E W Scripps Co (SSP) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to The Scripps First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Carolyn Micheli. Please go ahead.

Thanks, Gregg. Good morning, everyone, and thank you for joining us for a discussion of The E.W. Scripps Company's first quarter 2017 results.

A reminder that our conference call and webcast include forward-looking statements, and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. You can visit scripps.com for more information, such as today's release and financial tables. You also can sign up to receive e-mails any time we disclose financial information, and you can listen to an audio replay of this call. A link to the replay will be up there this afternoon and available for a week.

We'll hear first this morning from Chief Financial Officer, Tim Wesolowski; then Broadcast Chief, Brian Lawlor; Chief Operating Officer, Adam Symson; and then from our Chairman, President and CEO, Rich Boehne. Also in the room are Radio Division Head, Steve Wexler; and Controller and Treasurer, Doug Lyons.

Now here's Tim.

Good morning, and thanks for joining us today. I would like to start by hitting the highlights of the quarter and cash position as well as capital allocation, our bond deal and, finally, second quarter guidance. The press release contains the details of our first quarter performance, and we'll be filing our 10-Q later this afternoon so you can get more details there.

Since we reaffirmed our Q1 guidance a couple of weeks ago when we announced our bond deal, there shouldn't be too many surprises in our first quarter results. In our television division, first quarter revenue was about flat compared to the prior year and in line with our guidance. An increase in retransmission revenue of $12.6 million was largely offset by $8 million of lower political revenue in this non-presidential election year. Television expenses were also in line with our guidance at up 5%, driven by an increase in the programming fees we pay to our network partners. Radio revenue was down 4% in the first quarter. And expenses were down about 1%, both in line with our guidance.

And now turning to our digital businesses. Revenue was up 25% during the first quarter, right in line with our guidance again. And expenses were up about 40%, which was better than our guidance. First quarter results included Cracked, which was acquired during the second quarter of 2016. Excluding the impact of Cracked, revenue was up 16%, and expenses were up 25%.

Before I turn to the balance sheet, I want to mention that our effective tax rate for the first quarter was 73%. This rate was primarily driven by tax benefits on the vesting of employee stock compensation, all of which is recognized when the awards vest rather than included in the rate over the course of the year. We do not expect to pay significant cash taxes in 2017.

And touching on the balance sheet, we ended the quarter with $132 million in cash, which is about flat, with our cash balance at the beginning of the year. As you know, in April, we closed an offering of $400 million of new senior unsecured notes priced at 5.125%. They mature in 2025. And since it was a refinancing, the proceeds were used to repay our Term Loan B that was due in 2020. At the same time, we also amended our existing $100 million revolver to increase the borrowing capacity to $125 million and extend the maturity to 2022.

Because of the refinancing, we now expect full year interest expense to be $23 million, which is higher than our previously provided guidance of $17 million. Much of this increase is due to a $3 million noncash write-off of fees that were associated with the old financing.

Our net debt is $395 million, and we're still well under 2x leveraged on a 2-year blended basis. And for the beginning of the year, through April 28, we purchased about 110,000 shares of stock for about $2.4 million. The board approved a 2-year $100 million buyback program in November. We provided detailed revenue and expense guidance for the second quarter in our earnings release, and I think it's pretty straightforward.

And now, here's Brian to talk about the broadcast business.

Thanks, Tim. Good morning, everybody. I'm happy to report that total TV revenue ended up right about where we expected for the first quarter. Let me begin by talking about core television advertising.

I told you on our February call that we expected the quarter to start slow, but build after a postpresidential election slow down. The quarter acted exactly how we expected. And I'm pleased to say that our stations in the aggregate gained core advertising market share, outperforming our combined competitors across our 24 markets.

Let me tell you a few things that did impact our markets. The categories of retail, media, insurance and banking drove softness in core, accounting for about 75% of our decline across local and national. GDP growth of only 0.7% didn't help much either. We are seeing improvement with some of these categories in the second quarter, and we do expect positive momentum as we build through the back half of 2017.

Another factor that impacted our core performance in the first quarter was the significant shifting of major national advertising agencies -- of national accounts between agencies. In the back half of 2016, $26 billion in ad spending was under agency review. This review process slowed the approval of first quarter expenditures. Several of our largest national advertisers, including AT&T, Honda, and Volkswagen, Audi, switched their media buying agencies. Good news. Most of these shifts are now complete, and we're seeing these clients ramping up their spending.

On the retrans front, we saw another strong quarter for revenue growth at Scripps, up nearly 25%. As a reminder, all of our network affiliation agreements are under contract this year, with the 4 former journal ABCs coming up for renewal at the end of December.

