E W Scripps Co (SSP) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Scripps fourth quarter earnings call. (Operator Instructions) Also, as a reminder, today's teleconference is being recorded. And at this time, I'll turn the call over to your host, Vice President of Investor Relations, Ms. Carolyn Micheli. Please go ahead.

Thanks, Tony. Good morning everybody and thanks for joining us for a discussion of The E.W. Scripps Company's Fourth 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 scripts.com for more information, such as today's release and financial tables. You also can sign up to receive e-mails anytime we disclose financial information and you can listen to an audio replay of this call. The link to the replay will be up there this afternoon and available for a week. We'll hear first this morning from Scripps, President and CEO, Adam Symson, then Chief Financial Officer, Lisa Knutson, Local Media President Brian Lawlor and National Media SVP Laura Tomlin. Also in the room are Vice President of Radio Steve Wexler and Controller and Treasurer, Doug Lyons. Now here's Adam.

Good morning, everybody. Last August we began a comprehensive effort aimed at creating a stronger, more streamlined and higher-performing company, as I've said before, a company with equal energy on superior, near-term performance alongside our consistent strategy of long-term value creation. Our plan has 5 key components that have begun to play out over the course of the last few months and are already delivering tangible results. The first key component of this plan is the work we are doing to reduce our cost structure. We expect these cost reductions to yield more than $30 million in annual savings by the time we are finished executing them. This move gives us a meaningful boost toward our goal of margin and cash flow improvement. The second key component is our new approach to television station acquisition what we refer to as buy-sell swap aggressively engaging in a strategy to get deeper and even stronger in the markets where we operate. This will allow us to assemble the best-performing portfolio possible. The third component of this plan is to further refine our asset portfolio by initiating the sale of our radio division, allowing us to focus on our core local TV opportunity and the growth opportunities in our National segment. Selling the radio stations also gives these stations and their employees a better home with a radio industry focused owner. The fourth component of our plan is creating a long-term growth engine by investing in our National Media businesses. Last year we acquired the 4 niche audience Katz broadcast networks, Bounce, Grit, Escape and Laff. We expect the Katz networks to maintain a strong trajectory of growth capitalizing on the resurgence in over the air viewership. And at around the same time we took Newsy which was already well established in the growing OTT space and added distribution in the dominant cable marketplace because, as we've said before, we expect the future of television to be about over the air, cable and satellite and over the top. Our fifth component has been restructuring and reorganizing the company's businesses by the marketplaces they serve. Our goal is to enhance our focus on the consumer and support more effective and efficient operating philosophies. We have created a Local Media division comprised of our local brand on all of the platforms where we reach audiences and serve our advertisers and a National Media division made up of fast-growing businesses with national scale and reach. If you joined us at our Investor Day last September you'll remember I outlined 2 priorities that we are executing against with equal effort building short-term value through improved operating performance in our strong stable local business and setting up our company for a significant growth to create value for the long term. These 5 steps are moves we're making consistent with that commitment. With this work well underway the Scripps board decided the time was right to initiate the company's first quarterly dividend since 2008. Their decision reflects their confidence in the state of our business and our strategies for the future. We are well positioned today to return capital through a regular dividend to shareholders. And while we execute this plan, we remain laser focused on one of Scripps' characteristic strengths, our strong balance sheet. That's really in our DNA. And looking ahead to this election year, the sale of our radio division and the rightsizing of our cost structure will have the firepower and the financial flexibility to capture opportunities ahead.

Today, Scripps is a dynamic media leader through our strong local TV station portfolio, our multicast networks, our national news network and our podcasting business. And while we still have a lot of important work ahead of us our enterprise-wide efforts position us well for improved revenue and profitability while maintaining our commitment to the mission, high-quality journalism and service to our audiences and advertisers, a mission for which Scripps is well known.

Now here is Lisa.

Thanks, Adam and good morning, everyone. We hope we made it easy for you to think about how the company results -- about the company results in terms of our new reporting segments. Our press release provides historical table that have been adjusted to the new basis, so you have clean comparisons to prior periods. And we have laid out the prior quarters and 2017 to help you with your forward-looking model.

