Sinclair Inc (SBGI) 2013 Q1 法說會逐字稿

Greetings and welcome to the Sinclair Broadcast Group, Inc.'s first-quarter 2013 earnings 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 for Sinclair Broadcast Group. Thank you. Mr. Amy, you may begin.

Thank you, operator. Good morning, everyone. We are starting a little late to allow everybody to get onto the call. And participating 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. So, 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 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 10-Q, 10-K, and 8-K as filed with the SEC and included in our first-quarter earnings release. The Company undertakes no obligation to update these forward-looking statements.

The Company 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 expressed written consent of the Company.

Included on the call will be a discussion of non-GAAP financial measures, 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 financial measures to the GAAP measures in our financial statements is provided on our website under Investor information, Reports and Filings.

Thank you, Lucy. This has been another great quarter for the Company. So, before we go through the results, let me review some of the activities that have taken place since our last earnings call.

In February, the Company entered into an agreement to purchase certain stock and/or broadcast assets of four television stations located in four markets owned by Cox Media Group for $99 million, less $4.3 million of working capital, and entered into an agreement to provide sales services to one other station. The transaction is expected to close this quarter, subject to the approval of the FCC. Also in February, the Company entered into an agreement to purchase the broadcast assets of 18 television stations owned by Barrington Broadcasting Group for $370 million, less amounts to be paid by third parties, and entered into agreements to operate or provides sales services to another 6 stations.

In addition, and due to FCC conflicts, the Company entered into an agreement to sell its Fox station, WSYT, and assign its LMA with WNYS in Syracuse, and sell its Fox station in Peoria, WYZZ. The transactions are expected to close late in the second quarter or early in the third quarter of '13, subject to the approval of the FCC and customary antitrust clearances. To oversee and operate the cost in Barrington acquisitions, we created Chesapeake TV and brought Steve Pruett in as Chief Operating Officer to run those stations and to lead our acquisition efforts for other small-market stations.

In April, the Company entered into a definitive merger agreement to acquire Fisher Communications for $373.3 million, less about $20 million to $25 million of expected working capital at closing. Under the terms of the merger agreement, Fisher shareholders will receive $41 per share in cash for all the common stock they own. Fisher owns 20 television stations in eight markets, reaching 3.9% of US television households and four radio stations in the Seattle market. Additionally, Fisher previously entered into an agreement to provide certain operating services for three television stations, including two simulcast, pending regulatory approval. The transaction is expected to close in the third quarter, subject to the approval of the FCC antitrust clearance with the affirmative vote of two-thirds of Fisher's outstanding shares and customary closing conditions.

As a reminder, pro forma for all acquisitions announced to date, we will own and operate program or provide sales services to 134 TV stations in 69 markets and, if all were included in our 2012 results, including our synergies and all acquisition closed in 2012 were included for a full year, our pro forma net broadcast revenues would have been $1.513 billion and EBITDA would've been $682 million.

Now, turning back to our highlights. Effective March 1, we closed on our previously announced sale of WLAJ-TV in Lansing, Michigan, for $14.4 million; and effective April 1, closed on the sale of WLWC-TV in Providence, for $13.75 million. In February, the Company entered into a multi-year retransmission consent agreement with DirecTV. This is the last of the major retrans agreements up for renewal this year. The reason we are reporting early is because this morning we announced that the Company is launching an underwritten public offering of 14 million Class A common shares. The proceeds are intended to fund pending and potential acquisitions and general corporate purposes.

Now, turning to our results. Net broadcast revenues for the first quarter were $252.9 million, an increase of 32.5%, or $62 million higher than first quarter of 2012 and coming in within guidance. Excluding $64.1 million from the acquisitions, same-station revenues were up 3.1% and up 4.9%, excluding political. Growth came primarily from retrans and digital interactive.

Television operating expenses in the first quarter -- defined as station production and station SG&A expenses before barter -- were $132.4 million, up 38.6% or $36.9 million from first quarter last year. Excluding $32.8 million related to the acquisitions and $700,000 of stock-based compensation, same-station expenses were up $11.5 million or 13.2%. The increase was $1 million favorable to our guidance. If you recall, our estimates conservatively assume full employment and full bonus potential. The increase versus last year was due primarily to higher reverse retran fees and compensation. Corporate overhead in the quarter was $11.3 million, up $1.9 million, versus the same period last year of which $900,000 related to stock-based compensation. The remainder of the increase was due primarily to higher staffing and acquisition-related cost, offset in part by lower group insurance claims.