And speaking of ABC, we were thrilled to be part of Disney ABC's announcement last week that they had signed more than 160 stations for over-the-top and other Internet-delivered platforms. This deal includes services such as DirectTV Now, YouTube TV, Sony PlayStation Vue CenturyLink. In addition, we are part of ABC's TV Everywhere and over-the-top television footprint in our 15 ABC stations.

We have also signed a similar distribution deal with NBC and look forward to reaching agreements with the others. We're happy with these new partnerships that we are forging with the networks on these platforms, and we're especially pleased that the net economics that we realize from these deals is very much comparable to the traditional cable satellite world.

On the original programming front, we made a big announcement last week, a partnership with Grammy award-winning country music star and entertainment executive, Faith Hill. Together, we are launching a new TV program for Scripps, our fourth show in production today. It's a new daytime talk show that will be based in Nashville and will star another great country singer, Kellie Pickler, paired with Emmy Award-winning New York journalist, Ben Aaron. We think daytime audiences will be immediately drawn to these fun and appealing hosts.

The show will debut in 20 of our 24 Scripps TV markets that is being offered in national syndication by Disney ABC distribution. This is a continuation of our original program strategy to create shows that inform and entertain our local audiences.

Now turning to our radio division. In the first quarter, we saw a Milwaukee station leverage the success of the Green Bay Packers' playoff run into January, ending the season just one game shy of the Super Bowl. We also saw strong results at our Knoxville stations as well as improved performance from our Tulsa stations. And in Boise, our TV and radio stations produced a joint community event called The Incredible Age Expo, which generated a new revenue stream and leveraged our dual presence there.

And now here's Adam.

Thanks, Brian, and good morning, everybody. As with our television and radio results, we are reporting digital revenue performance that is very much in line with our expectations. As Tim said, digital revenue was up 25%, and that was driven by growth in our national brands. Our podcast industry leader, Midroll, continued its fast growth. During the first quarter, we served nearly 1 billion advertising impressions, up significantly from 700 million in the first quarter of 2016. And at the same time, Midroll pricing is growing nicely, driven in part by a big increase in what we think of as the most premium podcasting inventory. New hit shows like Missing Richard Simmons; our documentary series, Stranglers; and Freakonomics' author, Stephen Dubner's game show, Tell Me Something I Don't Know. Rates for these kinds of premium shows are 75% above our average inventory rate, and that's why we're very focused on the development of these big hit podcasts.

Also, in the first quarter, we officially relaunched our podcast subscription service, Stitcher Premium. Thanks to the buzz surrounding those new shows, we are exceeding our internal goals for growth so far. Subscribers to Stitcher Premium get access to a host of exclusive, high-quality and ad-free content only available through the Stitcher app and connected home and car listening services.

At our national news network, Newsy, we're seeing strong traction with audiences and advertisers through over-the-top viewing. More than a year ago, we made the decision to shift away from the commoditized web and mobile marketplaces. Instead, our focus today is on linear and on demand connected TV distribution platforms, including Apple TV, Sling, Comcast, Watchable and Roku. The strong advertiser demand we see for the young audiences Newsy attracts on these platforms continues to reaffirm our decision to move full force in this direction. Given our success with OTT distribution already, Newsy is becoming as much a television brand as a digital one. This Monday, Newsy will make its second appearance at the advertising industry's prestigious Newfronts for national digital ad buyers. We'll be breaking news on a number of topics that day, including new content offerings and other ways for brands to connect with Newsy's loyal millennial following. Stay tuned for more on Newsy this coming Monday.

Finally, on the local digital front, we continue to expand the footprint of our local television station brands on new and fast-growing media platforms, such as OTT and virtual home assistance. We announced just this week that our brands have launched on Amazon's Alexa service. In many of our markets, we are the only provider of local news/briefings. Our station brands joined Newsy, as well as other national sources, like CNN and NPR. Connected home devices like Alexa and Google Home are surging in popularity, and our stations are tailoring their news and information in order to meet the demand from all of our audiences. The expansion to Alexa continues Scripps' commitment to bringing brands to consumers in the home, car or wherever they are.

And now here's Rich.

Thanks, Adam. Good morning, everyone. You heard Brian and Adam talk about the opportunities we're mining in the broadcast TV, radio and digital businesses. The underpinning of those attractive opportunities is our commitment to producing high-quality content that resonates with audiences. Just last week, we received third-party endorsement of the quality of our work when our entire TV group, plus Newsy, and our Denver station individually were honored at the Walter Cronkite Awards for our 2016 election coverage. You can find examples of the award-winning coverage on our website. It's nice to win awards, but it's even better knowing that large and growing audiences, both locally and nationally, trust us during critical periods in our nation's history.

Now let me sum up and look ahead a little bit. In our broadcast TV group, we're seeing demand build in the ad categories that make up our core revenue, coupled with continued strong growth in retransmission revenue. And just a reminder, we see that retransmission growth continuing for the next several years at least.