I'll briefly walk through what is included in these reporting segments, then talk about our fourth quarter highlights, cash position, capital allocation, first quarter guidance and the impact of the new tax law on Scripps. The Local Media division includes our local and national TV ad revenue, as well as digital advertising that supports our local digital assets. These are the dollars that make up core advertising. We also are reporting political advertising and retransmission revenues to complete our Local Media division's revenue line. The National Media division includes the results of the Katz broadcast networks, our national news network Newsy and our podcast business Midroll Media, as well as a few other businesses with national reach. We're providing you with revenue from Midroll and Newsy for the first time and you'll be able to see their strong growth with historical comparisons as well. Our other segment includes the Scripps National Spelling Bee and the Scripps Washington News Bureau. Our radio stations are being sold and are presented as discontinued operations and by the way, our sales process is moving ahead nicely.

On the cost side, we have discussed $30 million of savings due to our restructuring work. You can expect roughly $10 million of the savings this year, and the full $30 million in 2019. Finally, just a reminder that the guidance we issued in our third quarter press release last November was given on the old reporting basis. So it will not be comparable to what you see today to the consensus estimate.

Turning to our fourth quarter results, here are a few highlights. In our Local Media division total fourth quarter revenue was down about 17% compared to the prior year. That's due to the absence of $53 million of presidential election year spending. Retransmission revenue was up about 5% in the quarter and up 18% for the full year. Local Media expenses were up about 6.5% driven by an increase in network programming fees as well as the cost of producing Pickler & Ben. On the National Media side, fourth quarter revenue was $53 million, including $41 million from the Katz networks, $5 million from Midroll and $3 million from Newsy. Division expenses were up 30% if you exclude the impact of Katz which we acquired in the fourth quarter. Fourth quarter segment profit for National Media was $2.7 million and I'd like to point out this was the first profitable quarter ever for that segment.

Turning to our ongoing restructuring effort. We incurred $2 million of cost in Q4. You can expect restructuring charges to continue through 2018 with the largest charge of about $4 million coming in Q1. For the quarter, net income from continuing operations was $11.5 million, or $0.16 per share. As of December 31, our cash totaled $149 million, while total debt grew in the quarter to $693 million, with the acquisition of Katz. From January 1 of 2017 to last Friday, we purchased 1.3 million shares of stock for about $22 million and since the Journal deal closed in 2015 we have spent $81 million buying back 4.7 million shares. The first quarter payout of our quarterly dividend will be $0.05 per share for shareholders of record as of March 1. This payout ratio leaves us flexibility to grow the dividend over time while maintaining the ability for opportunistic TV M&A and share repurchases. As always Scripps is taking a disciplined approach to considering how best to allocate capital, balancing business investment, acquisition and return of capital.

Turning to guidance, I would like to point out a few things for the first quarter. Regarding other revenue line in Local Media, for your models, you should expect that line to be about half of what it has been going forward beginning in Q1. There are 2 reasons for this. First, our stations no longer receive affiliate payments from Katz and second the fourth quarter of 2017 included an incentive payment for services we provide under shared service agreements where we produce news and provide other services in certain markets. In addition, our Q1 guidance for shared services and the corporate line is a little higher than our typical run-rate because it does include some costs for our anticipated proxy [content]. If not for those cost, shared services would be about 5% below the prior-year quarter.

Finally, the tax legislation was signed into law in December and is good news for Scripps since our effective tax rate is largely driven by the statutory rate. We estimate our normalized rate in 2018 to be between 24% and 26%. This new rate, of course, [will spike the] sale of our radio assets. Overall Scripps tends to come out ahead with the changes and will realize additional cash flow as a result.

Now here's Brian.

Thanks, Lisa. Good morning, everybody. I'll start with the results from our Local Media segment and our political advertising outlook and talk about the success of our original program Pickler & Ben and wrap up with some highlights from the Katz Networks. Our core advertising results were a bit better than our expectations for the fourth quarter, up 6.6%. Of course, we benefited from the comparison to the fourth quarter of 2016 when $56 million of political advertising would have caused some displacement for our regular local and national advertisers. Our largest category services grew more than 20% in the quarter while our second largest category auto was off just slightly with a 1% decline. We also saw a nice rebound in retail, which is our third largest category as well as a strong growth in our home improvement and telecommunication categories.

