E W Scripps Co (SSP) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Scripps second quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to pass over to Ms. Carolyn Micheli, Vice President of Investor Relations. Please go ahead.

Thanks, Paul. Good morning, everyone, and thanks for joining us for a discussion of The E.W. Scripps Company's Second Quarter 2018 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. 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 there. A link to the replay will be up 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 is Controller and Treasurer, Doug Lyons. Now here's Adam.

Good morning, everybody. As you know, over the past year, we've laid out a comprehensive plan for Scripps to improve its short-term operating performance, while positioning itself well to create long-term value. Today, I'd like to give you an update on our progress with the plan and the tangible results we're realizing.

Before that, though, I'd like to touch briefly on 2 other topics: first, Scripps was honored recently with 3 prestigious National Edward R. Murrow Journalism awards, the most in one year in the company's history.

KMGH in Denver, WEWS in Cleveland and WFTV in Nashville, won National Murrows in the categories of Hard News, Sports and Excellence in Sound.

In addition, KNXV in Phoenix is a finalist for 2 national Emmy Awards. These are a nice testament to our continued focus on quality journalism and our commitment to being a company of mission, as well as to the high level of service Scripps provides to all of its audiences.

Now let's turn to our strong company-wide second quarter results.

In Local Media, we blew away the expectations for our political advertising revenue, as we saw competitive elections emerge in markets across our footprint. We also saw retransmission revenue beat our expectations as the number of over-the-top subscribers began making a meaningful impact.

In National Media, we saw robust revenue growth from all of our businesses, including the Katz networks, Newsy and Midroll. We were pleased to see the whole company contributing to beating expectations. And Lisa will talk more about the specifics in just a moment.

Turning now to the bigger picture. The momentum continues with our transformation strategies meaningful cost reductions, the pursuit of TV station swaps and acquisitions, the sale of our radio assets, growth in our national businesses and the reorganization of the company to focus on short-term operating improvement and long-term value creation.

Our corporate cost-cutting plans are well ahead of schedule, and we've been moving quickly to realize savings. Lisa will give you more detail on the progress to help you with your models for this year and next.

Our television station acquisition strategies continue to evolve as quickly as the regulatory landscape, seemingly changing on a near-daily basis.

We are positioning ourselves well to seize opportunity. We still believe in adding second big 4 stations where possible. And we also see the value in participating in a way that brings on additional scale.

My message ought to be clear enough. As we've said before, don't count Scripps out as a buyer. We're well ahead on our way to divesting of our radio station group. We have made announcements on the sale of 7 stations so far, including our largest station WTMJ AM in Milwaukee.

I'm pleased that the running total today stands at about $28 million, and we expect to make announcements soon on the remaining 27 radio stations.

The businesses in our National Media segment are growing quickly. Aside from Katz growth of more than 20%, the other national businesses were up 63%. This is the growth we expect, validating our continued investment in the long-term value we see ahead.

We've been pleased with the performance of the 4 Katz networks. These are the nation's leading multi-cash channels. Each serves more than 90% of U.S. households at a time when more consumers are turning to over-the-air broadcasting than in any moment in recent memory. And in fact, Katz is attracting network-sized audiences for its cadre of brand and direct response advertisers.

The year-to-date revenue growth at Midroll and Newsy is directly tied to the investments we're making in them. And just like scale adds value in local television businesses, we're focused on building scale in these fast-growing national brands.

Last year, we kicked off our plan with a company-wide restructuring effort in support of more effective and efficient operating philosophies.

Today, whether it be through this morning's earnings or through our strategies to deploy capital, you should have a good sense of this company's urgency. We are realizing the results of improved operating performance in our strong, stable local businesses and see significant growth and value creation ahead in our national businesses. This reorganization work as well as our cost cutting will help us toward our margin improvement targets for 2020, when we expect cash flow from operations to grow more than 40% over 2016 and margin improvement of about 400 basis points over 2018. And just a reminder, that those targets do not take into account any upside from TV station M&A.

As we move into the back half of the year, we see significant opportunity in the local broadcast industry. A dynamic political landscape, continued growth in over-the-top households, the promise of automated advertising to drive greater national dollars into our local stations, and of course, the potential for M&A.

Today, because of the foundation we're building with our transformation plan, Scripps is poised to capitalize on all of these opportunities.

Now here is CFO, Lisa Knutson.

Good morning, everyone. We are pleased to be presenting strong financial results across both segments in the second quarter as well as improvements in our short-term operating performance.