We're also working to be in the best position to take advantage of the 2018 elections. Our early assessment of races across the country suggests that Scripps' TV footprint will be well positioned to take advantage of spending in highly competitive races.

Finally, in broadcast TV, a wave of deregulation is likely in 2017 to provide opportunities for owners like us to strengthen our portfolio of stations. With affiliates in large and attractive markets, we enjoy the benefits of scale economics today, with potentially more opportunity coming from further deregulation of our industry's ownership rules.

In the digital group, our national brands are gaining -- rapidly gaining scale. Newsy is quickly becoming a widely distributed television brand building upon its early success as a short-burst digital news content provider.

In our podcast business, Midroll sees strong growth ahead, as our share of ear continues to expand. Our local digital brands as well will see another year of growth.

Finally, as Tim said, we have a rock-solid balance sheet, further strengthened by our recent financing, which gives us the financial flexibility to be both nimble and opportunistic.

Thanks again for joining us. Gregg, we're ready to take questions.

(Operator Instructions) Your first question comes from the line of Kyle Evans from Stephens.

Brian, you mentioned that you expected positive momentum in the second half when you were talking about core. Could you dive down a little bit deeper and give us some detail? Was that just kind of rolling over tough Olympic comps and tough political comps? Or are you seeing something in your verticals that's causing you to expect that momentum? And then I've got some follow-ups.

Kyle, it's Brian. Yes, I think we're encouraged by what we're seeing in second quarter. So you saw our results for first quarter. And as we described, I think there are a bunch of different dynamics that were in play there. You pointed out the Olympics and, third, a heavy political in the back half. And I think we'll be able to take advantage certainly of the political displacement. So I think second quarter was a quarter that was really for us to try and understand kind of the state of the economy. And I think we like what we're seeing now. I think a couple of our key categories have nice momentum as we go through second quarter. Our pacing is very good. We have an interesting dynamic that will play itself out in the next couple of weeks on, ultimately, how we arrive at our finish record in second quarter. And that's the NBA Finals. So last year, we were fortunate enough to be the host station for the Cleveland Cavaliers. But getting them in the finals means $3 million or $4 million for us. And last year, it ran all the way out to 7 games. So we are certainly hopeful and prepared to take advantage of that opportunity if the Cavaliers get back to the finals. But even looking at all the other business, excluding the NBA, our pacing is much stronger than it was in the first quarter. Automotive continues to be a good category for us. We now see 3 consecutive months of year-to-year growth in automotive. Some of the others are still trailing a little bit, but there's enough on the backside to make up for the couple of categories that I mentioned. So I feel like with our visibility in the second quarter, knowing what's coming in the back half of the year, we kind of feel good about the momentum right now.

Where do you think auto shakes out for the year? And then I've got a follow-up on the OTT front.

Look, I don't know, at the end of the day, where it's going to shake out for the year. We've got a lot of business to write. We talked in February that January was down, but that February and March were up. And that was in fact the case. Now April's up again. So that's 3 consecutive months of year-to-year growth in automotive. We'll just have to see where second quarter shakes out. I've seen the [source] numbers like you have. The good news is people are sitting on a little bit of inventory (inaudible) [a lot]. And so it's driving some of our local dealers. They have to spend money to move those. So they're tying incentives along with advertising, and I think that's keeping that category healthy. Even if they're at 69 or 70, that's still a pretty robust auto environment for us. And they're going to have to do a lot of advertising to move those cars. So I think we remain optimistic that, that category is going to remain pretty healthy all year.

Nice progress with ABC. You're reporting some NBC progress on the OTT front. What do you think the time line is for the other 2? When will we see kind of broad adoption across all 4 networks?

Yes. I think there's been pretty active conversations. These deals have taken months to get to -- come to fruition. ABC was the first one with their affiliates to reach agreement, probably 6 weeks ago. NBC maybe took another 4 weeks. But now, we've signed on to that deal. The conversations with CBS have been happening in real time for the same couple of months, and I'd like to think we're getting pretty close there. And Fox is a pretty small platform for us, but I'm hoping that, that comes together, too. So my expectation is certainly that in the next 2 or 3 months that all the networks are onboard. All the affiliates or most of the affiliates are onboard. And we're building a new vibrant distribution ecosystem that, as I said in the script, the economics are really comfortable for us. They're in line with what we would have gotten in a traditional MVPD deal. And so we feel really good about being -- having our live channels on these platforms. And there's no value dilution across any of these platforms.

Your next question comes from the line of Michael Kupinski from NOBLE Capital Markets.

Brian, thanks for the color on the agency business. That should explain some of the disruption in national. I appreciate that. As you look into the second quarter, is both local and national pacing about the same?