Looking ahead to this year's midterm election. Scripps is well positioned to capture what is expected to be robust political ad spend. We have 16 governors' races and 12 U.S. Senate races in the Scripps footprint. With much at stake for both parties, we have every reason to believe it's going to be a very strong year.

On the original programming front, our new daytime show Pickler & Ben launched to successful ratings, and we recently announced we've committed to the show for a second season. We're having tremendous success selling the show in syndication. In fact, just last week we passed 100 markets committed to the '18-'19 season. The show is growing audiences in our time periods on the Scripps stations and we look forward to similar success in these new markets.

Now let's turn to the National Media segment. I'll talk about the Katz networks which report to me and then turn it over to Laura to talk about the rest of the segment. As you know, we closed on this acquisition on October 2. So we now have a full fourth quarter of results in the National Media segment. I'm pleased to say that the Katz networks are fully meeting our expectations. Just a reminder that these are the 4 over the air multicast networks, Bounce, Grit, Escape and Laff. They each now reach about 90% of U.S. TV households just over the air and then there is additional cable distribution as well. They continue to grow their audience. One recent example of that Bounce airs the Annual Trumpet Awards celebrating the outstanding accomplishments of African Americans. When it aired in the weekend of February 11, more than 2.5 million people viewed the program. This is exactly the kind of targeted programming combined with continuing expansion of distribution that helps attract general market advertisers, which ultimately grows ad revenue and profitability.

And now here is Laura to talk about the rest of the National Media division.

Thanks, Brian. Good morning everyone. I'll start by sharing what makes up our new National Media division. Our segment financials include Midroll, Newsy, the Katz networks and some other national brands. While Katz reports into Brian, I oversee the other businesses. And this segment is a collection of brands that operate in the national marketplace. All of them have national reach and leverage target demographics to attract a strong national advertiser base. These brands are fast growing and may require investment now to reap the significant returns we expect. Our investment allows us to capture both the greatest possible revenue growth and ultimate profitability.

For Newsy, our next-generation national news network, the growth is accelerated by our expanded distribution on the cable. Last fall, we successfully negotiated carriage for Newsy on most of the major cable systems. And by the end of the year, we had agreements covering 26 million homes. This combined with Newsy's broad distribution on most of the major over-the-top television services gives Newsy strong footing as one of the nation's most relevant and fast-growing news networks aimed at younger audiences. Newsy's revenue is growing quickly, thanks to multiple revenue streams, cable advertising and carriage fees, OTT and virtual MVPD advertising and digital ad revenue.

Our programming has evolved to serve the multiplatform consumer and has launched shows including The Day Ahead, The Why and 30 Minutes With. These shows and upcoming launches can be seen on Newsy's new cable channel.

Now I'd like to turn to our podcast industry leader Midroll. We see podcasting as one of the most compelling audio formats for the future of journalism and storytelling. The podcast industry continues to grow and nearly 1 in 4 Americans is listening to podcasts monthly. Midroll is a leader in the industry and continues to expand its reach. Midroll creates its own shows, serves as an advertising network for more than 300 podcasts and it runs a podcast distribution and listening platform Stitcher which has a growing subscription.

Midroll had a record-breaking revenue in Q4 and served up 1.5 billion ad impressions. That's up 15% from Q3. Midroll has recently formed partnerships with the NFL, Oprah Winfrey Network and Marvel Comics, 3 major national brands drawn to podcasting because of its growing, affluent and younger audience. Apple's new podcast analytics are helping to verify just how powerful this medium is and how engaged its listeners are. At Midroll we're seeing listeners that are staying on for about 90% of a given episode. And just as important to our plan, national advertisers such as Microsoft, Coca-Cola and Procter & Gamble who want to tap into this attractive audience are following these engaged listeners into the podcasting world. You can see that Newsy and Midroll are each high-growth businesses and we expect their strong performance to continue for many years to come.

