Sinclair Inc (SBGI) 2011 Q2 法說會逐字稿

Greetings and welcome to the Sinclair Broadcast Group Incorporated second quarter 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, Mr. David Amy, Executive Vice President and Chief Financial Officer. Thank you Mr. Amy, you may begin.

Thank you, operator and good morning everyone. Participating on the call 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 statement 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 reports on forms 10Q, 10K and 8K, as filed with the SEC and included in our second quarter earning release. Our earnings release was furnished to the SEC on an 8K earlier this morning. The Company undertakes no obligation to update these forward-looking statements.

The Company regularly uses its website as a key source of Company information which can be accessed at www.SBGI.net in accordance with reg FD this call is being made available to the public. A webcast replay will be available on our website later today and will remain available until our next quarterly earnings release. Redistribution of this call is prohibited without the express written consent of the Company. Included on the call will be a discussion of non-GAAP metrics, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements, but are provided as supplemental detail to assist the public in their analysis and valuation of our Company. A reconciliation of the non- GAAP metrics to the GAAP measures in our financial statements is provided on our website under Investor Information, Reports and Filings.

Thank you, Lucy. Before we go through the results I wanted to highlight some of our most recent accomplishments. In April, we redeemed the remaining $70 million of our 6% convertible bonds due 2012. In June we purchased Ring of Honor, the third largest wrestling promotion in the countrywWhich will premier in all of our markets this September 24. In July, the 9 CW stations we own and operate plus 1 that's simulcast extended their affiliation agreements for 5 additional years until August 2016. There is no reverse retrans component to the deal.

Now turning to our results. Net broadcast revenues for the second quarter were $159.3 million, an increase of 0.3% or $550,000 higher than second quarter 2010 and in line with our guidance. Television operating expenses in the second quarter defined as station production and station SG&A expenses, before barter were $73.1 million, up 5.7% or $3.9 million from second quarter last year. The increase versus last year was primarily due to higher network programming license fees, additional media promotion spending for the May sweeps, fees related to our mobile couponing initiatives and higher news profit share expenses as a result of increased news performance which resulted in higher payments to our new share partners.

Offsetting these TV operating expenses increases were declines in cash programming payments which were down 15.4% or $3.3 million in the quarter. Corporate overhead in the quarter was $7.1 million, down $200,000 or 2.4%. Television broadcast cash flow in the quarter was $70.3 million, down $200,000 or 0.3% from last year's second quarter BCS. The broadcast cash flow margin on our net broadcast revenues was 44.2% in line with our margin from a year ago of 44.5%.

EBITDA was $64.9 million in the quarter, up $1.1 million or 1.8% higher than the same period last year and better than our guidance of flat for the quarter. The EBITDA margin on total revenues was 34.8% in the quarter, equal to last year's margin of 34.8%. Net interest expense for the quarter was $24.6 million. Approximately $3.5 million lower than second quarter last year due to the refinancing and debt pay downs we have done over the past year. In the second quarter we recorded a $3.5 million loss from extinguishment of debt related to the call of the remaining $70 million of the 6% convertible bonds that were due 2012. We had diluted earnings per share of $0.23 in the quarter compared to $0.21 in the same period last year.

We generated $27.3 million of free cash flow in the quarter and $156.9 million for the trailing 12 months. 42% of our second quarter EBITDA was converted into free cash. And almost 36% of the free cash was distributed to our shareholders. We produced a 17.7% after tax free cash flow yield on our market cap and paid a 4.4% dividend yield. Now Lucy will take you through the balance sheet and cash flow highlights.

Thank you Dave. Total debt at June 30 was $1.187 billion. Included in that number is $27.1 million of the non-recourse VIE debt that we are required to consolidate on our books and another $19 million that is related to Cunningham's debt. In the past 12 months we have reduced our net debt by $80 million. On June 30 pursuant to the bank credit agreement, the revolving credit commitment was reduced from $135.9 million to $75.4 million. There are no further scheduled revolving commitment reductions.

We ended the quarter with $50.5 million of cash on hand and had $0 drawn under the revolver at quarter end. In April, we called the remaining $70 million of the 6% convertible bonds which takes care of any imminent maturities. Our next maturities are the $75 million revolving commitment which comes due in December of 2013 and is currently undrawn followed by our term loans which come due in 5 years from now in 2016. Our credit statistics once again reflected one of the strongest balance sheets in the industry. Through the holding company, leverage on a net debt basis excluding the VIE and non-recourse debt was 3.87 times. That's under 4 times through the parent. The first lien indebtedness ratio was 1.23 times on a covenant of 3.25 times and the total indebtedness ratio through the TV operating company was 3.83 times on a covenant of 7.25 times. And finally interest coverage was 2.87 times. Double the covenant requirement of 1.4 times.