Television broadcast cash flow in the quarter was $101.4 million, up $20.6 million or 25.5% from last year's first quarter BCF. The broadcast cash flow margin on net broadcast revenues for the quarter was 40.1%. EBITDA was $95.6 million in the quarter, up $19.8 million or 26.2% higher than the same period last year and exceeding our guidance. The EBITDA margin on total revenues was 33.8% for the quarter. Net interest expense for the quarter was $37.7 million, up $10.3 million versus first quarter last year. The increase was due primarily to the financings related to the acquisitions. Our weighted-average cost of debt for the Company is an attractive 6.6% and includes $500 million of 9.25% bonds. We had diluted earnings per share of $0.21 in the quarter, as compared to $0.36 in the same period last year. We generated $47.6 million of free cash flow in the quarter of which $12 million was distributed to shareholders. Over the past year, we have converted 52.5% of our EBITDA into free cash.

We are extremely proud of our portfolio of assets we have built over the past 18 months and believe the scale, diversity, and operating efficiencies we are creating will benefit the free cash flow of the Company and, ultimately, our shareholders. Now, Lucy will take you through the balance sheet and cash flow highlights.

Thank you, Dave. Total debt at March 31 was $2,270.9 million. Included in that amount was $68.4 million of the nonrecourse VIE debt that we are required to consolidate on our books. We ended the quarter with $25.8 million of cash on hand and $40 million drawn under the revolver. Capital expenditures in the first quarter were $7.5 million and now, with the addition of the Cox and Barrington stations, we now expect CapEx for the year to be approximately $48 million. And, outside of Cox and Barrington, there is no change to our original $39 million that we were guiding to last quarter.

Cash programming payments in the first quarter were $22.1 million and are estimated to be $88.9 million for the full year, including amounts for Cox and Barrington. Total net leverage through the holding company at quarter end was 4.36 times, and this excludes the VIE and nonrecourse debt and is net of cash. The first lean indebtedness ratio was 1.92 times, and that is on a covenant of 3.75 times. The total indebtedness ratio through the television operating company was 4.39 times on a covenant of 7 times, and interest coverage was 3.47 times on a covenant of 1.25 times.

On April 9, we amended and restated our bank credit agreement to increase the availability under our revolving line of credit, replace our existing term loans, and provide more flexibility under certain restrictive covenants. The new credit agreement consists of a $100 million revolving line of credit which is priced at LIBOR plus 2.25% and due April 2018; $500 million in tranche A term loans priced at LIBOR plus 2.25% and also due April 2018, of which $445 million will be delayed drawn to fund acquisitions and general corporate purposes. And then, finally, $400 million of tranche B term loans priced at LIBOR plus 2.25% with a 75-basis-point LIBOR floor and due April of 2020.

In addition, in April, we issued $600 million of 5.375% senior unsecured notes due 2021 that was used to refinance a portion of the bank loans. Currently, today, the revolver is undrawn and we have excess cash on the balance sheet for potential acquisitions and general corporate purposes. In connection with the bank credit agreement refinancing, we expect to take a $16.3 million loss related to the extinguishment of the bank debt in the second quarter. This is a non-cash expense related to the write-down of the deferred financing fees and original issue discount on our prior credit agreement. Again, that is non-cash. In addition, in second quarter, we expect to report a one-time charge of approximately $4.8 million to interest expense which is related to a portion of the new credit agreement financing costs that we cannot defer. So, now Steve Marks will take you through our operating performance.

Thank you, Lucy, and good morning, everybody. As Dave mentioned, net broadcast revenues of $252.9 million in the first quarter was within our guidance. On a same-station basis, net broadcast revenues were up 3.1%, and up 4.9% excluding political. Political revenues in the quarter were $900,000 as compared to $3.6 million in first quarter of last year. Including our acquisitions, local broadcast revenues were up 32.8% in the first quarter, while on a same-station basis local net broadcast revenues were up 7.1% when excluding political.