I'll start this morning with our second quarter highlights, then discuss our cash on hand and some color on CapEx.

See today's press release for second quarter historical tables that have been adjusted to our new segment reporting.

In our Local Media division, second quarter revenue was up nearly 6% compared to the second quarter of last year. That includes 3.4% growth in broadcast time sales, driven by higher political advertising dollars.

Our political advertising revenue for the quarter was nearly $15 million, which is more than twice the amount we received in the second quarter of the last midterm election in 2014.

Our retransmission revenue for Q2 also exceeded our expectations. We saw another jump in our subscriber base on over-the-top television platform, which drove a 12% increase in our retrans revenue compared to the 10% in our guidance. Brian will provide more color on our political performance and outlook for the third quarter and give commentary on our pay TV sub-count.

Expenses for Local Media were up less than 5%, mostly driven by higher network programming fees.

Turning to the National Media division, and just a reminder, it includes the results of the Katz broadcast networks; our national news network, Newsy; and our podcast businesses, Midroll and Stitcher, as well as a few other businesses with national reach.

Second quarter revenue for National Media was more than $68 million and that includes $47 million from the Katz networks, $10 million from Midroll, $6 million from Newsy. And of course, I'd like to point out the division revenue was a night feed of our guidance of low to mid-$60 million range.

Division expenses were $66 million. The increase over Q2 of 2017 was primarily driven by the acquisition of Katz networks completed in the fourth quarter of last year.

Second quarter segment profit was $2 million for the National Media marked its third consecutive quarter of profitability.

Turning to our ongoing corporate restructuring, we incurred a little over $2 million of cost in the second quarter and about $6 million year-to-date. We expect modest charges for the rest of this year; the largest were in the first half of the year.

And regarding our restructuring, I'm pleased to say that we're ahead of schedule on realizing our planned cost savings. We had said we expected to realize $10 million of savings this year and additional $20 million in 2019. We are now expecting $20 million of savings this year and $10 million next year to reach our plan of $30 million in annualized cost savings by the end of 2019.

For the second quarter, income from continuing operations was $8.7 million or $0.10 per share, including the impact of restructuring charges.

On June 30, our cash totaled $126 million, and net debt was $567 million. We are on track to bring our leverage below 3x by year-end. And of course, this is in the absence of any M&A.

On June 25, we made dividend payments totaling $4 million. Our board's initiation of the dividend last winter is part of our continued commitment to returning capital to shareholders.

Finally, in the second quarter, we again had capital expenditures related to the FCC repacking process. Year-to-date, about $10 million of our $26 million in CapEx is repacked cost. We expect these costs to be reimbursed fully by the federal government.

Now here's Brian Lawlor to discuss our Local Media results.

Thanks, Lisa. Good morning, everybody.

First, I'll start with our growth in political time sales, then the outlook for this political advertising year, our rising retransmission revenue, driven by our growing OTT viewer base, an update on Pickler & Ben, and then finally some growth at the Katz networks.

On the Local Media advertising front, we saw a healthy 3.4% increase over the second quarter of 2017 in our local, national and political advertising lines.

Our $14.9 million of political advertising was the big driver of that growth. And as we've said often, we'll take that high-margin money anytime. The level of political ad revenue for Q2 was about twice what we told you we expected back in May, which was consistent with the $7 million pro forma revenue we did in the second quarter of 2014.

We saw strong political spending in our 3 Florida markets due to the U.S. Senate race there. In San Diego, because of 2 highly competitive congressional races. And then Nashville because of a local special election, the U.S. Senate race and a competitive governor's race.

We also have active primaries in Oklahoma, Indiana and Ohio as well as early third quarter primary spending in Florida, Phoenix, Las Vegas and Kansas City.

Based on our second quarter results, we think we have the opportunity to exceed our third quarter 2014 political ad revenue of $21 million by more than 20% in the third quarter.

In addition to some political displacement, our core advertising in the second quarter was challenged by the loss of one NBA Finals game compared to 2017. The Cleveland Cavaliers have made the NBA Finals in each of the past 4 years, going 7 full games in 2016. Since then, a couple of million dollars have been taken out of our core revenue in each of these past 2 years as they played fewer finals games.

Unfortunately, with LeBron James leaving, it now looks like the Cavs championships could be done for a while. It's been a heck of a nice run for us. But we now have become big Piston, Sun, Nuggets and Pacers fans, as we hope one of them can become -- begin an equally strong play of push.