Yes, they're pacing a little bit better. But local is clearly pacing better than national, Mike.

Okay. And within the -- just kind of moving on to the other digital segment, what's accounted for the deceleration in the rate of growth there?

Mike, it's Adam. We did see actually in the first quarter some of the same impacts, a weaker -- particularly, in programmatic -- start to the year, January and February. The good news -- and that particularly impacted our local markets. The good news is that March picked up from there, and we're continuing to see an acceleration back to the point where we expect the pricing and the demand to be.

So has this changed your view in terms of the growth rates versus local versus national?

Maybe a little bit for this year and this year only. But we expect local to get back to the sort of same zone that we've been seeing over the last couple of years. Now I don't, in any way, think that what we saw in January and February was an indicator of more broad secular trends in the marketplace. I think that we just saw the same impact that Brian's described for national advertising also bleed over into the digital space. And I've talked to a lot of my colleagues, both in the traditional media space with respect to digital, as well as with digital pure plays. And just broadly speaking, it was a slow January and February with respect to programmatic advertising. Now that impacted most of our businesses. It did not impact Midroll at all, which does not sell any advertising inventory programmatically. It's all direct sales.

Got you. And I know in the last call, you indicated that the M&A activity didn't really -- wasn't really heightened, I suppose. And I think things may have changed since then. But I was wondering if you can give us your thoughts on the current M&A environment?

Yes. Mike, it's Rich. Well, yes, a lot has changed since we last spoke. I guess, most of the questions we're getting are just, are you a buyer or are you a seller? As if it's absolutely one or the other, it's black and white. If you look across the industry, I kind of doubt that everybody's going to be strictly a buyer or a seller. For somebody like us with strong affiliates and very large attractive markets, we -- as I said, we already benefit from the economics of scale today. So we'll see if there are opportunities for us to add to our portfolio, pick up some leverage. It just looks like a real donnybrook is going to commence in the wake of deregulation, and there'll be a lot of moving stuff around. So we'll see. I would say we're not seeing a ton of activity at the moment directly. But certainly, some of it's going on upstream.

Your next question comes from the line of Dan Kurnos from Benchmark Company.

So Brian, let me just start by saying that being the fair-weather Celtics fan that I am, there's no way Cleveland is not making the finals. So I guess, you'll have that baked in. I want to kind of drill down a little bit on the NBC deal that you did on OTT. Obviously, they kind of put out the sort of blanket, what I would term kind of a weak offering to everybody to participate. I'm assuming that you guys signed something much more substantive and substantial -- substantially beneficial than that?

I don't want to speak to what was early on. But at the end of the day, the agreement that was signed with NBC after several months of negotiations was, I think, a good agreement for NBC and an economic agreement for local affiliates.

And then, Rich, let me just maybe -- and Adam you can pipe in, too, I guess -- just press you on kind of the M&A thought process. Sort of given that backdrop, I guess, 2 things. One, I know you guys were kind of looking to be sort of, I guess, I know they call it one-off buyer, certainly maybe some larger-scale opportunities. But in sort of the top 60 DMAs, it just seems like it's going to be more competitive. Does that give you any concern about whether or not it'll either be more of a pick up the pieces of a mega-merger that might be your opportunity? Or you might be priced out if the networks maybe get more competitive? And then secondly, some of your smaller peers that are maybe more levered talked about getting -- maybe having to get more involved in a transformative acquisition. Does that -- has your thinking changed on that front at all?

Well, I'll tell you one thing that has not changed is we're only willing to pay when something that's actual economically worth. We're cash-on-cash -- looking for cash-on-cash returns. So we're certainly not going to get caught up in any frenzy, and we're also not going to chase some sort of mythical cap or some mythical description of scale. As I said, we think we operate pretty well at scale today. An awful lot will be determined by what happens with the rules around ownership in each local market, the voices rule. And until you know how that's going to shake out, I think it's very hard to tell how the landscape overall could change, because that just affects so much, especially for those are chasing the cap and chasing some large, large scale where there could be -- as you say, things pop out and provide opportunities for others who are just looking to strengthen their portfolio. But again, I think it's largely, on our part, speculation. We're doing -- spending a lot of time looking at our markets, adjacent markets, how do we think things might unfold. But there's not a whole lot that's actionable at the moment.

Okay, great. And then just one more, maybe for Adam, on digital. I think you talked about it a little bit. We actually -- we heard about some -- looking at the Q2 guide, we heard about some surprise CPM strength from IAC yesterday in Q1. And much of that had subsided in Q2, especially around their content plays. So I'm wondering if you're seeing some of that seasonality? And then, again, if you kind of reaffirm that digital is still going to grow in that mid- to high-30% range for the year.

