are competing very successfully locally. There's no doubt that we have certainly been sensitive to and aware of where you can get tripped up on paying more for something because you don't have critical mass or not having the same advantages, say, perhaps in the re-trans negotiation.

We have not seen that to date. We've been fortunate. I do know statistically our re-trans is about 9% of our revenue, and in the peer group that does disclose it, they're closer to 7%. So we do know that we're competing pretty efficiently and doing a good job there. We do know that our costs as far as apples-to-apples in buying product or almost in any way we compare ourselves, which we do compare ourselves inside and out, we believe we're able to compete.

Where the question comes down, and obviously on the Internet you can compete pretty handily, and we're finding ways to lever it by not necessarily having the costs in-house, our association with DataSphere is a good example of that where we're able to roll it out across the country, but we only take a piece of the revenues.

But as far as what could come down the road and how this plays out in the future, I don't think any of us would say oh, there's never going to be consolidation. I believe there is consolidation that will go on in our industry. It is typical in a maturing industry, but it's also, this is complicated stuff. I do think that we've certainly exhibited that we can navigate in a pretty complicated world at this Company, but we also recognize that there's a lot of challenges out there, and while we welcome those challenges and there's some benefit to size, meaning we can -- we're small enough to navigate quickly but we also are big enough to make a difference when we do it right, so it's all pretty exciting, but we also recognize that scale could matter at some point and could be meaningful and we're open to both sides of that. Does that help, Barry? Okay.

I would now like to turn the call back over to Colleen Brown for closing remarks.

Thank you, Operator, and thanks, everybody, for joining us today. It looks like we had a real full house. I appreciate the questions and I know that we've got a lot going on and I look forward to seeing some of the shareholders that we'll see tomorrow. And with that, I'm going to sign off and wish you a good day.

Thank you. Bye-bye.

Bye-bye.

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