Among our core key categories, automotive showed declines, similar to last 2 quarters. While the other 2 of our top 3 categories, services and retail, once again showed year-to-year growth.

Services and retail are important categories because they speak to how people are spending their discretionary income and to the health of our local economies.

In addition to our political ad revenue results, we also have good news on our retrans revenue. We had told you last fall that the growth in the over-the-top subscribers were coming, and revenue from those growing households is now flowing in.

Our subscriber numbers are current as of March, and at that time, we were at about 0.5 million OTT subscribers. Including these subscribers, our total pay TV sub-count has remained steady from last summer through this March 2018.

We had guided to about 10% increase in retrans revenue, and our actual results of up 12% reflect the impact of these new OTT subscribers.

Turning to original programming initiatives, we have good news here as well. Our daytime lifestyle show starring Kellie Pickler and Ben Aaron, will launch its second season this September in about 170 markets across the U.S.

Pickler and Ben joins 2 of our other original programs, RightThisMinute, which is in about 95% of the country. And The List, which enters its seventh season this fall. These successful shows help us provide our viewers with quality, family-friendly programming. All of these shows have gained tremendous traction with our viewers.

And my last piece of good news is on the Katz networks. As you'll remember, although Katz results are in National Media, the business reports to me.

When we closed on the 4 multi-Katz networks last year, we told you we expected them to produce high-teens revenue growth. So we were very pleased to see their second quarter revenue up 21% on a pro forma basis. The strategies for their success are straightforward, growing the audiences they're delivering to advertisers, increasing advertising rates as they attract more general market advertising brands and expanding their national distribution and reach.

The Katz team knows how to deliver, and we've been very pleased with their performance.

And now, here's Laura Tomlin to discuss the rest of the National Media division performance.

Thanks, Brian. Good morning, everyone. In addition to the strong performance we've seen in Katz, we had exceptional results from the other businesses in the division, including more than 60% organic revenue growth.

Our revenue performance validates the work we are doing to position these businesses for the greatest growth and profitability.

Let's start with Newsy. During the second quarter, Newsy continued its strong traction with viewers on over-the-top television services. Newsy is almost fully distributed on OTT, and it's a natural fit there because of its appeal to a younger audience, and really anyone who's thinking context and perspective instead of opinion and argument. About 85% of Newsy's second quarter revenue came from these OTT services, driving its nearly 100% growth.

Newsy is also ramping up its distribution on cable and satellite, and we now have signed contracts covering $38 million subscribers. We are nearing our goal of 40 million subscribers by the end of this year and are just beginning to capture the revenue opportunity from cable, as Newsy's programming starts to go live on these platforms.

Programming partnerships with prestigious media organizations, such as The New York Times, allow us to produce high-quality journalism that has resonance and impact with our audience and without the typical cable news cost structures.

Turning to podcasting. We have been thrilled with Midroll and Stitcher's revenue performance, growing 50% year-to-date.

As the podcast marketplace continues to grow, others are catching on to what we already knew: that consumer engagement with podcast is accelerating and advertisers are following.

Fortunately, Midroll is well established with advertisers and is position to grow aggressively along with the industry. Several of our blue-chip advertisers, including Procter & Gamble and Coca-Cola placed new ad buys with us in the second quarter.

We are seeing an influx of new brands as well a strong renewal activity. In July, we expanded our content catalog with the Freakonomics radio podcast, which has a large loyal audience.

Freakonomics is getting more than 12 million downloads per month and consistently ranks as a top-performing show. This show also offers content that is only available to our premium subscribers. The subscription business is growing rapidly, and we continue to learn what content appeals to our listeners and deliver that content to them. Shows like Marvel's Wolverine: The Long Night are receiving critical acclaim and attracting large audiences. And are certainly driving subscriptions to Stitcher Premium.

But the fact is, it's not just a few shows driving growth in our premium business; it's dozens of shows. Three years ago, we were serving up about 20 hours of premium content. Today, a podcast listener can find about 20,000 hours of ad-free content for which they are willing to pay us about $5 a month.

Midroll and Stitcher are a powerful combination that allow us to grow our leadership position in the podcast industry. Katz, Newsy and Midroll are all executing their plans and growing revenue with an expanding media ecosystems, multi-casting, over the top and podcasting. These businesses are capturing greater market share and are in turn fueling the divisions margin expansion. The year-to-date financial results for all 3 show solid progress toward our goals.

