Q3 2019 Earnings Call
Ladies and gentlemen, good day and thank you all for joining this Sinclair broadcast group third quarter 2019 earnings Conference call. All telephone lines are presently into listen only mode and instructions on how to submit a question will be shared after today's prepared remarks, you should require operator assistance during today's meeting simply press star in zero on your telephone keypad and an operator.
Well if this year as a reminder, today's session is being recorded and now for opening remarks and introductions I'm pleased to turn the floor over to your host senior Vice President and CFO Lucy Rutishauser. Please go ahead.
Thank you operator.
Participating on the call with me today, our Chris roughly President and CEO , Steve marks Executive Vice President and Chief operating officer with our television group.
Oh Boy Sports Senior Vice President Chief revenue Officer.
Jeff scrolling precedent pop sportsmen.
Before we begin villager Mcentire will make our forward looking statement displays.
Certain matters discussed on this call may include forward looking statements regarding among other things future operating results such statements are subject to a number of risks and uncertainties actual results in the future could differ from those described in the forward looking statements as a result of various important factors such factors have been set forth in the company's most recent reports as filed with the FCC.
C and included in our third quarter earnings release. It company undertakes no obligation to update these forward looking statement. The company uses its website as a key source a company information, which can be accessed at www dot SBG <unk> not in accordance with regulation FD. This call is being made available to the public a webcast replay will be available on our website.
And we'll remain available until our next quarterly earnings release included on the call will be a discussion of non-GAAP financial measures, specifically television PCR EBITDA free cash flow and leverage. These metrics are not meant to replace GAAP measurements that are provided a supplemental detail to assist the public and their analysis evaluation of our company.
A reconciliation of non-GAAP financial measures to GAAP measures in our financial statements is provided on our website <unk> under investors non-GAAP measures are certainly will now walk you through our operating highlights.
Good morning, everyone and welcome to our third quarter earnings call. The first since our August closing of the Fox Regional Sports networks business. We are now industry leaders in local news and local sports to at the most desired live content genres, while we focus on integrating the our sends our broadcast segment, which we now referred to as local news had a spectacular quarter.
Beating our guidance ranges on revenue EBITDA and free cash flow Lucy is going to walk you through those results in detail, but before I turn it over to her I would like to talk about the opportunities for the 16 billion dollar diversified media company that we're operating today.
The addition of their regional sports networks, we have deepened our commitment to local content, becoming the leading premium life local sports and news company in the nation a path we embarked on almost five years ago. In fact over 75% <unk> revenue is now generated from sports and news content. We believe the addition of the our sands.
Represents our presents advertising production programming and cross promotional opportunities as well as new revenue streams associated with legalize sports betting.
On a total company basis, we now derive about 70% of our revenues from distribution, which are more stable versus AD revenues due to the long term nature of the contracts in this regard our distribution team has been busy securing agreements for the TV stations tennis channel marquee, yes, and the our stands with such M. B P. D says.
18, T., Directv charter Cox and Mediacom.
We appreciate our distribution partners and look forward to delivering to them and their subscribers best in class local content.
We continue to have discussions with dish for the carriage of the our sense, whose contract expired in late July .
We can't predict whether or when we will get a carriage deal done with them for the our sense, we've removed dish affiliate fees from our forecast until either better sense of timing in terms of any such resolution.
I would like to point out that as part of the Arsone acquisition. There wasn't approximately 400 million dollar purchase price reduction related to potentially protracted negotiations with dish based on the length of the blackout. We don't expect that we will need to repay any of the adjustment out to Disney.
[noise] much has been written about subscriber churn of late which has only been made worse by satellite companies recent blackouts. It varies broadcaster stations and the our sense [laughter] I do want to remind people that because of the reporting like we do not yet know the other side of the churn story, which is where subscribers migrated to we should begin receiving those reports this.
Quarter and expect them to reflect subscriber churn improvement when we report our fourth quarter.
Our third quarter advertising revenue a core advertising revenue was better than expected and we're expecting pro forma fourth quarter to be up even more reflecting a positive core growth story for the year [laughter]. Looking ahead data continues to point to 2020 as the biggest political AD spending year on record recent reports to reflect that.
More funds have been raised by both parties at this point in time that in both 2015 and 2017.