And now, operator, we are ready for questions.

(Operator Instructions) Our first question comes from John Janedis with Jefferies.

I appreciate the transparency on the revenues and I guess that I wanted to start with local ad revenue. It looks like your underlying growth is coming in ahead of peers and I'm assuming it's partially due to the services category. But is there anything else -- anything else specific to call out [on auto, the] affiliation or market exposure front because it also looks like your auto was better than the market and I assume retailers as well? So any color there would be helpful. And then secondly, bigger picture, shifting to digital you've done a lot of work there over the past couple of years. And so, Adam, can you talk about your confidence level around those businesses relative to the start of 2017?

John, it's Brian. Let me take your first question relative to just where our growth was. We were obviously really pleased with our fourth quarter results and I think you homed in on the couple of categories that drove that. Services up 20% was a really strong driver of our success. A couple of subcategories inside of that. Real estate was up more than 20%, our medical and legal categories were big inside of that. But really the biggest driver was insurance. And you've been following us now for a while and you remember that for about 5 or 6 categories in 2016 and '17 we were talking about the insurance category being really soft especially kind of in that western region, Las Vegas and Tucson and Phoenix. In that area -- in that subcategory insurance has come back really strong. It was up almost 70%. Health insurance alone inside of that was up almost $3 million. So that was a big part of our driver there and our success. You mentioned auto. Auto, pretty good quarter. I think our sales teams just really continued to focus on that category. A lot of it's about meeting with dealer groups and local individual dealers and trying to bring them along and continue consistently on television and that continues to work. And then you mentioned retail. Retail was up almost 5% in the quarter. So that's a category that's really fluctuated over the last couple of years. But I think we had a good back half of the year last year and obviously, it played itself out with some of their retail results following the holidays. So -- and we're seeing that continue into the first quarter.

John, I'll take the second part of your question about the national businesses. Actually -- you referred to them as the digital business. And the reason we actually reorganize the company around marketplaces is because we don't necessarily see them playing a platform-specific role. When I think about Katz and Newsy and Midroll the common thread around all 3 of those businesses really is the strength they have with respect to scale and reach in the national ad marketplace. And so I'm really confident with what we're seeing. We continue to see significant marketplace growth with OTT and podcasting and that's really [buoying] a lot of the growth with Midroll and Newsy. Obviously moving Newsy into the already developed cable marketplace provides us a lot of upside and a lot of opportunity. That revenue will continue to ramp through this year as more of the MVPDs bring Newsy online. We've got this contract signed and done. But as you know, MVPDs flip the switch on programming in cycles. And so we expect to continue to grow the cable advertising and cable sub fees side of Newsy as well. And Katz obviously delivered over the year and on cable tremendous opportunity ahead because we continue to see growth opportunity with respect to the distribution but the audiences are growing. And with growing audiences comes higher rates and those higher rates are driven mostly by the transition from the historic reliance of these new networks on DR on into the ability for them to go out and service the general market advertisers because they are bringing to the table such good audiences with significant ratings for the brand marketers.

Our next question then will come from Michael Kupinski with NOBLE Capital Markets.

I have a couple of quick questions here. Has the company completed the reverse transfer of the few ABC stations that you had I think comes due in the fourth quarter of last year?

Mike, it's Brian. No, we're on an extension with them and still finalizing that agreement.

Okay. And then the company appears uniquely positioned to add stations in market. It seems that the company is focused on doing station swaps, but doing station swaps can be a little problematic as everybody thinks they have the prettiest child, so to speak. And I was just wondering if you can just give your color on how discussions to do swaps might be going and the likelihood that the company might complete station swaps this year?

Well, I am spending a lot of time on, Adams and I and others, so I'm sure -- hope we're going to be able to bring some deals to a conclusion this year. Look we have some attractive assets, others have attractive assets. But I think when you look at the numbers and the synergies that can be gained the results are not deniable. And so we've been chatting with other folks, and I think they see the same thing, the opportunity to get bigger and advance the market to make a market more durable for individual companies. And so as a result of that I think there's an open-mindedness to this moment of time that we're in right now and that's really how we're looking at it that we're not sure these rules will stay around forever, but we do think that this is a good thing for the business. I think it supports journalism, it will allow us to better serve our communities with a deeper commitment and as a result, we're trying to take advantage of this time. And I would certainly expect we'll get some deals done this year, Mike.