We continue to see good growth ahead for the segment, for sure. I would say, Dan, we play in a couple of different marketplaces certainly than IAC. On the news front, as I mentioned earlier, we did see a bit of a soft start to the year with respect to programmatic advertising in January and February. Things picked up fairly significantly in March, and they've continued to pace nicely. On the podcasting side, Midroll doesn't play at all in the programmatic marketplace, and we continue to see very, very strong growth in podcasting. As an industry, podcasting continues to grow, the most recent Edison Research sort of points to about 25% of the U.S. population now listening to podcasts with some frequency. Midroll, we believe we're the leader in the creation and the ad side, which obviously means that our share of the business continues to grow or our share of the opportunity continues to grow as well. So we don't see any of that abating as we head into the rest of the year.

Your next question comes from the line of Marci Ryvicker from Wells Fargo.

This is Marci. Tim, you didn't update the full year guide except for interest expense. So should we assume that what you provided on the last earnings press release is still valid for the year?

Yes. So Marci, this is Tim. Yes, it's our practice to give updated guidance for the quarter, the coming quarter, which is what we did here for the second quarter. We also gave guidance for the new interest expense. We don't, as a regular course, reaffirm the full year guidance that we give early in the year.

Okay. So we should not take that as gospel from last quarter?

Yes, that's correct.

Okay. And then, Adam, digital expenses were a lot less than what we've at least been modeling. And if we take the trends from this quarter and sort of play them up for the rest of the year, is it possible that this segment will start turning a profit in the fourth quarter?

Marci, so first of all, obviously, we intend to continue to grow, particularly on the national side of our businesses because we see really great value and the opportunity ahead. We think they're moving exactly in the right direction as we continue to plow the profits that they're producing back into the businesses to keep that pace of growth high. So I wouldn't necessarily draw any conclusions. I think we'll continue to move things in the direction that we've described. It's all very intentional. So anywhere we can, we try to maximize the opportunity. We know what our job is here. And if we were to pull hard on that lever and try to drive it to profit in this year, I actually think you ought to take that as a pretty good indication that the size of the price wasn't as big as we thought it was. So we continue to see a lot of opportunity in growth ahead, and we'll continue to invest in this business in order to capture that growth.

Great. And then one last question. What are your expectations for the Upfronts for Newsy? Is there any statistics you can give us from last year's Upfronts that maybe you want to beat this year?

I don't have the numbers, Marci, and I can gather some. But I will tell that last year's Upfronts, that was our first appearance at the Newfronts. And we were able to expose Newsy directly to about 250 representatives from brands and agencies, which directly led to us getting a lot more on the digital direct sales front. This year, we've been basically sold out the entire year. There's a lot of demand for digital video advertising, particularly OTT advertising that reaches younger millennial audiences. So rates can be anywhere between $20 up to $60. We average around $35 on those CPMs. So we feel really good about the success of last year's Newfronts. That also led to some branded content sales, where agencies and brands have come to us to ask us to help them tell their stories through Newsy's distribution channels to Newsy's audience. And we expect to be able to continue to do that this year, along with sort of being able to highlight some of our new distribution partners with respect to Newsy's continued OTT distribution.

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

I have several. Brian, if we take some of the things that you've talked about and look at the guidance and strip out political and retrans, it looks like core is still down about mid-single digits, give or take. And in light of the backdrop, the transition at various agencies and all the other things that you described, there still seems to be a hangup in terms of real momentum and getting the business going. So what would you say is the drag effect? What's keeping advertisers from spending?

I don't think there's a drag effect right now. It really comes down to the NBA Finals, Barry. All of our regular business is very much in line. You're running numbers and doing the math there. We've got an alternate log that isn't in our projections, that sits with several million dollars with the Cavaliers in the NBA Finals. And if that kicks in, those numbers move over to our realtime projections, and things look dramatically different.

Tim or Rich, could you just remind us what you're comfortable with in terms of leverage, given the buying power or balance sheet capacity that you believe you have in terms of M&A?

Sure. And I'll let Tim talk. We don't have a firm policy, but we have sort of an expectation for the time. Go ahead.

Yes, sure. Barry, this is Tim. Yes, so while we do have a balance sheet now that's less than 2x leveraged, we would stretch that balance sheet a bit for the right sort of acquisition. And kind of the target that we have in mind is something around 3.5x. We think this financing that we just did with the bond is really -- gives us a fantastic foundation in our capital structure, an 8-year fixed-rate debt with a bullet maturity. So sort of that, combined with this capacity that we've got up to 3.5x, things really gives us a lot of flexibility.

Great. Last one for me. And maybe this gets a little bit more hypothetical with all the speculation on Tribune and Sinclair and Fox and the potential formation of, for want of a better term, a handful of real supergroups. And I know, Rich or Brian, you've both talked about scale and the importance of it. But doesn't that change if you have a couple of really big station groups, either owned by the networks or others? And doesn't that leave you potentially a little bit more vulnerable?