Including the acquisitions, national broadcast revenues were up 31.5% in the quarter, while on a same-station basis national broadcast revenues were down 1.4% when excluding political. On a same-station basis, the automotive category was up 6.8% in the quarter. We also saw growth in telecom, retail, and direct-response categories. Services, schools, medical, and restaurants continue to show some softness.

Turning to our outlook, for second quarter of 2013, we are expecting net broadcast revenues to be approximately $277 million to $279.3 million, up 27.3% to 28.4% as compared to second quarter 2012. This assumes $1.4 million of political versus $11.4 million in the same period last year. Excluding the acquisitions, same-station net broadcast revenues are expected to be up 4.9% to 6.0%, and up 10.1% to 11.2% when excluding political.

Categories expected to grow on a same-station basis are automotive, telecom, direct response, furniture, media, and fast food, while schools and entertainment are expected to be down. Auto on a same-station basis is expected to be up by mid- to high-single-digit percents in second quarter.

On the expense side, we are forecasting TV production in SG&A expenses in the second quarter to be approximately $141 million. On a same-station basis, expenses are expected to be up 12.4% in the second quarter and 11.1% for the year, which assumes we are fully staffed and full bonus potential is earned. As we discussed last quarter, the full-year estimates also include higher reverse retrans associated with two of our CBS stations for which we have not been paying reverse, as well as higher reverse associated with the renewal of the DirecTV and media com agreements.

For the year, net retrans is positive. We expect EBITDA in the second quarter to be approximately $106.3 million to $108.6 million, or 15.6% to 18.1% of growth. On a same-station basis, EBITDA is expected to be down 5.2% to 7.7%. Based on our guidance, free cash flow in the quarter is expected to be in the mid to high $40 million range. With that, I'd like to open it up to questions.

(Operator Instructions)

Marci Ryvicker, Wells Fargo.

Two questions for you. The first is can you talk about the difference in trends between local and national advertising in the first quarter and maybe what you're seeing between the two in terms of pacing for the second quarter?

Actually, what we had, the reason why you saw a differential in first quarter is just a fact that we had some account shifts. Business in general continues to be pretty good both locally and nationally and the reason why local is so top heavy in first quarter was just some accounts that switched national to local. Performance continues to be pretty much what we expected. It is off to a good start. First quarter was decent and second quarter is coming out of the gates even a little bit more impressive than first, and we're doing well on both categories both locally and nationally are pacing pretty well for second quarter right now.

Do you think just generally speaking the right way to look at the business is just total spot because we're noticing there is a divergence in trends not just for you but across the industry?

I think at the end of the day that is what we count, all the dollars. I know when I'm looking at things I always go right to the bottom line and count it all up together.

Okay. And then, David, can you just talk about your view on the potential for dividend increases in light of the significant M&A that you've participated in and are likely to participate in going forward?

Yes, I think it's fair to ask the question and I think the broad answer is, is that when you sit back on a quarterly or annual basis and you look at the amount of free cash flow that we generate, I think the Board will make rational, informed decisions as to what to do with the cash and certainly increasing dividends is one of them, no question about that.

Thank you.

Alexia Quadrani, JPMorgan Chase.

Thank you. Can you give us a little color on just where you think we are in the cycle for a reverse comp? How far along are we before we sort of get to maybe more of a status quo? And it sounds like net retrans is still trending very well. I guess any color on how we should balance the two in terms of the potential growth?

Well, I think the reverse retrans is pretty much a defined term at this point in time. I don't suspect we're much different than any other broadcaster in the country. These things are all contracted and done. Windows open up depending on what the network is at various points in time in the future at which point in time the issue will be revisited. I guess that's pretty much it.

Yes. The only other color I could add to that would be that our legacy stations, meaning that all the stations we owned and operated prior to all these acquisitions announcements, have the network reverse retrans in place. When we talk about reverse retrans we're really talking about the big four, ABC, CBS, NBC, and Fox when you think in terms of reverse retrans. And then for the acquisitions, by and large they have their reverse retrans contracts in place, but in some instances they are -- we are taking on affiliation agreements that may have another two or three years before the reverse retrans starts to kick in. So, generally speaking, like Dave said, it's done and in place.