And now, operator, we are ready for questions.

(Operator Instructions) Our first question will come from Curry Baker with Guggenheim Securities.

On your 3Q political guidance, can you say if your bias is more towards the upside of 20-plus percent over the $21 million pro forma number for 3Q '14? It seems like based on your year-to-date numbers for political, it's pacing pretty hot. Is there also anything that you guys can share at this point as to your fourth quarter expectations for political? And can you add any color as to what you've seen to date as to where the political strength is coming from in 3Q? Particular states, races, issue, money, all of the above?

Curry, it's Brian. You have got a lot there. So obviously, we had a really good quarter in second quarter with our political double what it had been 4 years ago, which has led us to put out a pretty optimistic number of plus 20% for third. Obviously, we haven't yet forecasted fourth. I think you're right. Is there a chance to go over 20% and get some run? Absolutely. At the end of the day, it really is going to depend on how these primaries end up. We still have got a couple of big primaries in the third quarter. And then most importantly, what stays competitive. So all the way through fourth, if our races -- if our races can stay within a couple of points of each other, I think we have real good opportunity for a very strong year. As we saw in 2016 now, if some races start to move between 5 or 6 points in any given state, that money moves, the outside money moves to other markets where things can remain competitive. Right now, we're really well positioned. We have 12 Senate races. And as we look at it, about 7 of them, we think are really competitive. Arizona and Tennessee are open seats. So those are hotly contested. And then, Nelson's seat is up in Florida; McCaskill's seat is up in Missouri; Donnelly in Indiana; Heller in Nevada. All of those are very active as well as Sherrod Brown's seat in Ohio. So 7 very active races right now for the Senate. And if they stay close, we think they'll be well-funded all the way through. But there's always the chance that one of these 2 start to move 5, 6, 7 points difference. There's enough across the country that, that money then moves to closer, more competitive races. On the governors front, we have 16 races, really 7 of them again are very active at this point. 5 of them are just toss-ups. 4 of them, the Florida, Michigan, Nevada and Ohio, there's no incumbents, so they're open. And then the Iowa race with Reynolds is a very competitive. We also have an open seat in Colorado, and Scott Walker's seat in Wisconsin is going to be very competitive. So in the Senate and governor, we have 7 really competitive races in each. And then, just handicapping the House, there's currently, last I checked, a little over 100 congressional districts considered competitive. I think that'll shrink, I don't know, 65 to 75 somewhere. But even if it shrinks to that, that's double the last 2 cycles. So what we're seeing right now is the NRCC, the DCCC, they're well-funded, they're laying in base buys toward the election kind of early fourth quarter. And we're also seeing a high level of new third-party super packs come in. So I think we're expecting those final battleground districts to be identified by late September, and then I think we'll have a really good feel at this point of that 100 races that are really competitive, we're in over 20 of them. So I think our footprint is really good. But at the end of the day, I think our biggest markets, as I just look across with all this activity going on, I think Detroit, Las Vegas, Tampa and West Palm will probably be our big 4 political markets. Tampa really looks -- Tampa and Las Vegas look to be very active all the way through the end. So I know you asked a lot. I think I gave you a lot. You get everything you need?

I think so. I appreciate it.

Our question from John Janedis with Jefferies.

Adam, maybe a couple for you. First, you alluded to some of the uncertainty for the industry from rather a regulatory or business practice perspective to some extent, I guess. As a potential buyer or swapper, does it impact your strategy or time line? And have sellers changed their mindsets as well?

Look, I don't think sellers have changed their mindsets. We've obviously seen a couple of deals announced. The potential for others, I think, have come to the forefront. Obviously, everybody is waiting to find out what happens with the Sinclair Tribune deal to see sort of how that affects the overall ownership landscape. At the same time, we've had this backdrop of some decisions by the FCC as well as the courts since we last talked on an earnings call. And so we've tracked very closely, both the regulatory environment as well as sort of the M&A environment from the perspective of the number of players and which players are out there and potentially available. And we continue, I think we've said this management team has said for a long-term, we see the potential value in adding scale to our portfolio, and for the right opportunity, I think we'd be very interested.

Okay, thanks. And then maybe separately, I think you were early in terms of having a positive view on OTT contribution. And I'm wondering anecdotally, if you can give us some color on what you're seeing from the subs, either there's a region of focus or are they new to the multichannel universe? And I guess, do you think sub-losses can remain at this new level? And then also, can you remind us of the OTT sub-number from the December quarter?