Turning to some of the cash flow highlights, capital expenditures in the second quarter were $14.6 million with no change to our full-year prior guidance of $36.5 million. Cash programming payments in the second quarter were $18.1 million and are still expected to be $68.3 million for the year. Now Steve Marks will take you through our operating performance.

Thank you, Lucy and good morning to everyone. Net broadcast revenues in the second quarter were $159.3 million. An increase of $550,000 or 0.03% versus last year. And as Dave mentioned meeting the guidance. Excluding political revenues, our core business grew 2% driven by local broadcast revenues. Political revenues in the quarter were $1.2 million as compared to $3.8 million in the second quarter of last year. This was slightly better than the $900,000 we estimated. Local broadcast revenues were up 5% in the second quarter including political and up 5.3% excluding political. Primarily due to retrans contract renewals, payments received related to our D2 sub channels, domestic auto ad spending, retail, medical and legal services.

National broadcast revenues were down 12.8% and down 7.8% excluding political. The shortfall was primarily due to declines in spending by telecommunications, home products, insurance, and financial institutions, as well as reduced media spending by radio and cable companies. This was offset in part by increases in direct response, fast food and furniture. On a local national combined basis, we saw growth in our key advertising categories of auto, retail, direct response and medical. Categories which showed weaknesses were financial services, media ad spending, telecommunications and home products. Auto represented 19.6% of our time sales and grew 2.4% in the quarter. Just slightly below our forecast of mid-single digit growth.

Turning to our outlook for the third quarter, we are estimating that net broadcast revenues will be down 3.9% to 5.2% on the absence of political revenues. This assumes $2.6 million of political versus $9.8 million in the same period last year. Excluding political, this would translate into core broadcast revenues being approximately flat with a range of down 0.7% to up 0.6%. Our third quarter forecast is driven by auto, which is expected to be up low single digit percent and increases in retrans revenues. We are also seeing growth in direct response and fast food offset by continued weakness in media spending and services.

On the expense side we are forecasting our TV production and SG&A expenses in the third quarter to be approximately $72.9 million. A 2.9% increase over third quarter last year's $70.9 million. Included in the $2 million increase are salary increases across the Company, network programming licensing fees and expenses related to our digital mobile couponing initiative. For the full-year we expect TV operating expenses to be $294.5 million up 4.7% to a $13.1 million. Based on our guidance included in our earnings release provided this morning, we are expecting EBITDA in the third quarter to be down roughly 10% to 13% over the same time period last year or approximately $56 million to $58 million in the quarter.

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

(Operator Instructions) One moment please, while we poll for questions.

Our first question is coming from Bishop Cheen of Wells Fargo.

Turning to auto. Can you give us some color on what it feels like in the current Q3 and any visibility you have into Q4?

Everything that we are hearing, Bishop, is that the supply issue should correct itself in the last 4 months of the year. We have been hearing that consistently so we have to go by what we are hearing out on the streets. We are hearing that from local dealers and all of our contacts that some of this may be corrected as early as September. We were hoping that it would be a little earlier than that, but it doesn't appear to be the case. We're not seeing that take place in July or August. We are seeing, interestingly enough, some add to schedules for September which is boding well and supports that perhaps the situation will in fact correct itself by September, and give us a real nice ending to the year.

Now with that said, pretty interesting. With the catastrophe in Japan, this category for Sinclair is still up. So when you take a look at second quarter we reported pace increase in the category and our anticipation is we will do that again in third. So, the category itself, even with the catastrophic event in Japan, at least for this Company we continue to show increases and we're optimistic that the back half of this year, especially the last four months of the year, will be very competitive and that the spending will in fact increase.

Just to add what's seen on the financial side, as well, Bishop, is the -- on the manufacturing sector everyone that of any size is posting profits. Ford, GM, Chrysler, Chrysler was actually up 20% in their profits, very strong. Major dealer groups like Auto Nation, Asbury, et cetera, are passing along some very strong reports as far as how they are doing in their business. And so that all bodes well. The auto industry is strong and performing very well which is good for us. They are even talking about the kind of volumes later this year and into December that would suggest annual run rates of nearly 14 million units. So, that's an extraordinary number to think about and how that relates back to us is just nothing but fantastic.