And just following up on your comment on the core advertising growth. Any reason why auto shouldn't continue to be very strong? I know you guide for healthy growth in the next quarter, but it just sounds like there still could be significant upside there in that category for a while just given what we're seeing in the industry. And then any color on the entertainment weakness? Is there something you think that is pulling that down that should remain a drag for a while or is it more specific to what you're seeing just now in the first half?

I think that car business clearly off to a terrific start, a little bit better than we actually thought it would be and it continues to pace very well for second quarter. So, I would think that everything that I've read, 2013 will continue to be a very good year for this category. It's also a good year, by the way, for telecommunications which is coming back strong and becoming a double-digit plus category for us as well. So, I think when you have those two categories that are so critical to the health of spot and they are both off to a pretty decent start certainly for the first six months, that bodes well for 2013. As far as I believe you were talking about the entertainment category, is that what you mentioned?

Yes, you highlighted a little soft. I know it's not nearly as important to you as the others, but I just wanted to see if it was something that --.

Yes, it has really become not that significant for us and has not been significant for quite some time. So, haven't really been following it to the extent that we used to many years ago because it has been a category that has trailed off significantly over the years.

Aaron Watts, Deutsche Bank.

Steve, maybe one follow-up for you. Just on the momentum, it sound like you're feeling moving from first quarter to second quarter and that you're seeing going forward, is that being fueled by auto? And you mentioned the telco category. Can you maybe just talk about if it's advertisers in your market spending more across the board, just how the environment feels qualitatively?

I think we're in really good shape. Through all of our acquisitions we've, as you know, gotten a lot more heavier on the traditional three networks and with all the special events that we had in first quarter with CBS stations and the Super Bowl, and the Grammys and so on and so forth, it sort of fortifies our resume from having any one down quarter when you have so much exposure with four major networks. When these two major categories are healthy, as I mentioned automotive and telecommunications, it pretty much gets you off to the races and lays the groundwork for what should be a pretty good year and certainly off to a very good start. So, I continue to be very optimistic on the spot side we already got one quarter down net expectations and we're very confident that we're going to do likewise in second quarter.

Okay. And then just one other question for me. Curious if you could give us your most recent thoughts on where you're at in your efforts to get your programming streamed into your local market whether it's from apps or otherwise, mobile -- access to the mobile markets on a local basis?

Yes, I'll take that. There is -- I think what you're seeing is a growing trend in movement, albeit slow on the part of the networks to let the local affiliate start to move their content onto the various platforms. Clearly, the mobile business is starting to move forward and you may have seen recently the announcement by CBS that they are buying an interest in a company called SyncBack and SyncBack's primary purpose in life is to take local broadcast content and make it available to an app on the Internet. So, we fully expect that momentarily as a start, our CBS's will end up being used through that app and be available to the public and over the longer term we fully expect that all over-the-air television stations will be available on mobile devices in every market in the USA, et cetera.

Is it important for you to kind of beat competition for streaming your signals into your markets to the punch or do you think that as long as you come out with that good product, even if you're not first to it, you can ward off that competition?

Yes, I think it's just about content. How it gets delivered in today's world is while it's not irrelevant, the fact of the matter is our view is that all content is going to be available on all devices all the time and it just boils down to who has the best content and who's doing the best job.

Doug Arthur, Evercore Partners.

Just a point of clarification. On same station revenue growth of 3.1% and 4.9% without political, if you take -- if you took out retrans and digital, what -- is there a number -- cleanup number for that and based on your commentary, whatever that number is, it sounds like it's strengthening going into Q2? Thanks.

Yes. I think what you're asking, Doug, is was the core business, core time sales up in the quarter and the answer is yes.

And yes we are strengthening as we get into second quarter.

Okay. Thank you.

Davis Hebert, Wells Fargo Securities.

Just a quick question on the equity capital rates. Could you talk about what this means for your mix of M&A financing going forward and what it means for the leverage profile of the Company?

That's a great question but we're not in a position at this point to address those issues under SEC rules and limitations. So, as much as we'd like to talk about it, we're not allowed to.

Okay, fair enough. And then the $48 million of CapEx, can you remind us what is included in that number and then maybe if we pro forma Barrington and Fisher, what that looks like on an annual run rate basis?