Yes. Lisa can give you the numbers from December.

About 400,000. 300,000, 350,000.

350,000.

Yes, 350,000 the last time we talked. Just, I want Brian to give a little bit more color. The only thing I would say is we'll be tracking closely, as I'm sure you will, the MVPD's announcement. So I think Dish reported this morning, they made it seems like we're seeing a stabilization on the overall MVPD side. There will continue to be, I'm sure, some churn. But what we're seeing that Brian can talk to you about on the OTT side, I think, provides us a lot of optimism overall about the pay TV ecosystem.

John, it's Brian. Going back to really when this all started at the beginning of 2017, at the end of 2016 till now, our total net subs are only down about 2%. So I think MVPDs subs are probably down about 5%, but we've been able to convert, as we said, about 500,000 of these subs now to OTT subs. I think it's really important, as I said in the script, that since last summer, all the way through now, we haven't seen any net decline. So anything -- anyone that's transitioned from an MVPD, we now see connecting to a virtual OTT product. So I think we're seeing stability. It doesn't mean that we won't see some sort of slow decline, but since the beginning of this process 1.5 years ago, over 60% of the people who have cut the cord have transitioned to OTT subs. And we see that percentage increasing over time to -- I think now more and more people are getting comfortable with that product and they are choosing to leave the MPVDs but move right over. Again, I would just remind you that the net economics are as consistent for us in the OTT space as they are in the MVPD space.

That's helpful. So Brian, do you then assume going forward that this is sort of a new sublevel run rate of close to flattish versus down a bit?

Look, I think it remains to be seen. What I don't think is there's going to be a dramatic decline that isn't going to convert over, as I said. In the last 9 months, we've seen really 100% conversion. If you look at the whole thing, it's over 60%. I don't know, I guess, I'm thinking moving forward somewhere in the 75%, 85% conversion rate, it seems to be kind of where the trend is now.

We have a question from Kyle Evans with Stephens.

Brian, I know this is a tough question. But can you take a stab at what you think the displacement was in the 2Q numbers on local core? And then kind of looking out, what do you expect out of this midterm cycle?

We did have a couple of very active primaries in Q2. So we put that number somewhere between 25% and 30% I think it'll grow as we move through the cycle probably, move more toward 40% going forward. Even in some markets, it'll surpass 50%. But I think, as I look to Q2 and model things out and look to where the pressure was from the markets, I put it in the 25% to 30% range.

What's your outlook for auto for the balance of the year?

Auto looked a lot in second quarter like it had for the 2 quarters before, down mid-teens. We actually are seeing third quarter better than that. So look, I don't think it's going to get flat or grow through the year, especially with the displacement. I think it's going to be a challenge. But July was better than the last couple of months. before that, and August was pretty good too. So I think we're seeing a little bit of improvement. A lot of our decline really had to do with, well, really one company: Dodge Jeep Chrysler. About 70% of our decline, 60% to 70%, really, was attributed to their shift in brand strategy. I think, overall, as I'm look at the auto sector, year-to-date, car sales are up about 2%. June was good, up 5%. So our spacings, it's about 17.5%. So this sector seems to be okay. I think some of the brand shifts and maybe some strategy shifts relative to staying away from where they knew they would have some pressure of clearing good schedules on the auto are having an impact on the political or having an impact. So I think the fact that we're seeing some improvement maybe things are settling out, but because of the displacement we'll have a hard time getting good clearance of a bunch of the market. So I think we'll see down for the rest of the year. But we're starting to work with these big brands now to get a better feel for what their strategy is going to be for next year, and I'm hoping to look a lot better.

Great. And one last one. Impressive sequential growth in Katz. And you broke -- you listed kind of audience growth, rising ad rates and better distribution or reach across the country. Can you kind of unpack those? And I know that's hard to do, but it's growing better than 20%, and it looks like it's on track to become a quarter of revenue. So I want to dive in there. And maybe also seasonality in that business as well.

Yes, it's Brian again. I think they all work together. I don't really think that there is one thing that I can point to, Kyle, that says this is the reason for the growth. I think distribution is key. All 4 of the networks are now distributed in over 90% of U.S. households. It's just they've continue to renew partners on long-term contracts to sign (inaudible) through 2024 in the most recent quarter. Ratings are critical. And so we're seeing ratings growth that's significant double digits in many cases of their prime time viewing and their overall viewing of Q2 '18 versus Q2 '17. They're doing obviously very well in the up-fronts. They're wrapping up their cycle now, but I think once those numbers finalize, we'll have a good story for you. So I think you're seeing distribution, they're fully distributed, their ratings are going. And as a result of that, they're able to convert more of their clients to general market. They're able to push DR to hybrid DR. And so I think they've got a process here, and it all works together, and it's all having been very successful.