Got you. And if those discussions are not going to go well, I understand that maybe you are probably swapping out some of your smaller market TV stations and trying to double up in bigger one -- bigger markets. If those don't go well do you -- can we anticipate that you might have further asset sales and look at selling those assets rather than just trying to swap them?

That's not really our plan, Mike. I mean, I think at the end the day our goal is to be bigger, not smaller. But I think hopefully through the use of swaps we're able to realign our portfolio to a more -- to a stronger, more profitable and, as I said, more durable portfolio.

Got you. In terms of retrans, can you provide some guidance in terms of the cadence of revenue growth in the retrans through 2020, especially now it seems like you guys completed the Comcast negotiations? So I was wondering if you can just give us some visibility there.

So in 2018, we have price resets on about 37% of our subs; 2019, 41%; and 2020, about 17%. So typically, these are 3-year deals. They may fluctuate by 3 months or so. But most of them are 3-year deals. So we'll -- we've got kind of an evenly spread renewal cycle here over the next couple of years.

Last question. The company indicated that it plans to achieve 40 million in subscribers for Newsy. Will the company be willing to use retrans negotiation to gain additional subscribers for Newsy going forward?

Mike, this is Adam. I'll take this question. I actually think there's been a little bit of confusion in some of the analyst reports that we've been reading. So let me make sure I'm really clear on this. There are really no parallels between what we've been subject to as a result of the Comcast and the SNI deal with now how we're negotiating carriage for Newsy. Last year when we acquired the contracts for carriage for RLTV, I think I said that we would pay up to $0.93 a sub and work with the MVPDs to reprogram it from RLTV to Newsy. So any expense involved in flipping programming from RLTV to Newsy is being amortized over the life of the Newsy carriage agreement in Newsy's plan. And if we [had a new expense] as a result of working with the MVPDs to do that programming flip, it also would have lowered the cost of our acquisition of that sub from RLTV by up to about 40%. So that's why when I was saying last year that we paid up to $0.93 a sub and how could you have an acquisition with an up-to cost, well, that's because if there was going to be expense going in the direction of the MVPD that expense would be amortized and flown through Newsy's P&L and would also lower the cost of the RLTV sub acquisition. I would say, I think that that still leaves us in a position for this to be the most efficient cable flip in history.

Our next question then will come from Dan Kurnos with The Benchmark Company.

Brian, just quickly on local pacings, I mean, we can kind of back into it now, there is a little bit of noise from the local digital stuff shifting over. It still does seem a little bit better than the peer group. Auto was also down slightly less than I think what we heard yesterday for you guys. It's been a focal point for investors. Can you just talk about some of the puts and takes in the automotive category and then obviously a lot of people have been talking about crowd out from the Olympics and lack of advertising on non-NBC channels. Just how that you think that impacted your results in Q1? And if you're seeing any sort of pickup with early book heading into Q2?

Dan, it's Brian. Obviously, we said auto is down about 1% in the fourth quarter. I think it's pacing a little softer than that right now in the first quarter, probably because what you spoke about really the Olympics. We only have 5 NBCs. It's a small part of our portfolio. Our NBCs are performing well, up double digits for the quarter. Between the Olympics and the Super Bowl, combined those 2 things are $8 million, a little over $8 million. And so our 5 NBCs are performing well. But when you have a footprint that's heavy and ABC as well CBS or Fox we do see some advertisers kind of pulling back or sitting out against those 17 days. And so auto has been a category that's been a little bit softer there. For the quarter I think we've given out some guidance here that we're looking at revenue being up mid-singles, our pacing is up low singles, [due diligence] is a small part of that. But I think our categories look a lot in first quarter like we did in fourth quarter. So auto was off a little bit more, but I spoke of the strength of services, of retail, home improvement and I think we're seeing those same categories kind of drive our first quarter as well.

