Q3 2022 Sinclair Broadcast Group Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Sinclair third quarter 2022 earnings Conference call.
This time, all participants have been placed on a listen only mode.
Floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Lucy route as Jose.
Executive Vice President and CFO .
Floor is yours.
Thank you operator.
Participating on the call with me today are Chris Ripley, President and CEO , Rob Whiteboard, President of broadcast and Chief operating Officer, and Steve Zenker, Vice President of Investor Relations before we begin I want to remind everyone that slides and supplemental information for today's earnings call are available.
On our website S. P G I dot net.
On the information page and on the earnings webcast page I also want to remind you that today's call is a sinclair only call a separate public call for Diamond Sports group will be hosted in a couple of weeks now Billie Jo Mcintire will make our forward looking statement disclaimer.
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 SEC.
And included in our third quarter earnings release, the company undertakes no obligation to update these forward looking statements. The company uses its website as a key source of company information, which can be accessed at www Dot <unk> dot.
<unk> net in accordance with regulation FD. This call is being made available to the public a webcast replay will be available on our website and will remain available until the next quarterly earnings release included on the call will be a discussion of non-GAAP financial measures, specifically adjusted EBITDA adjusted free cash flow and leverage the company considers adjusted.
It ought to be an indicator of operating performance of its assets. The company also believes that adjusted EBITDA is frequently used by industry analysts investors and lenders as a measure of valuation. These measures are not formulated in accordance with GAAP and are not meant to replace GAAP measurements and may differ from other companies uses or formulations. The company does not provide reconciliations on it.
Forward looking basis further discussions and reconciliations of the company's non-GAAP financial measures to comparable GAAP financial measures can be found on the company's website Www Dot S. P. G I thought net and.
In addition, given the deconsolidation of Diamond on March 1st of this year and in order to have a meaningful discussion around comparative results and trends all discussions with prior financial reporting periods. During this call reflect Sinclair only pro forma numbers and that's actually a diamond and any inter company transactions with them and exclude businesses sold in the prior to.
12 months for actual results, including the periods. The timing was consolidated please refer to this morning's earnings release.
Chris Ripley will now give you an update on the strategic direction of the company.
Good morning, everyone I'm going to keep my comments relatively brief as we covered a lot of ground at our Investor day, just weeks ago on October 3rd.
Our results for the quarter were in line with our revised expectations provided during our recent Investor day political revenues remain robust and as mentioned on Investor day, we're still expecting a record midterm political year.
With a week remaining until election day, our full year political estimate is $335 million to $340 million, which is in the $325 million to $350 million range. We gave on our Investor day, Rob will give you more color on the advertising environment in just a minute.
Our total adjusted EBITDA of $198 million was within our guidance range aided by lower than expected expenses.
During our Investor day, we spent a fair amount of time on our growth initiatives. When you look at the future of Sinclair It will be driven by our current TV station assets as well as our growth initiatives. These initiatives fall into four categories multiplatform content marketing services data distribution and community interactivity.
A key aspect of our growth strategies is creating additional revenue streams to grow incrementally monetize our linear audience and our 80 plus million unique digital viewers as well as drive new uses for our broadcast spectrum.
Today's Sinclair achieves the vast majority of its revenues from linear advertising sales and distribution. We believe these gross growth initiatives will unlock significant revenues rivalry in today's two revenue sources.
And we also have our investment portfolio, which we currently estimate as worth approximately $1 2 billion or close to $17 per share.
It has generated an IRR of approximately 20% since 2014.
I'd like to take the time to give you more insight into this portfolio. It currently consists of real estate private equity venture capital investments and direct investments in companies.
The real estate investments are in a number of different different properties that are almost all income producing and Sinclair has a majority ownership in most of them.
Many of our apartment buildings with Occupancies over 90%.
The earliest real estate investments were entered into as far back as 2007.
There are also commercial projects in which the company has an ownership interest.
The private equity and Metro capital investments are generally minority investments in funds that invest in many different areas, including middle market companies in the U S and India as well as specific industries, including technology manufacturing and environmentally focused services suite.
Sinclair also has minority direct investments at 14 companies, including valleys and play Fi Holdings, which is a full service sports marketing company operating at the intersection of sports media and technology.