Kyle, I just wanted to point out one thing. I think you were trying to put all the pieces together for your modeling as you were looking -- asking me questions about core earlier. So I talked about what my displacement numbers look like. Also, keep in mind that our Cavs performance was down about $1.7 million, having 1 less game. So in 2017, we had 5 games. We did about $5.5 million. This year, we had 4 games, and we did $3.8 million. So if I look at that $1.7 million, I also take in that 25% to 30% displacement. I had core as I see it somewhere between down 1 to 2.

Question from Marci Ryvicker with Wells Fargo.

Just going back to core. Given the displacement is going to continue into Q3 and Q4 as political ramps up, should we expect that negative 6 to your stabilized negative 6 or go down a little bit each quarter?

Marci, it's Brian. Look, I don't know. I think it will change market to market. The markets where the pressure is, it'll probably be greater. Other markets where there's less pressure, probably won't have as much of a decline. At the end of the day, honestly, we just manage everything to the best of the opportunity. And I don't really worry about if something is a core dollar or a political dollar. I want to take the best dollars where we can maximize our opportunity. And obviously, that served us well in the quarter with total revenue being up 6. But there's spot -- the ad sales that we sell were up 3.5. And I think we'll be doing the same thing. I think we're well positioned to seize the opportunity on the political. And if those races stay hot, we will be taking advantage of those higher rates and the pressure there. But if they're soft, obviously, that will take advantage of the core. So we really balance out the 2. So I think I can't give you an exact answer because it's really going to depend on the political. If the political is hot, minus six will probably grow. If the political isn't, the core will improve.

Okay. And then going back to the OTT, the $500,000, where are the bulk of these subs coming from? Is it one virtual MVPD that you're getting the bulk of it? Or is it distributed throughout? Any color there would be helpful.

Yes, I think there's 3 or 4 that are gaining traction. You've got DirecTV Now that's doing well, and you've got YouTube TV.

Hulu.

Yes, Hulu is doing well. So there seems to be 3 or 4. And Sony. Those will probably be the 4 that are really distancing themselves from everybody else at this point.

And then the last question. I cannot remember if you've told us what you're going to use the cash for from the radio station sales.

Marci, it's Lisa. We've said in the past that our #1 priority is TV station M&A. And we believe that by year-end, I mean, barring any use of cash for TV M&A, our leverage will certainly decline by year-end. But that's really what we've earmarked our cash for.

We have a question from Dan Kurnos with Benchmark.

So a couple of questions here. Maybe, I guess, for Brian or anyone else who wants to jump in on this. Obviously, you're not going to see the major benefits of this with all of the displacement now. But you guys have talked pretty optimistically about the national programmatic initiative launch right over in the back half of this year. So can you just talk about what you're seeing there, what your expectations are, and how that has an impact on the numbers? And then, Adam, to ask sort of the M&A question in maybe a different way, obviously, we know that Cox is -- might be interested in selling. Are you willing to take a stab at a transformative deal if one makes sense for you? Or is it still -- is there kind of an upper bounds to leverage? And it's still really would be aggressive but maybe it'll make several 1s and 2s but nothing of that drastic of a nature?

Over the long history of this company, I think the company has been willing to always seek transformation in one way or another. And I would say that we feel no different today. So I'm -- you've known me now for several years. I'm not particularly an incrementalist and feel like if there's an opportunity to significantly add scale to our local stations portfolio, enhance the durability of our group, improve the margins and cash flow, we would absolutely take advantage of that in this window of opportunity that we see. Brian?

Dan, on your question of programmatic, and really I think what you're describing is the advanced automation and the automated buying. I think we've been one of the early adopters who have been talking about it for probably 2 years. I think we've been a good partner with many of these agencies as they begin to test and move into that space, and we had set up some early systems to be able to seamlessly execute that. Last year, I think we placed somewhere around $10 million through the automated platforms; much of that was partnering with agencies to test. I think we're now in a very good position to continue to advance that as more of the agencies we're talking about are continuing to work to transact their first buys through an automated platform, and we continue to believe that there's going to be a lot of momentum over the next 24 to 36 months, as these new systems are perfected. We think this is a really efficient way to interact with our stations, and we're hoping that overcomes some of the challenge of the manual process of buying local media that this can bring dollars back into our local marketplace.