It's Rich, Barry. Well, definitely, there's concentration. I think we're less concerned about it when it comes to people who own stations across the country that we'd probably be more concerned and everybody would be depending on the concentration that is allowed in each individual market. Like everybody else, we see the benefits going deeper where we do business in markets we really like, and everybody else sees that same benefit. So that's where -- I think where -- if there's a squeeze, where you would see it most, is what happens in local markets. This has been a business historically where value is really embedded at the local station market. And if you only owned a few stations, the way you reap that value was not much different than somebody who owned a large number of stations across the country. But again, if the local voices rule changes and there's really a lot of concentration markets, that's when everybody would have to stand back and say what's the squeeze effect, those who -- end markets where you're [unheavily] concentrated. So yes, that's probably what we're watching more than the national scale, the cap, which to me seems to be less, far less of an event than the voices rule. I'll let Brian jump in.

I would agree. I mean, obviously, Barry, we're operating in a business where leverage is important, leverage in the industry relative to negotiating networks as well as the MVPDs, and then in market leverage. And I think we've been able to be very successful and have appropriate leverage that we've been comfortable with in both places. I think we're a major player. We have a seat at the table in the industry. I believe that the kinds of markets that we're in and the strength of our stations in these big markets (inaudible) markets have given us appropriate leverage on our big negotiations. And having good news producing stations in our local markets with strong brands has allowed us to be viable in those markets. As the industry changes, as Rich just said, we'll have to weigh our leverage in both places. I think we've made a decision we're not going to chase the cap. We think that the kinds of markets that we're in and the strength of those stations can -- well, nothing changes, right? We're still in 18% of the U.S. with great stations and great cities. So I think we'll spend time probably weighing more of the end market leverage and making sure that we can compete in both places.

Your next question comes from the line of Craig Huber from Huber Research.

Brian, I'm curious, your updated thought on where you think ownership cap may go to. What's your timing expectation? And I know it's tough, but what's your best thought?

Yes. Barry, your guess is as good as mine on where -- I'm sorry, Craig, where the ownership cap may go. I'm not sure that the cap gets addressed this year. I think that the end market, voices before rules, and those probably go for us this year. I think that the cap probably goes to next year. And whether that ultimately -- if there's a proceeding to advance it and whether that happens at the FCC or Congress remains to be seen. But I don't know more than anybody else about where that may ultimately settle in.

There's been some controversy out there, Brian, on this subject. I mean, what's your thought in terms of do you need a congressional bill to change the ownership cap? Or do you think the FCC could do it?

Well, I think that debate is happening inside of the FCC. I think that the -- my understanding is that different commissioners have different opinions on that. So I'm not an expert on that. But I would tend to think even if the FCC had determined they had the authority, I think it's a big enough issue that would have a significant impact on American cities that it at least would have a lot more discourse in Congress than perhaps the change of the UHF discount rule did.

Okay, that's helpful. I appreciate that. Brian, when you think across your TV markets, what markets in particular do you think you have the most potential upside? Some obviously are performing better than others, but the ones are on the lower end. What 2, 3, 4 significant markets you think you have the most upside to get the ratings up and, obviously, the revenues and margins over the next 2 to 4 years with the best opportunities?

Yes. I think we -- obviously, we have a couple of markets that we have some pretty dominant #1 stations in. But I think as we look across -- some of our biggest markets is where there's just -- there's more money in those markets. There's big political opportunities in those markets. And we do spend more than our fair share of time trying to continue to put Phoenix, Denver, Cleveland, Las Vegas, Tampa, those top 20 type markets. I guess, Vegas is a little bit smaller, but due to its influence in political, is a really important market for us. So any of those markets just have a big political footprint and a ton of money being spent in it. So it's in our best interest to continue to work towards improving our ratings and news, improving our syndicated, our programming opportunity. And so I think if you are just to look at where our best opportunities are, I would just start with our biggest markets.

Okay. And then also maybe just curious. In the first quarter, for TV again, Brian, auto -- why don't you tell me about 3 of your large categories: auto, retail, and local services? How did those perform, the ad revenues there?

Yes. So auto was off about 0.5%. But quite frankly, it's probably about flat when you take out the fact that our Super Bowl footprint dropped from a stronger CBS to a smaller Fox footprint. And so when you look at the money associated with automotive in the Super Bowl, that makes up that little bit of difference. So auto really was about flat. And as I've talked about a couple of times, tough January, but bounced back really strong in February and March to get it back to flat. As we called out in the script, retail had a tough quarter. It was down high single digits. Furniture was off. Medicine was off. Clothing, drugstore, electronics with the closing of hhgregg. Jewelry was off, that we saw some other advertisers kind of move their money around from spot to network. So that was probably our most challenged category there. And then services was off low single digits. Again, we've talked a little bit about the insurance category being challenged in a couple of areas. And I think that was the biggest driver, and a little bit of softness inside of financial banks and institutions. We had many other elements, home improvement, HVAC, fitness, medical, all in -- legal [all inside of] services were up. So it's not a systematic or widespread problem in services. We've been kind of -- there's a lot of money in insurance and banking. And those 2 areas have been kind of just dragging us down a little bit over the last couple of quarters. But the rest of that category feels pretty strong to us.