Our pro forma total free cash flow guidance for 2019 is expected to be 1.038 billion to 1.065 billion pro forma 2018, 2019 free cash flow is expected to be approximately $14 per share.
Excluding dish for the rest of 2019 and all of 2020, our 2019 2020 free cash flow guidance is now $11.50 to $12.50 per share.
We continue to evaluate our strong liquidity positions for both segments and are expected free cash flow generation with an eye to improving our overall cost of capital with that in mine were contemplating redeeming a portion of the $1 billion of Diamond Sports Holdings preferred which is callable at par for 90 day window. Beginning later this month the preferred.
Has an l. plus 50 cash dividend, which would increase our free cash flow. If we partially redeemed you had with excess.
Cash on hand, now, let me turn it over to Lucy to discuss our financial performance. Thank you Chris I'm, just a to correct. One thing I did perform <unk> L plus seven cents, Oh, sorry, a cash dividend.
So as already mentioned, we achieved this quarter in all key financial metrics.
But before I go into detail about eating at each metric. Please keep in mind that street consensus estimates or not comparable to either our third quarter report it resolved or our fourth quarter guidance.
Because U.S. and acquisition closed in late August some analysts contributed estimates, including New York I sense, and some did not which has resulted in an unusable consensus.
We've also received questions from the Diamond bondholders on held to receive their financial statements.
As stated in the Indentures, we have 75 days to provide the financials, we will be putting them on a secure web site, which the bondholders will be able to access via a link from our public website SPG I Dot net we will also provide the trustee when you are oh.
Now turning to the results.
Media revenues for the third quarter for 1.070 billion, an increase of 47% were 340 million higher than third quarter 2018.
These results include a partial quarter I'll be your sense.
Excluding me or a sentence media revenues were 719 million, but you 16 million above the high end of our guidance range.
Included in our third quarter media revenues are 679 million of distribution revenues, 105% increase over the prior year period.
Excluding the Russian distribution revenues were 373 million, which is 7 million above the high end of our guidance range.
Based on current contract expectations, we continue to expect net distribution revenue, excluding the Orissa tends to grow low double digit growth percentage for this year.
[noise] total company fourth quarter core advertising is expected to be up mid to high single digit percent.
Hello, political revenues were 6 million into third quarter, we are starting to see a pick up in the fourth quarter.
It's an expectation of 15 to 20 million in political.
For the here, we expect 2019 to finish in the 26 to 31 million dollar range.
And as previously stated we expect 2020 to be our biggest political year on record.
[laughter], our digital businesses in the third quarter continued to overachieve posting over 30% revenue growth.
For fourth quarter, we expect we are expecting total company total company media revenues.
To be approximately 1.565 billion to 1.587 billion up 84% to 87% is compared to fourth quarter 2018.
[laughter]. This assumes 15 to 20 million a political revenues versus 150 million last year.
And includes 1.1 billion in distribution versus 334 million last year.
Pro forma for your media revenues are expected to be only 6.5 billion as compared to 6.7 billion in 2018, again, which was a political.
[laughter] media operating expenses in the third quarter to find this media programming and production and media SGN They expect.
Were 745 million up 62% from third quarter last year, primarily the result of yours and acquisition for part of the corner and higher programming costs.
Excluding the our sense media expenses were 492 million, which is 8 million better than the low end of our guidance range due to lower gionee and sales expense.
For the full year total company media expenses are expected to be approximately 2.8 billion versus 2018 media expenses of 1.8 billion a year over year increase is due primarily to the Orissa Act on arson acquisition, a part of the year.
And higher programming fees in compensation.
Pro forma for your media expenses are expected to be 4.3 billion.
As compared to 4 billion in 2018.
Due to higher network in sports programming fees higher cost of sales on our digital revenue growth and miscellaneous DNA.
Corporate overhead in the corridor, which is 237 million, which includes 94 million in nonrecurring transaction fees legal and regulatory.
And an additional $120 million reserve believed to be at this time, a reasonable estimate of the potential loss exposure related to the Tribune litigation I.
I note that that litigation remains fluid and the reserves remain subject to material change.
[noise], excluding those amounts and stock based compensation corporate overhead was in line with prior guidance.
For the year corporate overhead is expected to be 80 million, excluding 250 million a nonrecurring transaction, he leaves litigation and regulatory and 19 million in stock based compensation.