Great. And then, if I can just ask one other OTT question but more related to the Newsy strategy. I -- Brian, I appreciate the color, obviously, on all the MVPD stuff or sort of the traditional OTT. Is it kind of the same channels that you're seeing a strength for Newsy? Or are there other channels that are more efficient at driving sub uptick or viewership of Newsy?

Dan, it's Laura. I think we certainly see a lot of the same uptick from a lot of those platforms. I would say that a good percentage of our audience right now comes from Roku. And that's one of the platforms that we benefit from really nicely right now.

We have a question from Michael Kupinski with NOBLE Capital.

I want to go back to Katz for a second. I was just wondering if the revenue growth was coming from maybe your more mature networks, or is it coming from the developing ones? In other words, what is the variance? Is it coming from the developing networks and is it gaining distribution there? Or just a conversion on the advertising side?

Mike, it's Brian. Look, we're seeing growth in -- all 4 networks are growing their revenue. Bounce is the one that is our most mature, and to this point, most successful. It has the best transition with general market advertisers. And as a result of that, add a little higher CPM because of the way that building -- that business is transacted. Our success in the upfront and scatter on that. It continues to drive Bounce. Grit has got a ton of traction. They've kind of adjusted the strategy to really be about Westerns, and our ratings were up double-digit over prior years. So both that and Escape are doing well. But quite frankly, the one that we launched most recently, Laff, which we just started rating a year ago. The ratings were up 50% year to year. Its distribution is at 93%. That one is gaining a lot of acceptance in general market. Now it has a lot of run room to go. But you're seeing a lot of growth in these -- in all 4 networks. But I think, while Bounce continues to really be the leader, all 3 of the others have traction, and Laff has a lot of traction.

Got it. And I know that when you purchased Katz, you indicated that what you thought the company would do in the first year in terms of revenues, $180 million, $30 million cash flow. Can you update us on what your thoughts are for Katz at this point?

Yes, I think we're on plan. So they're delivering on all expectations that we had.

Okay. And in terms of Midroll, at what point do you throttle back the level of investments of that company and return it to profitability? And I know that it's in the presentation, I think you mentioned about achieving goals for the business. But I'm not sure what those goals are. Can you kind of explain those?

Mike, it's Laura. Look, Midroll is performing really well. I mean, if you look at our growth, 35% over last year. We're in an industry that is growing immensely, and so we are going to continue to invest now to capture growth for the long term and really create value for the enterprise. So I will tell you that I don't see throttling back anytime soon. We do manage and track a lot of key performance indicators, like, how many people are listening on our Stitcher platform, how general market advertising is growing. We track CPM. So we do a lot of internal tracking of KPIs. If for some reason, those KPIs start to lag, then we would make it really -- we will make a decision and think about how much we might continue investing there. But there are no signs of that right now. And I think we're just full steam ahead on this -- with this business.

Got you. But in terms of like the benchmarks, what can we look for in terms of when there's the opportunity for you to throttle back? I mean, is it -- I know that you've been adding a significant amount of content and growing that. But are there certain benchmarks we can look for?

Yes, I mean, I think we track a lot of internal benchmarks that we don't share publicly. But I would tell you that there's -- I don't see any reason that we would throttle back right now. More and more listeners are coming into the space, more and more advertisers are placing buys in the medium. So there would be no reason to throttle back on something that can create great long-term value and significant growth.

Mike, let me just add. I mean, the term throttle back would be something we would employ if were not achieving the growth targets we're seeing. At this point, the industry is expected to grow to between $1 billion and $2 billion. Midroll is a leader in the industry. We're meeting all of our expectations on revenue growth. We continue to extract greater share of ear every quarter. And I can't imagine why we would want to throttle back in such a fast-growing industry. I would say that the best metric to track right now is revenue growth. And if you see us suddenly throttling back our investment, I think that's a good indication that we're not meeting our own expectations. So as Laura said, right now, full steam ahead because we see significant value. This business will cross into profitability at the point where it's -- where the revenue is eclipsing the expense, not where we start cutting our way to profitability.

Question from Craig Huber with Huber Research Partners.