And if I recall the 14 is off of a 12.9?

Yes, exactly. It's been -- it's continued to grow throughout the year. I think we started off the year somewhere around 11.5 to 12 as far as our estimates and that's continued to grow despite with the tsunami and just the terrible events that took place over in Japan. You know, we are still seeing that number continues to grow. So, yes.

Okay. Thank you.

Our next question is coming from Aaron Watts of Deutsche Bank.

One follow-up on that last question on auto. I'm just curious, how auto shook out in the second quarter relative to what you maybe were expecting. Because unlike a lot of other people we have heard from so far, you guys were up. And I'm just curious if you saw some weakness in other categories that kind of offset a surprise in auto staying in positive territory?

Well, when you take a look at what transpired in the second quarter, what was interesting when we did our call at this time for second quarter, we had not experienced hardly any cancellations. As soon as we hung up the phone we started to get some cancellations when the call was over. But when we did the call we were robust with April down and then it -- then we started to take on some cancellations. As we look at third quarter right now, the cancellations are running less and there is much more optimism about the last 4 months of this year and what we are seeing supports that.

So as far as other categories in our response this morning, we highlighted what categories were falling short. I think telecommunications fell a little bit short of expectations as well as the finance category. And really, interestingly enough, with all of the catastrophic event of the automotive situation in Japan, it happened to be one of our strongest categories. So, it's the other categories that need to rebound right now. But auto is showing a plus with the potential to be far greater than what we are seeing. Hopefully in the back four months of the remainder of this year.

And setting aside auto for the third quarter, the other categories, if you had to take a broad feel of it, given what's going on and some of the uncertainties in the general economic backdrop, what would you say the tone is you are hearing from your advertisers there? Have you seen any sort of hesitation in spend? Or later orders coming in? Things like that?

No. It's very interesting actually. Because if you take it category by category, even telecommunications we have some nice stories where people that weren't spending last year are spending over and above what they did last year. Unfortunately, we have some big accounts in that category that aren't spending as much as they did last year. So, you are seeing a mixture of both in the sell of each category. There are significant businesses that are achieving levels higher than they spent last year and that's balanced off by some that are not. So there is positives to be taken by every category and there is some negatives as well.

So we are not exploding in a disaster situation in any one category. But we don't have everybody participating on the upside. It's a little bit of everything. So -- and I think from what we are seeing in the third quarter that's clearly the same case as in third and it's a little bit too early to predict how these other categories will do in fourth. I think we will have a better feel for that in another probably two or three weeks.

Okay. And last one for me and this is more a big picture question for Sinclair. So, if I think about spectrum and on one end you just picked up Ring of Honor. Great fit for your CW, MyNet stations. And maybe you are thinking your acquisition appetite is satiated. You are happy with things as is. And then maybe on the other side of the spectrum, you can think that there is definitely a few TV station groups out there for sale more than we've seen in a long time and you have an opportunity to build your footprint. Where does Sinclair fall in the range of that spectrum right now?

I think that we've noticed that there are a number of groups out there for sale. As I'm sure you have. And the other thing we would tell you in that regard is, is that if we look at those businesses and they fit our profile and they are accretive, most importantly, then we will take a look at them seriously. If they don't fit our profile and they are not accretive we won't waste two seconds with them.

And is it -- what do you think about that? Do you think that the ask on these station groups is going to be too high for you to get there?

Too early to tell.

All right. And then I guess the last piece of that is, do you think that we maybe see some fresh private equity money coming back into the space again like we did a few years back?

Well, that would be interesting because most of the guys are trying to get out of private equity guys.

Exactly. You remember us talking about this a couple, 3 years ago we said what we are seeing is a lot of private equity guys coming into the space and trying to take advantage of you know the values then. This business being what it is, they are looking for their out. And in that regard, I don't see a lot of private equity interest, actually. And we really put ourselves in a really good position regarding our position and our balance sheet to take advantage of the opportunities. And like Dave says, we are all about building value and finding accretive acquisitions.