Non media EBITDA was approximately 13 million into corridor see 11 million better than our prior guidance on timing of one media expenses, which will occur next year and higher sales at our Internet company.
EBITDA in the third quarter, including the 200, excluding the 214 million a nonrecurring costs.
76 million net programming cost was 374 million.
Excluding the R.S.N., we beat our EBITDA guidance.
About $49 million.
Total company, even John the fourth quarter adjusted for 6 million and nonrecurring cost is expected to be approximately 434 to 455 million.
I do want to point out that the RFS and traditionally experience their lowest EBIT job and those the first and fourth quarters due to advertising seasonality and contractual timing of the payments to the cheap.
[noise] pro forma for your EBITDA is expected to be between 2.1 billion and 2.2 billion.
Versus 2018 pro forma EBITDA of 2.6 billion.
The decrease is driven primarily by the reduced political revenue.
And lower carriage fees. If you are I sense due to a step down in NBP de agreement that we assumed at closing and removing dish from the last five months 2009 cheap.
<unk> diluted loss per share on 93 million weighted average common shares was 64 cents in the corner.
We're $1.15 cents <unk> income per share when adjusted for the nonrecurring transaction fee.
Excluding the 214 million a nonrecurring expenses, we generated 203 million a free cash flow into corridor.
Excluding the R.S. and free cash flow was 125 million exceeding the high end to prior guidance by 43 million.
Total company free cash flow in the fourth corridor is expected to be approximately 177 to 203 million.
And 578 to 603 million for the full year.
As Chris mentioned, we are increasing our average 2018 2019 pro forma expected free cash flow per share, including the origin.
To approximately $14 per share former prior guide of $12 per share.
Our 2019 2020 average pro forma free cash flow is expected to be $11 in 50 cents to $12 in 50 cents per share versus a prior guide $13 and that primarily reflects the dish blackout offset impart by lower end.
Interest expense on favorable financing terms and better to Dalston in 19 performance on the legacy business.
Turning to the balance sheet and cash flow highlights capital expenditures in the third quarter were 35 million, including 16 million for the repack.
For the full year in 2019 total cap that before the repack and including the Rs and is expected to be 95 to 100 million.
And for 2019, Repacked Capex is expected to be 67 million.
At September Thirtyth total debt was 12, and a half billion and cash was 1.4 billion.
Total net leverage do the holding company at quarter end was 4.8 times.
S. T G first lien indebtedness ratio on a trailing eight quarters was 2.7 times on a covenant of four and a half.
And 4.6 times on a total net leverage basis.
Diamonds first lien indebtedness ratio on a trailing four quarters was 3.7 times.
And 4.9 times on a total net leverage basis.
Absent the dish Black <unk> total net leverage for diamond would've been about 4.7 times.
I do want to remind everyone of our near term target leverage for the Sinclair Division applied raised to low four times.
And for Diamond of low to mid four times, and so with that I would like to open it all your questions.
Thank you and through our phone audience joining today, if you would like to ask your question over your phone line. Please press Star then one on your telephone keypad.
From a reminder to press Star then one prior to the opening of the Q1.
We signaled to be sure. That's your signal could reach our equipment. Once again that is star in one and also another from a reminder, that it for joining us today on the Speakerphone. Please return to your handset before pressing star and one.
And that is star and one gentlemen will take just a few moments to give everyone a chance to signal.
[laughter].
[noise].
Well take our first question from the line of Davis Herbert with Wells Fargo.
Hi, good morning, everyone. Thanks for taking the questions [laughter] I just wanted to ask on the Diamond sports.
Balance sheet.
With the 1.1 billion of cash on hand is I believe the yes has a transaction already closed is there anything else, we should adjust for whether a you know it's a team put option or anything of that nature.
Yes, So Davis if you recall, we there is a oh by the raise which.
I couldn't be put early in 2020.
So we didnt respond that amount Oh, that's that's almost 400 million and show you should assume that 400 million that is earmarked and then as Chris said you know we are evaluating I'm looking to redeem a portion of the pull forward a stock which is again, our highest cost of capital should that.
That will generate a free cash flow going forward.
Okay. That's helpful and then if you do indeed.
Some of that preferred does that preclude you from taking part and further Rs and M&A.
Going forward.
No no it doesn't we have.