I have few questions. I think -- let's get started with your goal here is like $30 million of annualized costs that come out of this system here. Can you just give us some extra color where that's coming from; I realize most of this point and a labor force. But what sort of departments and stuff? Or is that just got across the board, the first question?

Craig, it's Lisa. So just to be clear, $30 million of annualized savings over the next 2 years. And in my prepared remarks, $20 million of that will now be realized in 2018 and $10 million in 2019 to realize the full $30 million. A vast majority of the cost savings are recognized in the segment, and the remainder at corporate. So that gives you a sense of where the dollars are coming from. As you said a majority of the cost savings is coming from employee costs and, really, it's about centralizing, hubbing, finding better ways of being more efficient. And then in some cases, just doing more with less people. So hopefully, that answers your question. And I'd be happy to give you more color if you need it.

Well, I have you all, so appreciate that. The uptick in the pension expense, I know it's a small number here. But is that just a one quarter blip? Or is it -- should we expect that in the fourth quarter as well?

One quarter blip, really, just for second quarter.

Okay. And then you've talked about your appetite here to buy more TV stations, and as I sort of look at your company's debt leverage, it looks to be roughly about [4 terms] of leverage taking it to your average EBITDA estimates, say. Your company, historically, has been very conservative of this balance sheet, I think in terms of debt ratio. I know it's sort of in the upper end where it's been historically and stuff. If you are going to go on make a move here to buy more TV stations, where do you start getting not comfortable in terms of the debt ratio? I mean, would you be comfortable with 5x, 5.5x, 6x or is that way too high than that in your mind?

Yes, I guess, I would answer in this way. First of all, there's all sorts of creative ways in order to affect the transaction. The second thing I would say is deploying capital into businesses with a clear path to delever is a primary concern for us. So I think that without sort of changing our ethos in being a holder of a conservative balance sheet, I would say we think that there is opportunity ahead without changing the ethos and while maintaining financial flexibility.

And then, Brian, you talked about auto. Just remind us what auto did in the first quarter. It sounds like in the third quarter, you don't think it's going to get to flat on a year-over-year basis. You'd blame most of it on, I guess, on Chrysler, but do you have an early read on the fourth quarter or is that just too far out your mind?

Yes, fourth quarter is too far out, Craig. Did you ask...

What was it in the first quarter? What was that rate of decline? If I remember correctly, I think it was less than what we saw in the quarter.

No, it was mid-teens. Second quarter and first quarter were really similar.

Okay. And then, Brian, when you look at your, sort of, guidance here for the third quarter and you just kind of strip out political, your retrans outlook and stuff. It looks like the core advertising number flat, they'll be down 4% or so in the third quarter year-over-year. Is that what you're sort of thinking?

No, it kinds of...

(inaudible) kind of too optimistic, but I'm just asking.

Yes. No, honestly, it's similar to the question Marci asked. I mean, I'm really not thinking. We are trying to maximize our revenue, whether it's through political or through core. And we're going to have a lot of both to be able to manage. So honestly, I'm not managing to a core number. I'm managing to maximizing revenue, and I think the health of political and the momentum around political will be the factor that dictates core. There's plenty of core business to be had there. The other question is how much of it can we afford to take.

And my last question, I apologize for this, Brian. What's your thoughts here on this court case on the collusion with several of your peers out there for local TV advertising? Do you think it has merit? I mean, you've been in this industry for a long time? Does it happen out there? Does this thing have merit? What can you tell us and your thoughts on this?

Yes, look, we're not involved and -- as such. I don't really have an opinion on it.

A question from Davis Hebert with Wells Fargo.

Just a quick one for me. You said, Lisa, the leverage would be going below 3x on the last 8 quarter basis by the end of the year. Could you give us the actual number for second quarter based on that same ratio?

I'm sorry, can you repeat the question, Davis?

Yes, on the last 8 quarter to your average basis, I'm just looking for leverage as it stands today based on second quarter numbers.

Oh, I'm sorry, yes. It was about 3.7 turns.

3.7 turns on a net basis?

Yes.

And at this time, there are no further questions in queue.

Thanks, operator. So to summarize, the results we reported today illustrate the impact of our plan to transform the business, improving our short-term performance and positioning the company for long-term growth. We're well ahead of plan with our cost-cutting initiatives. We continue to focus on ways to grow and strengthen our portfolio through M&A, and we're significantly growing our National Media brands. Our aggressive plan will drive meaningful margin and cash flow improvement, and we're confident in our ability to execute. Thanks so much for joining us today. Have a great day.

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