Other investments include companies and advertising security software wireless communication and semiconductors and broadcast cloud production.
The final piece of the investment portfolio is the diamond accounts receivable facility alone, which advances funds to diamond for a portion of its accounts receivable balance the counterparty risk is with diamond's customers.
Such as the big distributors with which we have a relationship and our broadcast business. So these are customers, we know well and with which we're comfortable the rate. We earned on this investment this quarter averaged six 8%.
During the quarter, we made additional investments of $6 million in our portfolio and receive distributions, including exit payments of $52 million for.
For the full year 2022, we projected investments of approximately <unk>.
$68 million and distributions, including exit payments of $137 million.
When you look at the adjusted free cash flow, we generate excluding diamond's consolidated results for the first two months of the year Sinclair currently trades at a fee of free cash flow yield of approximately 50%, which is more than double the broadcast industry average and an even greater disparity to major market indices simply put we believe were grossly.
Undervalued and have continued buying back our shares is one way to enhance returns.
Before I turn it over to Rob I wanted to mention the series of automotive seminars that began last week and which highlight the benefits of over the air data distribution for the auto industry I.
I think you'll find that very enlightening on the significant potential of ATSG true Pan out for data transmission, which offers wide coverage and high reliability at attractive costs.
Now I'll turn it over to Rob who will give you some greater color on the advertising market in our third quarter results from thanks, Chris total media revenue for the quarter increased 5% over last year political AD revenues were strong during the quarter outpacing 2018 pro forma results by 28%.
Year to date political ads revenues through the third quarter up more than 50% over 2018 pro forma and only down 2% over 2020 pro forma which was a presidential election.
<unk> continues to see strong political spending leading us to project the full year the range from 335 million to $340 million.
Chris mentioned this would be a record midterm election year for us and would represent an over 30% increase above 2018, the strength and political was the primary reason for core advertising declining versus a year ago as well as the absence of Olympics, The Olympics and the weakness in insurance and sports.
But in categories, which are really not macro but industry causes we are keeping an eye on how them with macro economy might affect us and we will have a better grasp on demand. Once the elections are over we have built into our Q4 guidance some impact from macro environment and the impact of higher.
Interest rates on consumers.
I do want to point out a couple of weeks ago, We announced a multi platform creative partnership with Anthony cycle.
It is the creator of the CSI franchise, and he will help develop content pursue declaring a number of different areas. The partnership with Anthony underscores our commitment to creating original program.
Can be not only utilize on Sinclair platforms.
So to third parties as well more importantly, Anthony intends to use our deep news content library to bring these stories to life.
During the quarter, we launched an enhanced CRM and more in depth artificial intelligence and machine learning pricing model to be utilized on a forward basis in 2023 and beyond the revenue model utilizes algorithms similar to what is used for hotel and airline pricing basically pricing and supply.
Demand dynamics I'll now turn it over to Lucy to go more in depth on the financials. Thank.
Thank you, Rob and good morning, everyone again.
I mentioned, you can follow along with our slide deck and our financial supplement on our website.
Media revenues for the quarter were up 5% versus the same period, a year ago, driven by higher political AD revenues and higher distribution revenues.
All set in part by the lower management fee and lower core advertising due to political crowd out and the other factors Rob discussed.
The 836 million the media revenues, while below our guidance range was primarily due to timing of political which we expect capture in Q4 softness in a couple of bad categories and higher core advertising crowd out in certain markets, where political is running very strong.
<unk> all of which I mentioned at our Investor day.
History abuse shouldn't revenue increased 1% versus last year, but fell short of our guidance range due to higher than expected subscriber churn, which was still in the mid single digit range versus last year.
Looking at total advertising it was very robust when including political revenues, increasing 15% over last year.
Core advertising decreased high single digits in the third quarter compared to the same period a year ago. As a result of the absence of Olympics and political crowd out the shortfall to guidance was primarily the result of certain categories that came in lower than expected and increased crowd out.
In markets with hotly contested races, where political is running stronger than anticipated.
Media expenses were 5% higher in this year's third quarter versus last year on higher network programming fees and higher sales and G&A expenses were favorable to guidance.