Got it. That's helpful. And then just one more sticking with TV. I know you guys are probably not going to give a number on political. So maybe just sort of your thoughts on how you are feeling heading into the balance of the year and sort of where you could shake out. I know you talked about the competitive races you have. But if there's any way that you could give us sort of some color on how you're feeling relative to 2014 that would be helpful.

I think we're certainly optimistic. It's early. We believe there will be more money in the cycle across the industry this year than there was in 2014 and then it really comes down to just are the races in your markets competitive. And if they are, you will have the opportunity to really benefit from that. As I said, it's early. Of the 16 governor races right now, 3 of them are tossups; Florida, Michigan, Nevada. So those are good spending states. If those races stay close, those could be very strong -- strongly financed races. On the Senate side, we've got 5 tosses -- 5 tossup races; Arizona, Indiana, Missouri, Nevada and Tennessee. Again, I think if these things stay within a couple of points we have the opportunity to really benefit from that. Our cadence on our political for this year probably will look a lot like '14. we did $75 million in '14 and maybe $10 million of that was in the first half of the year. First quarter was $3 million. I think our first quarter of this year will kind of look about the same, but really it's going to be after the first quarter -- first and second quarter primaries. Then you hit that third quarter -- that heavy third quarter primary schedule and then I think things would really kick off. We are seeing a decent activity around some of the Senate races in Arizona, Indiana, Wisconsin right now. We expect these year's spending to continue probably through first and second quarter, although point levels are moderate at this point. So it's lying in a nice base. We've got a couple of smaller markets that we're seeing some early activity right now and we are seeing some super PACs lay in a fair amount of money for the fall, just to kind of reserve some space. But as we've seen in the past if the races don't stay competitive we'll lose that money. If the races are competitive they'll probably add on to it. So right now it's kind of gearing up for a good, active, healthy year and if the races stay close, we should be in a really good position.

Got it. Super helpful. And then just last one, just kind of higher level, Adam, as we think about sort of Newsy going forward with the incremental revenue streams here, I'm just curious you're sort of in a land grab mode to an extent, you're going to get more carriage around. I assume you're not going to sort of -- Adam, maybe you can sort of give us at least some sense of like what those carriage fees are, nominal or whatever, however, you want to characterize them. But relative to the opportunity on a go-forward, sort of where would you sort of bucket the greatest opportunity? And are you going to -- since that, those dollars, I'm assuming are effectively dropping straight through to the bottom line, how much of the incremental revenue that you're getting from these more profitable revenue sources are you reinvesting in sort of continuing to drive sort of what you would view as market-leading position there?

So let me [untap] that question a little bit. As we said earlier we've taken a product that was already developed for OTT, a stream that was already there. We're continuing to develop it out. Most of the hiring going around additional journalists and content and sales and we're now migrating that into cables. And with respect to cable, we've said we are -- we think we're going to ramp our subs up to 40 by the end of the year. Obviously, those things come online in cycles. So we expect cable advertising, which will start out significantly in the DR space to really begin to grow more I think materially in the second half of the year. Some of the -- some of the contracts call for these right away, some ramp up over time. And I would characterize that as a good start and nominal. I don't want you to misunderstand, sort of this is not a comparison between the sub-piece obviously that Newsy is getting early on as a new brand and retrans. But it's a very good start and I think it solidifies the place that Newsy plays on the shelf here that we have with the MVPDs. With respect to reinvesting the profits, we've got a lot of opportunity ahead. Both of these businesses are growing combined 50% annually. We expect both Midroll and Newsy to be able to keep that pace. Katz obviously as well. And so we expect that we'll continue to invest some of the profit from the National Media division back into these growth businesses.

The next question in queue then will come from Kyle Evans with Stephens.

Could you guys give a target leverage number per year end assuming a Radio sale?

Kyle, it's Lisa. We -- looking (inaudible) we are about 3.5x levered today, we do have a substantial amount of cash and we expect our operations to produce a significant amount of cash in 2018. And of course, we expect net of tax proceeds from the radio sales to hit the bottom line as well. So we're really sort of comfortable where our leverage is today and I think with that cash coming in, obviously it will work its way down in 2018.