When you look at what's going on out there in the private equity world, when you look at the fellows out there that have acquired distressed debt and any other kinds of pieces of paper of some of these bigger companies like the Tribunes of the world, the Freedoms of the world, I mean you can just name them. There has to be 50 private equity companies out there that own probably 150, 200 television stations in this country and they can't figure out what to do with them. So, too bad for them. But the reality is we are going to stay on the sidelines and do things that make sense and kind of watch the marketplace and see where those guys go. I think Dave is right. I don't see anybody coming to the marketplace from the private equity side. They are all trying to bail. So, the opportunity for us is just to be vigilant about these things and just be prudent and do the right thing which we will.

Perfect. Thanks for the color.

Our next question is coming from Marcy Ryvicker of Wells Fargo.

This is Eric Katz in for Marcy. First question, has there been any advancement on mobile video? Is this even a consideration by the FCC when they think about spectrum reclamation?

I don't think there has been any major advancement. I think the industry is trying to get itself together to kind of move in that direction. I think it's still on some track to happen in the near future. Right now I think there is more about the technology side in terms what are the manufacturers going to produce, how are they going to produce, what's it really going to do, kind of stuff. It just -- we just haven't sorted through it yet. But I think everybody is completely on the page of, we have to do it, it's just mandatory.

Okay. Thank you.

I think we will.

Okay. Second question, now that the NFL is back on. Are you anticipating an increased contribution to FOX to cover any increase in license fees and when will this be decided?

No. It's already decided. We are done.

Our deal is done with them.

Our deal has been done for quite awhile.

Okay. All right. Thank you.

Our next question comes from Doug Arthur of Evercore.

Am I right in assuming that the bulk of your FOX affiliate agreements come up in Q1 '12, and if so --?

No. You're not correct.

Okay do you have any FOX affiliate agreements coming up in early '12?

No.

Okay. So when is the -- so how long is the agreement in place now?

The end of '12.

The end of '12.

Okay. So any preliminary thoughts on how that's going to go down? Or is it just too early to discuss?

I think it's certainly too early to tell. But I don't think it is going to be anything fundamentally different than what we already have. I think FOX has been very clear about what their view is and to the people that just want to do it, then that's fine, if people don't want to do it, then they have to take their shot. And there are people out there taking a shot and they are dealing with it however they haveto. We don't seem to understand that. But I don't think FOX is anymore out of line than anybody else is. Or in line anymore than anybody else is.

They are just running their business, they think they have entitlement to some of the money we get from retrans and I don't disagree with that. But the other people have a view of they are not entitled to anything. Which I don't necessarily understand, but everybody has to run their business the way they see to run their business. We just run ours a little bit differently than everybody else. I think we have a great relationship with FOX and we understand their view of the world and we can certainly accommodate what their interest is at this point.

Okay. Great. Thank you.

Our next question is coming from Barry Lucas of Gabelli and Company.

David, I don't want to put words in your mouth, you seem to be suggesting that with a fairly large bucket of station groups on the market, private equity on the sidelines and what should be affiliate-accommodating financing environment, we hope, that this go round strategic buyers are going to be advantaged going into any deals?

I think that's -- I think that's reasonable.

Okay.

I'd just add to that to say when you take a look at Sinclair versus other strategics we probably have an advantage over a lot of our peers in that regard. You know, starting with our balance sheet and going through -- all the way through the operational leverage that we can bring to the table in regards to how we look at opportunities and how they would fit into our portfolio. But even when you look at that from our point of view, there is nothing that we have to go out and purchase. We are not in a position where we are disadvantaged at all in terms of our portfolio. So, we can be very selective and if the price makes sense for us, we can make a deal. You know we keep going back to what's accretive and what creates -- provides value to our shareholders and builds on our cash flow as we go forward. So those are the kind of components that we will be very focused on in the -- with the opportunities that are out there.

I think when you look at the bigger picture in the context of all of the assets that are for sale out there, our view has kind of been reduced to, or simplified to, the things that we can control in life. Since we can't control what the market does with regard to stock price, the only thing we really can control, through acquisition and just overall management of the business, is free cash flow per share. That's it. So when we look at transactions, it's, is it accretive in terms of free cash flow per share, or isn't it? That's really the test for us.

That's helpful, David. Have you seen anything in the -- whatever the final version now is of the debt reduction legislation that suggests that spectrum sales are back on the map and likely to occur?

The only thing I saw the other day was something to the effect that spectrum offerings had been taken off the debt table.

Off the table?