Adjusted EBITDA for the quarter grew 5% over the third quarter of last year, mainly on the strength in political revenues, partially offset by the Diamond management, the deferral and the higher expenses as discussed.
As compared to guidance are $198 million of adjusted EBITDA came in at the low end of our guidance range.
Adjusted free cash flow of $170 million in the quarter also was within our guidance range with adjusted free cash flow per share of $2.43 for the quarter and diluted earnings per share of 32 cents.
We increased our cash balance by almost 200 million during the quarter for an ending balance of $607 million and when combined with our undrawn revolver put our liquidity at more than $1 2 billion at quarter end.
Total debt at the end of the third quarter was $4 3 billion and Stg's first lien indebtedness ratio on a trailing eight quarters was three three times, while total net leverage through the bonds was four one times.
During the quarter, we repurchased approximately 500000 common shares under our <unk>, one stock buyback program and an additional 300000 shares since September 30th.
That brings our year to date shares repurchased to approximately 7% of our total shares outstanding at the beginning of the year, our total share count at the end of the quarter was $69 9 million.
Turning to our fourth quarter guidance I want to remind everyone that in the fourth quarter of last year, we experienced the cyber security incident that negatively impacted advertising revenues by approximately $63 million.
As such when comparing to 2020 ones revenues I will speak to the adjusted pre cyber revenues.
To see the comparisons to last year's actuals. Please refer to our earnings release from this morning.
We expect a record amount of midterm political AD revenue for the fourth quarter of 174 to 179 million and as already mentioned on this call. This would put our full year political revenues at an expected 335 to 334 $340 million.
<unk> $35 million to $340 million, which would be over 30% more than what we booked in 2018, and only down less than 5% compared to the 2023, Georgia run off presidential election year.
Political revenues are the main driver for media revenues, increasing approximately 10% to 12% versus the cyber adjusted fourth quarter last year of $862 million.
Fourth quarter core advertising is expected to be down high single digit to low double digit percent verses. The cyber adjusted fourth quarter last year with the decline in core primarily driven by anticipated political crowd out and mild macro economic weakness as Rob discussed.
Yeah.
Fourth quarter adjusted EBITDA is expected to be between 294 and $313 million compared to 202 million pro forma last year, which is not adjusted for the cyber incident.
The increase is primarily the result of the lost revenues from the cyber incident last year and higher political revenues. This year, partially offset by the lower management fee higher network programming fees higher technology costs crowd out of core advertising due to political and higher sales.
Cost on the higher revenues.
Adjusted free cash flow for the quarter is expected to be 385 million to 409 million were $5.52 to $5.86 per share so with that I would like to open it up to questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that world posing your question. Please pick up your handset assisting on speaker phone to provide optimum sand quality.
Hold while we poll for questions.
Okay.
Thank you.
Our first question is coming from Don Cornhouse with Benchmark company. Please go ahead.
Great. Thanks, good morning.
Maybe Rob I guess just on the <unk>.
Q4, Chris on the on the outlook of the macro impact, it's actually youre not different from what we had in our core assumptions. So maybe just tell us a little bit what you're seeing whether it's category specific category weaknesses.
Put in the release or is there any incremental cancellations just outside of sort of the unevenness were hearing from across the industry.
Sort of what is influencing.
Your guide beyond the crowd out and knowing that we don't really have visibility past the election would be helpful start.
Yeah, Dan I'll take as Rob.
As I indicated.
From the sports betting they've crossed the 50% mark in the country.
Legalization, so where we saw that short term.
The increase of spending in that category, they've now gone the network as well as.
The all the sports networks, such as Diamond.
And with insurance because of the losses, they took from weather as well as COVID-19 related illnesses, we've seen a pullback in that and that's more of the industry segment than the macro.
We'll get a better sense of how.
The core is feeling about the macro economy and the political because there are a lot of core advertisers sitting on the sidelines based on the heavy political spending and the pricing that's taking place so.
But we have not seen any key categories come in with any types of cancellations to date.
Okay.
Thank you.
Our next question is coming from Barton Crockett with Rosenblatt Securities. Please go ahead.
Hi.
I guess a couple of questions one is following.
Following up on the AD categories I'm just curious.
About auto what Youre seeing there.