Ample resources on hand to to tackle what's a what's in the marketplace today.
And we're so we're very excited about additional tuck ins being very incremental in generating synergies for us.
Excellent.
And.
And when I look at the cash at Diamond Sports of 1.1 billion I think you close with 800 million does that.
Imply that you generated free cash flow done sports to build that cash balance off.
Well, there's two components that drove that one was just purchase price adjustment that I referenced.
Approximately 400 million on the rest is free cash flow generation.
Okay and last.
Last question before I turn it over.
Has anything changed in terms of at least you gave your leverage targets, but.
With that dish being blacked out in and a subscriber declines et cetera, do you anticipate your leverage forecasts.
I think it was low to mid four times a bad debt.
I'm in sports within 18 months is that we should we see a little bit of a lag and getting to that target leverage.
So look I think the way you should think about leverage is that you depending on what happens with dish, which as we said we read if we don't know what will happen with dish, we view it as a temporary issue either we come to a deal with dish or their relevance in the industry will be reduced overtime.
But that will create elevated leverage diamond for some.
Period of time, but really it's a temporary issue and.
It dish foregoing you know the our senses the equivalent for me.
From my viewership perspective, a for growing the top 10 entertainment programs combined so its a its its really a if we're going a key piece of the Oh, the bundle and that's only going to be exasperated over time as a sports betting.
Moves through the country, and and Sparks, even greater interest and engagement.
With our content.
Okay, great. Thanks for taking the questions.
And next we'll hear from the line of Marci Ryvicker Wolfe Research. Please go ahead. Your line is open.
Hi, Thanks, I have a couple of questions. The first one net lease T., we said you pro forma.
EBITDA guide that 2.1 or 2.2 versus the 2000 18.6, you mentioned lower carries that with anticipated at closing I assume you're talking about the old step down that had been disgusted November 18 that there is no new step down to arrive at that number.
That's correct Marci that that's the all of the contracted on <unk> associated by a 21 to yeah, we assumed at closing.
Okay, Perfect and then when you mentioned a core advertising in Q4 being up mid to high single digits is that TV stations only or does that include our sense.
To that that includes you are a sense, but remember the for the Orrison business advertising is really only about 10% of their business on the scheme as a whole company, what you're really seeing there is driven by the broadcast performance.
Okay and then.
For the.
He did free cash flow guide for 1920. The 11 50 to 12 50, what is contributing to the range meeting what what gets you to the low end versus the high end.
Well I mean right now it's really just a range marci because you were still in our finalizing our 2020 budgets.
And and so it's really just putting a range and they are is we normally do well right you're used to west always coming out with a range.
Because you have all.
You know, we don't have a lot of visibility on on advertising all as well.
And eat away then okay.
Yeah things like political for for 2020, which historically is harder to predict but we think it's going to be a massive year, obviously drive some of the range.
Okay. So just normal range and then one last clarification question. The current balance sheet from Q3 include the 400 million for the rate.
Yes.
Great. Thank you so much.
Next we'll hear from Aaron Watts Deutsche Bank. Please go ahead your line is over.
Everyone. Thanks for joining me on <unk>.
One quick one on the core AD environment. It sounds like you're seeing some momentum heading into the ended the year can you talk about some of the drivers of that and if you have any early kind of indications on how 2020 might start that'd be helpful as well.
Yeah, we're seeing this grant the pharmaceuticals or attorneys insurance driving all driving our business. So I was.
Well, we're introducing new categories in new solutions that are driving the norm focus on selling all 360 solutions has solidified the pool.
Any color around the auto category.
Auto category for third quarter was down low single digits, and we expect to see the same results in Q4.
Okay.
Got it and.
Chris.
One more on dish I'm, just curious you have been able to reach.
New distribution agreements with some other large players in the space recently very recently.
Any color you can give around what the hang up is with dish is it purely price are they asking for something unique or different and I guess as your optimism at reaching an agreement with them changed over the past few weeks.
I really can't get into you know the this specifics on the negotiation.
Just for a myriad of reasons, we don't talk about so that level of the specifics.
And I would say that I'm I'm still in the same place that have always been you know our value proposition is very strong as I mentioned.
The the at the viewing is is for these are sends or are greater than the top 10 entertainment programs combined and often times are the top program in prime time.
So you know, it's just a matter of ER and making sure that dish recognizes the a the true value of the our sense.