Yes, so our -- before Cox and Barrington -- now, let me also just state that all of the numbers in our outlook that we gave this morning, they do not include anything for Fisher. So, our outlook this morning in our earnings release includes through Cox and Barrington only. So, the $48 million of CapEx still has the original $39 million pre-Cox and Barrington CapEx. So, that has not changed at all. And so all we've done is we have layered in about $9 million for Cox and Barrington and our assumptions there is that Cox rolls in as of May 1 and we have Barrington rolling in as of July 1.

Okay. Got it. So that does not include the $6.5 million that they got from Fisher, I believe?

No, nothing for Fisher at this point.

(Operator Instructions)

[Graham Eharg] with [Lobe] Capital.

I just have something that I'm going to read verbatim here because I'm not exactly sure what it means and I'm wondering if there is any intimation or insinuation I can take from it in terms of the timing on the deal? It just says additionally Fisher previously entered into an agreement to provide certain operating services for three television stations, including two simulcast pending regulatory approval. And I'm wondering if that regulatory approval is any way an [intendment] in terms of the FCC changing control licenses that will need for deal consummation with Fisher?

No, I wouldn't put it that way. It's probably more detailed than you needed and it just goes to an acquisition from Newport, and I think it's a new team to be specific to the market and they're just going through a normal process of approval with the FCC and the likelihood is that it will be done before we get our approval, but it's not a contingency at all as to our deal.

Okay. Thank you, guys.

(Operator Instructions)

Marci Ryvicker, Wells Fargo Securities.

I want to go back to the M&A because you've done $2 billion of acquisitions. At this point, how much more is out there and is there a limit to your capacity as to what you can do?

There is obviously a limit to everything. The fact of the matter is I think that there is just a lot of different businesses out there for sale, large market, small market kind of stuff that is either on the market or will come to the market we think in the next year or so. So, I think our view is pretty straightforward. We intend to be a candidate for those assets if they meet our profile and in the end you know our history. We tend to buy things at the right price and historically we've always said if we can't buy at the right price, we won't buy. So, I think the evidence in the past is pretty clear. There is lots of assets for sale and they are for sale at the right price at least for now.

If you get -- sorry.

I think that continues for at least another two or three years.

Do you -- I know you're participating in the low hanging fruit which is kind of the Phase I consolidation now. What about the more transformative consolidation we've heard about which I think people in the industry have termed Phase II? Is that something that Sinclair will be a part of as well?

Well, I think we're -- I think absolutely yes to that. Whether we're successful or not is to be determined, but I think when you really get down to it, the vast majority of the players out there are in some form or other connected to private equity firms. So, the history of the private equity firm side of equation is sooner or later everything is for sale. So, our view is we wait patiently and sit on the sidelines and wait for those things to come to market, and I think once that is done -- just coincidentally, we did an article a number of years ago in broadcasting and cable where we suggested that there would be a point in time where there will be four or five broadcasters sitting at the table and there won't be anybody else other than us in the networks, and I think were not there yet but were getting closer to that eventuality.

Yes, one of the thoughts or comments I would have is just that from a standpoint of limitation, we were may be limited by just the 39% FCC cap and that right now on a measurement basis is actually we're under 20%, we're in the 19% range. So, as far as a capacity with the FCC, we have a significant way to go before that even becomes a factor. And we've historically and I think that's going to continue, we've avoided becoming an acquirer in the top 10 markets where a lot of the population, a lot of the percentages are gathered.

So, you really wouldn't see us top 10, but our mid market strategy, we are going to continue to focus on that aggressively and now with our test big small-market TV station strategy, that gives us even more outlets and more opportunities to acquire than we ever had before. And interestingly enough it is sort of like the more we acquire, the stronger we get; the stronger we get, the more we acquire. So, it's a very interesting --(Multiple Speakers) yes.

I think the other thing, Marci, just the long and short of it is based on the regulations, we could effectively nearly double in size in terms of the coverage and if you just doubled, not that you can attribute doubling it across all the numbers, but it's not an unreasonable thing to assume that we could double in size across all the metrics.

Got it. Thank you.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Well, thank you, everyone, for participating on the call. We know we gave you a little bit -- very little notice and we will have more updates as we progress here. Thank you and talk to you later.

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