We're starting to comp.
Some of the headwinds I'm wondering if you know what they are trying to say or if there's.
Incremental kind of macro worries.
So a little bit of color there would be helpful. And then second question is.
Getting back to your comment about the 50% free cash flow yield wishes.
Incredible.
The question is this like you know companies that are you don't have to.
That kind of sits.
Situation you Wonder why wouldn't you.
A sea change in the level of share repurchase I mean, you produced.
Share count 7%.
Hard to see how you can come up with a better investments at a 50% kind of a free cash flow return.
And got them and I think the result of that is maybe.
Yeah.
A little bit of distrust of the 50% figure because you know where you're putting your capital.
I'm just wondering you know what would it take or why wouldn't you do like a big tender or sea change in terms of share repurchase.
Alright, Robert I'll start first.
From the auto position.
We're now comped against the chip shortage Covid and we did actually see year over year increase in all of our spending.
With that said a couple of things that.
It keeps me awake at night and keep us looking at that sector is.
On top of the chip shortage, which I think they're starting to solve they now have a sheet metal shortage Toyota announced that minivans won't go into production for at least 18 months and obviously interest rates on car loans have increased so that could be good or bad we believe inventories will start to stockpile.
Based on the interest rates going up and the <unk>.
Tier three dealerships will need to start to advertise to move those vehicles.
Vehicles versus the shortage that they've had on their logs.
Yes in terms of your second question.
We are I think approaching about 40% reduction in our shares outstanding.
From share repurchases over the last three years and this year, we're approaching 7% reduction. So so the activity has been quite significant.
And.
We.
We put our money, where our mouth is in terms of being grossly undervalued and I'd expect us to continue to be aggressive there.
And also we're looking at ways in which we can.
We talk about our investment portfolio so much because.
When you when you think about that in terms of the sum of the parts that just makes our valuation will really look wacky. So.
We're thinking about ways that we can we can highlight that value and recognize that value even even more.
Okay.
Thank you. Our next question is coming from Aaron Watts with Deutsche Bank. Please go ahead.
Hi, everyone. Thanks for having me on I've got two questions I guess first a loosely can you remind me how much of your debt stack as is floating rate.
And can you also.
Remind us if you have any of that floating rate exposure hedged in and how rising rates combined with the macro headwinds you cited may or may not impact how much liquidity you keep on hand and capital allocation near term.
Sure. So we have we have about 60%, which is floating so you know every 100 basis points and in in rates is going to translate to about 27 million of higher interest and I know the fed is meeting today and we're expecting a.
And increase in grade to me and we've built that into our forward guidance.
So that's all in the interest rate side, we have looked at hedges in the past, but again, we found them to be expensive to lock in tour for several years as you would have to with the hedge.
And then you know really just as far as preparing for any downturn.
We've gone through this multiple times, what whether it was you know for many of US too. We're here during the great recession doing COVID-19 and 2020, so we pretty much have a playbook of what we can do.
We started as I.
Mentioned I think last quarter on the call we've already.
<unk> throughout our management teams.
To curb expenses, we started that several months ago.
For this year, you've seen that in the results of our expenses, which had been favorable.
Two our guidance levels.
And then we also refinanced all of our current debt maturity. So we don't have any refinancing risk for the next four years, so we've done that but there.
There are other things that we could we could pull if need be if we get to that point, but you know what.
The important thing here is that we are.
You know that we'd be smart about what we're spending the money onto whether it's deep.
Deep discounts in our securities and as you know we've bought stock back this year, we bought that back at at deep discounts.
We've continued to make investments in the things that are growing for the company, whether it's our outside investments whether it's our our four pillars of long term growth. So we just have to be smart about it and the last thing I would say Aaron as we go if there is a recession, we would go into that period with substantial.
Liquidity currently at over $1 2 billion today.
Okay very good that's helpful.
One other question I had for you is just following the recent Disney ABC renewal any changes to your net retransmission fee outlook for the next three years I believe you were speaking to a low to mid single digit growth rate and and maybe any general learnings or takeaways you can share from from those recent ABC.
From that recent ABC renewal with Disney anything around rate increases our commitments to keep content on broadcast versus streaming platforms et cetera.