Okay, and if I could just one last big picture question for you Chris.
Yes.
Several.
Well publicized in heavily promoted streaming service is starting starting up this mine as well as next year, a couple more getting added to the mix.
Curious to hear your thoughts on what impact that that could have on your business overall, whether it's from an audience raining standpoint, or more pressure on cord cutting anything you can give us on your thoughts would be helpful. Thanks, well lay a you know the streaming wars are in a different or in a very interesting dynamic enter into.
Three there the reason we have pivoted towards our focus on local sports and local news. We think the relevance of general Entertainment will continue to be diminished because of the because of the streaming wars and all these new entrance.
So so the value of sports news will increase overtime as is the value of any one entertainment program continues to be diminished by oversupplied.
And so we think that's a positive trend in terms of where we pivoted.
With over 75% or a revenue are now coming from sports and news, it's really that being quite weighed heavily.
Towards a sports so that as well as sports betting, which I mentioned, a just a just to get to remind you a few facts on that.
[noise], you've got to you know people, who view sports regularly 38% a indicate they watch more if they could that on it and of those who don't watch regularly 25 cents say they would watch more.
It's a good that on it so Ah. So we're set up to have a huge increase engagement around our sports properties and where are the ones that actually provide the tonnage. The you know the over 5000 games a year that we produce so so were the primary beneficiary of that increased.
Engagement and we see the value of those sports.
Properties going up over time on a relative basis.
Especially on a relative basis, given what's going on in general Entertainment.
Okay, great. Thank you.
[laughter].
And once again to our phone audience today, if you would like to ask your line of questioning over your phone. Please press Star then one and again a reminder, that if you press star and one prior to the opening of the Q1 Q, we invite you to signal.
Once again that is star and one ladies and gentlemen, we'll hear next from Stephen Cahill Wells Fargo. Please go ahead. Your line is open.
Yeah. Thank you very much maybe just first a another question on dish when I look at that change in the dollar per share of free cash flow in your 1920 guidance I'm backing into around 5 million subscribers on on dish to the are a sense and I think that's only about half of their total sub footprint. So I'm just one.
Wondering if you know that all sound in the ballpark and if that is part of the challenge that there are some you know you are a sense don't cover all of their subscribers and then maybe separately on the political side of things I think you've talked about maybe starting to drive some political AD revenue into the our Ascendon 2020. So I know you haven't had a lot of time with them but.
Where are you kind of on that path and do you think that you could see some meaningful political revenue on those networks next year.
Sure so you're you're broadly in the right.
You know a ballpark if you will for protest or less than 10% of our subscriber base on the our sons and then they weren't fully penetrated.
There I'm you know they they were partially penetrated which is pretty standard for most mbps. We don't we're not in the full basic package on the our sense for most any piece.
And then on the.
On political we've started connect the dots with Ah with our Arsone folks with our broadcast folks who are in the flow in a big way on the political.
Spending so you know it's it's it's hard to quantify for you, but since we're in the flow on a on a significant amount of.
AD dollars are coming in from slips next year.
We believe we will be able to substantially increase the amount of AD dollars that go to the our sands, especially in hot markets where are we.
Additional I'm highly rated a inventory and and then you know what it would also is going to be at a big tailwind for the our sends from an advertising perspective, and we're starting to see you know it hit certain markets here were sports betting has been legalized is that we've we've.
Just we'd be taken significant orders and in some markets at eight at significant premiums are aware sports betting has turned on because he our sense are you know the one of the ideal places for them to start advertising. So some of those orders your seat you're seeing that hit the New York market.
If you're paying attention to what's going on with MSG, It's it's benefiting yes, and a and more and there's other markets and the Arsone portfolio, where those orders are starting to hit and they're not just you know they are at a pretty healthy premiums to what we normally sell ads. So so that's good.
To be a nice tailwind into next year.
[laughter], maybe some quick follow ups on those could you give us any sense of what the percentage of overlap does it states that have legalize sports betting where you have networks and then what do we think about I'd just like longer Tom rights cost growth that you're news sports segment as we try to put all this together under the new helpful reporting structure.
Yes.
So right now there's just a handful of our son's that have what a core market overlaps with those that are they have gone legal and are actually up and running operationally.
So as as more states or turn on that's gonna be a much much bigger impact.