Off the table. Look, I think there is a lot of discussion about this subject and my sense is there's -- it's creating some overhang on the industry and what I would tell you is I'm not going to -- I can't quote Less Moonves but I'll just give -- tell you what the context of what he said was, awhile back and I think it's just right on point. Is if anybody wants to sell their spectrum space feel free. I'm not selling mine. I don't know anybody who is going to sell their spectrum space, because I can't fathom how any commercial buyer out there is going to walk into a television market where somebody has a real business and they are going to say we are going to make you an offer you can't refuse. I just can't fathom that happening under any circumstance.

So, I'm not sure what -- how this thing's going to play out in the end, but I frankly can't imagine Brian Roberts after having just spent billions of dollars to go buy NBC is going to wake up one day and say, gosh, I guess we ought to give our spectrum space by to the government so the phone companies can turn around and make billions of dollars off of it. I just don't see that happening. Maybe that's naive of me, but I can't fathom that.

Okay. And last area, maybe you could touch a tiny bit on the mobile couponing business, how that's working? Where you are getting the spectrum from as an example is that working on the and how are you getting paid, really?

We are in the process of testing a product. That would be the best -- it's a work in progress. We have been testing the product for over probably 6 months nowin specific markets. And I don't think we are ready to go into great detail on the mobile couponing business yet. Of course we haven't completed our test yet. However, obviously if you take a look at what's going around, couponing is becoming top of the mind awareness. And mobile couponing is a whole different issue. And I think we are on to something. Again, it's in its testing phase. The tests so far have been good. But we're not ready to branch out just yet. So, it's still a work in progress.

Just one data point, but I think we can toss it out there and that is to tell you how many clients that we currently have on -- across the platform.

Right now -- right now we have over 13,000 people signed up as clients, advertisers.

So, I think the thing to be just be conscious of here is we are going to be very reluctant. I hate to talk about this in any great detail, because it's very -- it's a very competitive space and we are just not going to want to be telling people what we're doing in any detail because it's just threatening. So, we are going to try to keep this under the vest as much as we can and about the only thing we are going to be able to tell you on a going forward basis, if it's as successful as we hope it can be, is to simply say here's what the numbers and we're not going to tell you how we do it. So it's kind of like retrans. We are successful at it but we're not going to tell you how we do it.

Okay. Fair enough David. Thank you very much.

(Operator Instructions) Our next question is coming from Nadia Lovell of JPMorgan.

I have two questions. What were core advertising revenues? Were they up or down in Q2?

I think they were slightly up. Just a pinch.

I'm sorry?

Just a pinch up.

Okay. And then for your Q3 guidance, your forecast, and you're not forecasting revenue guidance. What does that imply for the core ad revenues? You did say auto seems to be pacing up at the moment but overall what does it imply for core ad revenues?

I think like I said earlier I think third quarter is going to mirror second quarter. We are anticipating hopefully a very slight increase on the core business. And that's where we are at. I think after one month down into third quarter, it's fairly looking like third quarter mirrors in a lot of degrees second quarter. So, we are anticipating a very slight growth. Interestingly enough, when you take a look at where we are at, and I think this is very critical for the remainder of the year.

First of all we are billing more money politically than what we budgeted. And that bodes very well for us. We are in a odd year and we did budget aggressively in an odd year for political even with budgeting aggressively and knowing that the dollars will not match second quarter, we are well over what we are budgeting on the political basis. Had a very strong political month in July, which leads me to believe that will repeat the strength of that in August and September.

Then, when you take a look at our core business that you are suggesting, the one thing that this Company has going for it that few companies do not for the remainder of the year, we can list them. Number one, we are not a big player as a company with Oprah. She will be obviously off the air beginning in September. We only have 2 markets where we broadcast Oprah. We think that will be an advantage for us. In addition to thatwe are the biggest buyer of Big Bang Theory of any broadcaster in the country. And we debut that at the end of third beginning of fourth quarter and that's going to fortify a lot of our properties.

So, in addition to that, being FOX's largest client and having the most FOX affiliates of any broadcaster in the country, we are going to debut The X-Factor in September. And the early returns and the sales that we are making on that show suggest that it may have a similar strength to American Idol at least on the up front. The rates that we are getting are second to only American Idol right now. So, we were selling that without even a rating point or without any ratings in the book we are selling it on estimates.

So, when you take a look at our back half of the year, last 4 months, and you take all of the things I just said into consideration, political being better than expected, Big Bang Theory running in a host of Sinclair markets not being affected by Oprah leaving broadcast, I think bodes very well for this Company for the remainder of the year.

Thank you very much for the color.

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

Thank you, operator. Thank you, everyone. And this concludes our conference call for the day.

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