Well, so Aaron I'd say.
We had when we gave our last guidance that three year CAGR of low to mid single digits that we by and large already knew what the economic outcome was going to be for ABC. So that was that was baked in there.
And what we've learned from that.
That interaction and the ones leading up to it is that.
There has been a.
Shift and.
In terms of negotiating position.
Vis vis the networks as they are focused elsewhere on streaming and they have.
Some of our content around and change the exclusivity provisions.
And also just given the magnitude of dollars that we already.
Pay in terms of reverse retrans. So we saw a significant.
Reduction in.
And the growth rates for reverse retrans to be more reflective of.
The value, we bring the value they bring and what the current subscriber environment is so we were very pleased with the outcome at ABC.
And we actually think there their commitment to the network has actually been growing recently.
They put more NFL product on ABC after the last the NFL deal.
And.
They have secured and are there other major sports properties.
As far as we know there are no plans to reduce.
Any sort of prime time programming thats been rumored.
On other networks and so we think they're great partners for us and and they were.
We thought the negotiation.
<unk> reflected this synergistic relationship we have with them, but also reflected.
The market dynamics and the gives and takes between the two parties.
Okay. Thanks, Chris Thanks Lucy.
Thank you. Our next question is coming from Edward Riley.
Please go ahead.
Hey, guys. Thanks for taking my question just to Echo borrowings comment.
The investment portfolio.
I'm wondering if there are any scheduled.
Monetization events for the next year.
He might be able to recycle back into share repurchases.
Yes.
So there isn't necessarily scheduled monetization events. There are several investments that yield income on a regular basis.
That's not huge dollars, we're talking tens of millions.
In terms of that flow as I mentioned.
In my remarks this year.
We had.
I think it was let me see here.
We have $137 million coming in in 2022.
In terms of distributions exit payments versus investments of $68 million. So you can see that there was sort of a net positive.
Tune of about $60 million to $70 million.
Yeah.
This year and I would expect next year.
There'll be some.
Some further distribution and exit opportunities that tends to happen.
In this in this portfolio.
If it's economic situations are not as robust and then you know I would expect that to be maybe a little bit slower than historically has happened but beyond that.
It's not something beyond saying that these things generally happen and they do.
Every year.
We don't have.
Great visibility to tell you what.
What will happen next year.
So if I can just add to that so in the.
Well, Chris mentioned that we don't.
Had the exit schedule. There is one that's included in the free cash flow guidance.
Just over $20 million of exit distributions.
So we do have that one of them in the in the guidance for Q4.
Okay, great. Thanks.
Was wondering if you could maybe provide some color on.
This growth and growth in digital.
I might have missed that I spoke about earlier.
Sure.
Yes, we could see continue to see growth in digital.
Mid single digits growth.
Some of the growth was curtailed by the auto category, but we're seeing continued growth in the fourth quarter as well our assets that we've built.
Not only from our Ono, but our marketing services continued strong in the marketplace.
It's interesting and we tried to highlight this at our Investor day is that when you take a look at our overall ad business.
You've got the twin pillars of growth there are political and digital and they have compounded over the years become quite significant in terms of size.
And and are are fueling overall growth in our in our in our AD business overall, so as they've gotten bigger.
So were overwhelmed some of the other weaknesses.
And the core AD business so.
We've been very pleased with the with that that tailwind that we've had overall our Nashville, just one last comment our national team as well as our local sellers go through continuous education and training by the senior digital leadership, So we're prepared to capture.
The digital dollars in the local marketplace.
Well as those that are flowing through programmatic.
Okay, great. Thank you.
Yeah.
Yeah.
Thank you. Our next question is coming from Steven Cahall with Wells Fargo. Please go ahead.
Thank you and apologies I joined a little late so hopefully what I'm going to ask Hasnt already been covered just the first kind of big one on gross and net retrans. When we look at it on like a four five year stack.
It looks like that net retrans is below where it was in 2018 and gross retrans has definitely been slower than the peer group. So I'm just wondering how you all think about that if you've done any of that comparative analysis have you been less aggressive on retrans rates, because you would have expected higher cord cutting it doesn't even have to do with RSM carriage. So we're just.