But right now there's there's literally I think I you know I can count them on one hand, how many have core market overlaps that above states that are operational not just legalize but also operational.
And in terms of Oh, they expense growth or we are in I'm sort of it we expect a on the on the low side of mid single digits for a for expense growth going forward on your arsons.
Thank you.
And once again, we encourage our phone audience. If you would like to ask a question or need clarification on anything covered in today's release.
Star and one on your telephone keypad well hear next from the line of.
<unk>.
We are.
Okay, great. Thank you for taking the question I wanted to follow up.
Yeah.
Dish, a bad and just I guess altitude a they were dropped a enough for a couple of any PD is and I think that no. One of the reason is that they didn't really have or any other programming. Besides the artist and you guys had just on a deal with dish at the end of 22 enough.
The broadcast channels that I'm, just wondering how the our sand would factor and to your next round of broadcast negotiations with cash.
Sure I think that that's a very you know relevant point coming to market with more programming is always a better position as it relates to.
Negotiations or with a with the Andy P.D.. So so that's going to be you know something of that.
You know it takes that we have not done.
Done to deal with dish by then that will be a very relevant factor or by then.
Great. Thank you very much.
And once again, ladies and gentlemen that is star and wonder if you'd like to ask a question. We'll hear next from Dan Kurnos, What's the benchmark company.
Thanks [noise].
Chris I guess, then just on on sort of adding programming you guys announced ring of honor onto the Rs. Then you got talking about adding.
Other programming there can you just maybe update us on where you are with sort of all the initiatives that you were talking about that you could do a with the Rs then.
Whether DTC or adding programming timing of all of that and then just on.
You know, it's a lot smaller, but you're kind of getting a little bit deeper into the anybody states are not specifically asked a lot of streaming there's a lot of properties out there and I hear a lot more focused on they are a sense I don't know if you want to get a lot deeper in with wister or if it's really more just an adjacent c., but I'm just kind of your thoughts on.
Sort of building that out.
You know from a maybe a more M&A perspective.
Mhm.
So we have.
We're about to increase our ownership in stadium, which is one of our or multi cast a bus sports channel or sort of post cable network.
That focuses on sports and it really will.
Supply.
Upgraded content to the ours and.
At a at a cheaper price or I'm, sorry, less expensive price. Then then then what's on their today so starting.
At about the one year Mark from our acquisition, we expect to start.
Achieving some of the synergies we spoke about a when we announced CR sends the hundred million plus of synergies will be powered by content from stadium, which will be an upgrade from a from what is on their today outside of the gain the pre and post.
And we'll be at a at a lower cost were also.
Investigating other programming strategies, especially in local markets working fine local news and will be sports or to create additional revenue opportunities, but the but the backdrop. If you will will well it looks like it'll be coming from stadium and that will generate a cost savings.
For for the ourselves.
And where we're particularly excited about somebody experimentation will do with a combination of local sports and local news, we think bigger picture that is a the north star for us or whether you know whatever the future business model may hold is offering a package show local bundle. If you will to the marketplace of local sports and lower.
Good news and we're poised to be.
The dominant local news provider in every and every.
Market in the country. If you have the the tent pole of of local sports, which is really the only exclusive content that exist in ecosystem and so that that that weighs heavily into our thinking about where we're headed in terms of supplying that oh local bundle and things that we're doing on store.
They all play a role in that and that longer term vision.
So right now is AD supported its growing quickly it's adding channels.
You know right right now it's positioned as our free offering free AD supported offering.
It will be the top of funnel into subscription based offerings that that's the current thinking on store and a it's ramping nicely.
And now we're turning our attention to what what would be the what would be the subscription based offerings.
That we can add on topic.
Great. Thanks for all the color prescription.
Q.
[laughter].
Okay, so opportunity when I session for today I'd like to turn it back over to you Miss Rutas Houser for any additional for closing remarks. Thank.
Thank you operator, so again, we appreciate everyone joining us on this call. This morning, our first all day going forward as much different diversified media company.
And as usual if anyone has any questions. Please feel free to give us the call. Thank you.
Ladies and gentlemen, this does conclude today's earnings release and we do thank you all for your participation. You may now disconnect your lines and we hope that you enjoy the rest of your day.
[noise].
[noise] [noise].
[noise].