And maybe an update on Katz in terms of the ad mix and your efforts to upgrade from DR to more general market. Are we on track there and where do you think that can get to over time?

Kyle, it's Brian. Yes, we're very much on track. As I said Katz is meeting every one of our expectations on the distribution side, on the rating side and on the revenue side since we acquired the company. A lot of our 2018 strategic plan and budget is around the success that they would have had in the upfront, which concluded recently. They hit all of their upfront target numbers, I can tell you that. Across our 4 networks of portfolio we grew our upfront revenue over 50%. So as -- I think what we've said in the past is the Bounce is the one that right now about 50% of their -- all of their advertising comes from the general market. The rest is either DR or hybrid DR and then Escape, Grit, and Laff are obviously they are newer networks and they're building toward that, but they are a good bit behind that. So it's a year-by-year process, but we hit all of our financial targets from the upfronts which lay in that foundation of the general market advertising.

When you look at -- it sounds like you are doing a lot of work on the buy-swap front. When you look at swaps that could end in Big 4 duopolies, what kind of margin lift do you think you get from stations stacking in market?

We've done it and we've modeled it a couple of different ways. Obviously, it really depends on whether you're looking at an ABC and a Fox or you're looking at an ABC and a CBS or even an ABC and a MyNet. And we're seeing in our models lift anywhere between 7 to 15 margin points just really depending on the circumstance.

Okay, maybe last one. Brian, you mentioned that the local digital was small since we're all about to rebuild our models, would you care to be a little bit more specific there in terms of the size and growth rates?

Again, I don't think we're -- Kyle, sorry, I don't think we're sharing those numbers right now.

Lastly, sub count and retrans. Could you give us a look back at 4Q?

Yes, I think obviously on our last call we talked about our decline of about 3% of our total subs and that included some seasonality. So I think we talked about watching that a little bit. The good news was as we got to the fourth quarter our rate of decline had slowed. It was a little bit of additional decline but it was all offset by new over-the-top households. So at this point, no net loss beyond what was previously reported, which is from the beginning of last year, about 2% to 3%.

You are seeing OTT subs revenue come to the door and largely offset the declines you saw in 4Q on the traditional side?

Yes, so we talked about the fact on the last call that we were waiting for that. We were seeing the people cutting the cord on the MVPD side and we're expecting that they will be signing on with some OTT subs. We have now seen that, we're now being paid for that. Obviously, it's not one for one at this point. I still think that marketplace is shaking itself out, but we had a couple of 100,000 subs that are new OTT subs that we factor into our models.

The next question will come from Marci Ryvicker with Wells Fargo.

I have a couple. First core advertising and TV. What visibility do you have post the first quarter? I know there's a lot of noise in Q1 in the streets focused on the slow start to the year. But this is a harbinger for the year or is there anything you can say about Q2?

Marci, it's Brian. I think obviously we know the cadence of broadcast. Second quarter, fourth quarter are typically much stronger. We're seeing that. I think there were a couple of big automotive clients that made kind of strategic decisions to go light in the first quarter and then build on their base for second, third and fourth. And so we've seen that money laid in. So I think that at this point, obviously, it's very early, most of our negotiations happen on a quarterly basis, but our annuals are laid in exactly where we needed them to be for second quarter. And as I said, I think especially because of insurance and auto, we are seeing a lift beyond compared to last year. So I think at this point we remain optimistic that that step-up that we would normally see in the second quarter looks to be real.

And then can you give us any color on the progress of the radio station sale, maybe conversations you're having, valuation, timing and [if you may give us a sense as] perhaps our thoughts about what you could sell it for maybe too low?

Yes, I mean -- Marci it's Adam. I guess I'd say right now, we're in the midst of the process. It looks really good. We're very pleased with what we think the result is going to be. I suspect we'll have more to share with you within the next 2 months.

And then Adam, is it fair to say that you're prioritizing your use of cash when it comes to M&A more on the local side than on the national side at this point of?