And then, Brian, I guess, your subs -- in your retrans subs, what's the percent change there versus a year ago on a comparable station basis? And also, while on the same page, what percent of your subs are up for renewal this year, next year and the following year?

So this year, we talked, about after having lot of subs come up at the end of last year, this was going to be a light year for us. We've done a couple already this year. So we've only got about 5% that'll finish out between now and the end of the year. The next 2 years are huge at the end of -- or by the end of 2018, we'll have negotiated 37% of our subs in '18. And then as we hit the end of '19, it's over 40%.

Yes. And Craig, we really haven't seen a meaningful change in the number of subs across our portfolio.

Okay. But last question on the digital front. For your -- there is national properties. I'm just curious, if you won't break out or can't break out the percent change there, revenues in the first quarter, can you at least just rank order for us the percent change in the revenues there for national properties within digital?

Just sort of echoing what I said before, Midroll, which is not impacted at all by any of that softness we saw in programmatic, would probably have grown the fastest. And then I'd have Newsy and Cracked following.

Okay. And then also maybe you could help us. Your local digital properties, what was the percent change there in revenues in the first quarter year-over-year, please? That's my final question.

The percent change, we have been pacing at about 20% for the past couple of years. As a result of some of that slowdown in the first quarter, it was definitely south of that. We expect it to ramp up a little bit again, but that's sort of where things stand right now.

Does (inaudible) mean like 10% to 12%? I'm just trying to ballpark it.

I think the first quarter was a little bit shy of there.

Your next question comes from the line of John Kornreich from J.K. Media.

One single small quickie, and then a larger one. You -- just straighten me out on this. Local digital website advertising, is that in the digital segment or in the TV segment?

Yes, John, that's in the digital segment.

And what portion of this, whatever, $65 million, $70 million you're going to do this year is local website?

It's looking this year that's about 50-50 will be the split, local to national.

And is the local website advertising [dare I say up], up a little bit?

Oh, yes.

John, it's Brian. I just want to jump in. You're asking a point that just probably deserves a little clarity. When we report television, it is local, spot only, national spot only. We don't include our digital revenue in that. Many of our peers do. And so as you're looking to do comps, I would just encourage you to really kind of read between the lines to see who's including digital into their local and national core numbers. We break those out separately, but I'm glad you asked that.

And it looks to me that it depressed your first quarter of ad revenue by maybe close to a point?

Yes. I mean, no doubt that if we added in our digital every quarter, our local would book better, but we don't -- we're pretty strict.

A much larger question. Rich, as you know, for a mere couple or 3 decades now, I've been quizzical about your margins. And that continues. Your first quarter margin, I know it's a low quarter, a seasonally low quarter and no political and all that. But 19% -- and even last year when you had political, it was only about 22%. I think I've come up with the reason. I think I have -- finally have a theory. And that theory is that, exacerbated by your acquisition strategy, your local ad pricing is relatively weak, and that's exacerbated by the acquisition strategy of loving to pick up #3s and 4s and fix them. Listen to this figure, which is absolutely to me shocking. If you look at your first quarter, $180 million of revenue, you have $66 million of retrans. I'll give you a 50% margin on that. I don't know. My guess is it's higher than that. But 50% margin as a roundabout means that your profit on retrans is $33 million. Your total profit was $35 million. So you're making 2 -- in the first quarter, you made $2 million on $110 million of advertising. I know the first quarter exaggerates that. But the point -- and by the way, that $2 million on advertising is down 90% from a year ago when you had about $16 million. I mean, I don't get it. The only thing I can come to a conclusion on is that in advertising, your rates are too low for competitive reasons.

Let me -- I think you asked about 12 questions there, John. We're trying to unpack them. But first, let me let Tim Wesolowski sort of unpack the math there in which margins you're talking about, and...

Yes. So I think, John, you're talking about the 19%. So that's Q1 TV-only margin or are we talking...

Yes, yes, yes. And then I segregate profits on retrans versus profits on advertising.