Love to get your perspective on why maybe the retrans growth levels have been a little bit below the peer group and then I have a quick follow up for Lucy.
So look I think the Ah.
Certainly some of our deals were done in a different era of.
Cutting expectations are one of the deals that we have highlighted previously was our ABC affiliation of deal that we just actually renewed that was.
Hampered us through a couple of years.
Of how that performed where we're much happier with the new deal we just.
We just are renewed and.
And then.
Going forward, that's one of the big reasons, why we put out.
The three year CAGR expectation at Investor Day.
Because we do have.
We're not in a net retrans will not grow in 2023, but we have between the end of at the end of 'twenty three and the beginning of 'twenty four there 70% of R.
Our score subscribers up on the distributor side, and we see that as a.
A huge opportunity to reset the table and we think we'll do very well there through that period, which will power the the three year CAGR.
Great. That's really helpful and then Lucy just on cash interest.
We've done some modeling looks like cash interest could be up a lot next year based on the debt.
It could be up even close to a 100 million. So I'm just wondering if you could comment on based on where rates are today, how to think about cash interest in 2023.
And just as it relates to cash I know that what happens to diamond has a bit of a what if.
But investors certainly care about what happens to the Nols. The bond market is kind of implying that a diamond filing isn't such a low probability what if anymore. So can you give us a sense of what happens to your Nols if things do change for diamond. Thank you.
Yeah, so on the <unk>.
But we can certainly go offline with you and give you the component pieces of our debt.
60% of that is is floating so if.
If you look at where the forward curve is and I don't have that here by you.
You can you can run it and apply it to the to the variable rate debt, but.
For every 100 basis points to the interest expense would go up by about $27 million annual.
So the 100 million you would have to have like a really steep increase in the in the curve, which gotcha, which we're not seeing okay, but again, if we can go offline and we can give you the component pieces because remember we have we have all the notes that are that are fixed on fixed rate.
On the on your question around.
The Nols.
Like if we.
The impact of those Diamond Nols is not as big as you may think because there is.
Is a significant amount of disallowed interest.
Diamond under the current tax rules.
And that continues to increase year over year I mean, it is true that if we no longer owned 80% or more of the equity that we would not get the benefits of those nols, but theyre naturally decreasing anyway because of the disallowed interest.
Great. That's super helpful. Steve I appreciate that color if I could go back to one other piece to it is don't forget that.
Right now, we're sitting with $600 million of cash balance and that cash is also earning interest.
So as the curve increases.
No.
Depending what your model Sean for your cash balance will also generate more interest incomes to make sure you're also looking at it on a net basis.
Gotcha great.
Thank you for that.
Okay.
Thank you. Our next question is coming from Dan <unk> with Benchmark Company. Please go ahead.
Yeah. Thanks.
Dropped earlier on the follow up but just.
Chris maybe I wanted to also ask us back at the Analyst day can you just talk about the profitability of China right now and subsequently you know given all the puts and takes and Lucy commented on this a little bit as well.
We go into next year, knowing that there is macro uncertainty just how are you thinking about sort of the levers around investments.
Next year around these growth initiatives, obviously pushing towards DTC for example, and Kenneth how much of Thats already been I don't know encapsulated versus.
Considering.
Pulling back just as you know.
To optimize cash flows things get messy in the short term.
Yeah look it's a fair comment we do.
We probably have at least $50 million or more of the.
Losses in the portfolio that are quote unquote investments that we've made in tennis alone.
That probably announced around $10 million a year.
And certainly it's in a downturn we would modulate.
Some of that spending.
And but at the same time, something like tennis that has such robust growth opportunities in international and fast channels like T too.
In direct to consumer which should come in 2024.
We wouldn't want to hold back on that on.
On that too much because we think tennis has such a bright future in front of it in terms of in terms of being the global brand for tennis and that that sort of a central point so.
But certainly there will be a prioritization within our investment spending.
If a downturn hits in 2023.
Got it that's really helpful. Thank you.
Okay.
Thank you as there are no more questions in the queue.
Back to Chris Ripley, President and Chief Executive Officer for any closing comments.
Thank you all for joining US today, if you should need more information or have additional questions. Please don't hesitate to give us a call.
Okay.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.