Yes, absolutely. I think right now we're in a moment in time where we think there is an opportunity for us to strengthen our local media portfolio. That may take capital, it may not take capital. I think earlier the question about what our net leverage ratio would be at the end of the year was a tough one to answer because we've got the cash set aside right now that we think we might need in order for us to strengthen that local media portfolio. And so that's really where our priority is.

And then the last one from me is on the dividend. How did the board, I guess, come to decide on the size, is it yield, is it percent of cash flow and how should we think about the progression from here in terms of potential increases?

Marci, it's Lisa. We [cite] that it was about 1.3, 1.4 yield, which we thought was a pretty decent initiation. It's been 10 years since we've had a dividend. I think from the perspective of the board it's based on our strategy, based on the future that we have laid out. The payout ratio really give us flexibility to grow the dividend over time, maintaining our ability to be opportunistic with TV M&A and share repurchases.

(Operator Instructions) Our next question will come from Davis Hebert with Wells Fargo.

Just a couple of balance sheet questions. You mentioned 3.5x being the 2-year average leverage and just want to confirm. Is that net of cash and does that include -- still include the radio cash flow?

Yes, it does.

Okay. And then if you sell radio, would you be required to pay down bank debt?

Actually, we're obviously pretty comfortable with where the leverage is today. Our debt agreements do require us to use the proceeds from radio to pay down debt if those proceeds are reinvested within a specific period of time, but we intend as Adam said earlier through buy-sell-swap we really intend to use those proceeds.

Okay. And then I think when you announced the Katz acquisition you had expected the leverage to be at 2.5x by the end of the year, I think based on the same 2-year average, and is that still the expectation?

I think I just answered that question a few moments ago. I think with the cash that we have on hand, the cash that will build throughout the year and the sale of radio we really think that it's going to come down nicely throughout 2018.

Our next question that will come from Barry Lucas, Gabelli & Company.

Brian, [I was hoping to get a] little bit more color on the M&A situation and granting that we're barely 2 months into the year, a lot of people have talked about swaps in trades. And I'm just wondering what the delay is if there is a delay. And does the fact that the Tribune-Sinclair [deal was hanging fire is] that an impediment to getting these deals done?

Barry, it's Brian. I don't think their deal had anything to do with what's going on with everybody else. A lot of this had to do with just waiting to see what the rulings are going to be from the FCC, would this going to be stayed in court, and these are complicated. And so there's a lot of work, a lot of companies are talking, I'm sure they're talking beyond just us, but there is a lot of activity in the space going on. So I don't think there is anything to read into that anything is keeping deals from getting done other than these rules have changed quickly and as a result of that I think people are moving at an appropriate pace to work through that and find things that are going to make sense to improve their companies.

Can I ask one on the content side? You said Pickler & Ben have commitments for 100 markets. What kind of audience reach would that equate to and what do you need for that to be a breakout in terms of getting to profitability?

Well look, I don't want to mention a reach because we're not done. I think by the time we reach season 2 this number is going to look a lot better than 100. 100 is just a stepping stone on the path to where we want to be. I mean, certainly our expectation is that we're at 70%, 80% of the country by the time season 2 starts. And beyond that that hopefully season 3 and 4 it's fully distributed and if we're lucky we get a hit on our hands. So it's certainly performing well in the markets that it's been on now for 5 months, it's growing ratings, had a lot of energy around the show. I think it's good family value, fun kind of forget-about-life type show and people seem to really need that and enjoy it right now.

At this time, there's no additional questions. Please continue.

Thanks, operator. To summarize, we're pleased with the progress we're making and are optimistic about the opportunities ahead. We are taking cost out of our business to improve profitability and cash flow while selling a non-strategic asset to optimize our portfolio. We are pursuing a clear M&A strategy to improve our television station portfolio and we are carrying out our mission to serve our communities with journalism and support our local economies with advertising. We're establishing a long-term growth engine by investing in and growing our National Media segment positioning us to attract lucrative general market advertising dollars. And we're returning cash to shareholders through our recently initiated dividend. Thanks so much for joining us today. Have a good week, everybody.

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