Yes, yes. And again, you're looking at a cyclically small quarter. So those are sort of -- that's not surprising. Let me address a couple of the bigger questions, and I'll let Brian jump in as well. Yes, we -- our strategy of picking up 3s and 4s at excellent prices that show an excellent return on investment for shareholders, that has definitely been part of our strategy. You can buy a #1 and you pay for a #1. You can buy a #3 and you pay for #3. Our focus, again, has been on return on investment. So, yes, if you look over short periods of time and say some of these stations we've picked up, including some in the journal transaction, are not market leaders and, therefore, do not produce the same revenue. Yes, that's true, but they produce excellent returns on investment.

Which is what counts.

Yes, yes, over the long-term. Plus, we figure you get, as an option, almost a preoption based on what we pay, the opportunity then to improve performance. A couple other factors. One is the Comcast and the retrans adjustment. You've got to work that through the system as well. I'll let Brian talk about the size of that. Go ahead now.

Yes. I mean, obviously, we've talked about over the years, and it continues to have an impact on us. The fact that in 2 million households, we're not paid on those Comcast subs. John, I think you were at the last conference when the question was asked of me of whether we are in fact paying our network partners for those Comcast households, even though we're not being paid on it. So and I answered that, that is in fact the case and has been the case for the last couple of years. And so I encourage you to work the math because there's some significant margin points that are left on the table there. We've talked about the fact that we're trying to get more aggressive with duopolies at a point when other companies are rolling up duopolies in their markets. We owned HDTV and Food Network. And we were creating amazing value for our owners at that time by putting our money to work there and launching new networks versus buying second stations. So we understand that. That's a little bit of a liability that we have to work under now. And again, at the last conference, we also talked about just the changing dynamics of the impact of fragmentation and a strategy in the past of not necessarily interest in buying specific stations, but buying into markets. And we have been comfortable getting into markets, whether it's Denver or Las Vegas or San Diego or Indianapolis, where maybe we weren't getting a #1 or #2 ranked television station, but we've found great appeal in the markets as long-term operators that we thought we could create tremendous value. And so as we shared at the last conference, look, it's harder now due to fragmentation and maybe some less loyalty of television viewing to be able to grow a #4 than a #2 or #1. And I think we're probably more honest about that today, recognizing the trends that are happening. But at the end of the day, we continue to have great assets in great markets. We do come with uniqueness that our peers have not had relative to MVPD subs and duopolies and other things. But the one thing, I guess, I would take exception with is the -- that our TV ad rates are too low. I think we are very capable sellers in our markets. We have great sales leadership. We certainly understand how to use leverage and use the assets we have to maximize our (inaudible) value. Keep in mind that in my script, I talked about the fact that we outpaced our markets in the aggregate. You don't do that if you're underpricing your inventory. So I think there's a lot of moving pieces here that we're always happy to continue talking about that are unique to our story, but I don't think underpricing our inventory. We wouldn't be able to outpace our markets and grow market if we weren't pricing appropriately.

Well, now let's Tim throw in one more piece of math, and then I'll...

Yes. So when he talked about the math, I guess, there's 2 things, John. One is looking at the bigger picture and the profitability of the segment, including everything. Don't forget this Comcast piece, right? So it's 2 million subs. We're getting nothing on those. And the flow-through on those subs in 2020, when we start realizing them, will be very, very high. So that's a very big number. And secondly, the math on your net on this. So retransmission, as you can see, is about $66 million. Total program and program licenses is $45 million. We haven't broken that down between network and syndicated, but we have said the lion's share of that is network. So that's a $21 million difference, and you sort of have 33 of 34. So it's pretty sensitive to what that assumption is. And I think if you look at there's 2 factors, we're going to get a boatload more, net profitability when these Comcast subs come up. And the sort of the reality of that flow-through on that, you come up with a little bit of a different picture.

And the fee on Comcast is -- I take it is close to 0?

Yes.

Yes, real close. Like real, real close. John, let me kind of -- I think you did several things. One, you point out the value of retrans, and you used a cyclically small quarter to really show the strength of it. And no doubt about that. Also, yes, we have acquired or merged in some 3s and 4s. But as I think you just heard, we're confident the margins will move up. And they have moved up, and there's good opportunity. And then just, yes, you've known us for a lot of years. And I know it's kind of out of style right now, but returns on investment are an important focus for management teams. We're probably value investors at our core, and I can't imagine why that would ever change. And I think it comes out for the best over the long-term. In the midst of a frenzy, it can be very out of style. But fundamentally, we think it's the right thing to do.

And at this time, there are no further questions.

Thank you, Gregg. So just to sum up the Scripps opportunity in 2017 and beyond, stable core, television advertising combined with plenty of retransmission revenue upside; rapidly growing national digital brands and already profitable local digital operations; and the specter of a strong 2018 midterm election year, as well as healthy industry regulatory and M&A climate; and lying beneath it all is a rock-solid foundation of a strong balance sheet.

Thank you so much for joining us this morning.

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