Q2 2019 Earnings Call
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Thank you for calling which conference would you like to join.
I would like just to join the Sinclair broadcast group.
Put your name please with spelling.
Hi, Rachel our HP Ht Oh.
Smith as am I.
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And your company name.
Era I E R E.
Yeah.
All right I'll push went into the Sinclair earnings conference.
Thank you.
You're welcome.
Yeah.
Leverage these metrics are not meant to replace GAAP measurements, but are provided as supplemental detail to assist the public in their analysis and valuation of our company a reconciliation of the non-GAAP financial measures to the GAAP measures in our financial statements is provided on our website under investors non-GAAP measures for certainly will now walk you through the operating highlights.
Good morning, everyone and thank you for joining our second quarter earnings call. The four Lucy gets into our over achieving results. Let me highlight some of our recent accomplishments and noteworthy announcements.
We continue to work with Disney towards Department of Justice approval in a third quarter close of the our assent acquisition. Our recent closing of bond financing and successful syndication of bank financing to fund the acquisition received a strong positive response from the financial markets and we significantly exceeded our initial cost of capital assumptions from announcement Lucy will take you through those details in a few moments.
Our stations continue to be recognized for their impactful new storytelling and investigative reporting so far this year, our newsrooms have one 328 news awards and counting.
On the distribution front, we recently renewed our retransmission consent with charter in a multiyear deal that covers our TV stations tennis channel marquee and the our sense when closed.
We realize there is noise in the marketplace with Nexstar and CBS dark on ATP, Directv and with Meredith and the Fox our sense dark dark on dish.
In fact, 19 of our JSC almay partner stations for which we do not negotiate retransmission consent. We're also dropped from 80 at the end of May or early June . We believe however that both 18 TV and dish will recognize the value of broadcasters highly rated content and come to fair terms with the industry as season premieres in football season start in September .
After partnering with the Salvation Army in March to support relief efforts for the unprecedented Midwest flooding. We once again partnered with them in early June to promote another day of giving to support communities across the country that experienced devastating tornadoes and floods all end Sinclair and our viewers collectively sent the salvation Army about $80000 from this day of giving to help with their mission.
We also awarded eight scholarships did college students as part of our commitment to support diversity in broadcasting.
Now, let me hand, it over to Lucy to discuss our financial performance.
Thank you Chris.
As you mentioned, we over achieved this quarter in all key financial metrics media revenues for the second quarter $721 million, an increase of 4% or 24 million higher than second quarter, 2018, and exceeding the low end of our guidance range.
Included in our second quarter media revenues are $367 million distribution revenue of 15% increase over the prior year period.
Based on current contract expectations, we continue to expect net retrans to grow low teen growth percentage for this year and next.
Political revenues in the second quarter were 3 million versus $28 million in the second quarter of last year and election year.
Media operating expenses in the second quarter defined as media production and media SGN, a expenses were 500 million up 11% from second quarter last year, primarily the result of higher reverse retrans fees and costs related to our growth initiatives.
Our reported media expenses were 6 million favorable to our previous guidance on lower DNA and sales expense.
For the full year media expenses are expected to be approximately $1 billion $979 million to $1.981 billion.
As compared to our prior guidance the $8 million improvement is primarily due to the favorable expenses realized in the second quarter.
Corporate overhead in the quarter was $52 million and includes $28 million in nonrecurring costs for legal regulatory and transaction and $5 million stock based compensation expense.
Excluding those amounts corporate overhead was in line with prior guidance.
For the year corporate overhead is expected to be $73 million, excluding $71 million in nonrecurring costs for legal regulatory and transactions and $19 million in stock based compensation.
Non media EBITDA was approximately $11 million in the quarter that 7 million better than our prior guidance on lower one media expenses, which will occur later this year and higher sales at our antenna company.
EBITDA in the second quarter adjusted for the $28 million in nonrecurring costs for legal regulatory and transactions.
Was $193 million at 11 million higher than the high end of our prior guidance range. That's on the higher non media EBITDA higher revenues and lower media expenses.
Net interest expense for the quarter was $49 million.
Equity method investments for the quarter were a loss of $12 million.
Diluted earnings per share on 93 million weighted average common shares with 45 cents in the quarter and 70 cents when adjusted for nonrecurring costs for legal regulatory and transactions.
We repurchased 500000 shares in the second quarter at an average price of $40.10.
Excluding the $28 million nonrecurring expenses for legal regulatory and transactions.
And net of $5 million in tax impact on those expenses, we generated $97 million of free cash flow in the quarter exceeding the high end of prior guidance by $27 million.
$20 million of free cash flow went to share repurchases $97 million debt repay down an $18 million in dividend distribution.
Free cash flow in the third quarter is expected to be approximately $75 million to $82 million.
Please note that is compared to street consensus estimates.
The difference is due primarily to timing of Capex and one media expenses from the second quarter.
For 2018, 2019, we are reconfirming, our free cash flow guidance range of $1.150 billion to $1.220 billion or $6.16 to $6.54 of free cash flow per share per year on 93 million shares.
We are also Reconfirming, our 2019 2020 free cash flow guidance of 1.2 billion to $1.3 billion were $6.43 to $6.97 free cash flow per share per year on 93 million shares.
These estimates are pre the Rs and acquisition.
We are reconfirming, our expectation for consolidated free cash flow per share, including the Rs ends up $12 per share for pro forma 18, and 19 and $13 for pro forma 1920.
Now turning to the balance sheet and cash flow highlights.
Capital expenditures in the second quarter were $33 million, including 12 million for the repack.
For the full year 2019, we are maintaining our non repack Capex guide of $110 million to $120 million, but are reducing our 2019 full year expected repack Capex guide from $136 million down to $82 million due to scheduling challenges for outside resources and tower crews.
This year's favorable decrease in the repack capex will be pushed to 2020.
Cash programming payments during the second quarter were 24 million and for the year, we expect programming payments to be $94 million inline with our prior guidance.
Net cash taxes paid in the second quarter were 31 million, including 4 million related to last year's gain on the sale spread spectrum.
For 2019, we are estimating cash taxes paid to be approximately $31 million with essentially all of that already paid in the first half of the year.
As a result of extension payments on 2018 taxable income.
For full year free cash flow purposes be sure to add back the 4 million the taxes on the 2018 spectrum sale gain.
The effective tax rate in 2019 is expected to be a benefit of approximately 2%.
Reflecting tax credits related to sustainability initiatives and lower book tax income on the higher nonrecurring costs for legal regulatory and transaction and lower gains on spectrum repack reimbursements from the FCC unit timing with some of those gains now being pushed into 2020.
At June Thirtyth total debt was 3.788 billion, including $20 million of non guaranteed and the debt.
Cash at June Thirtyth was approximately $929 million. In addition, we have 484 million available on our revolver, bringing total liquidity to roughly $1.4 billion.
In April we paid in full the remaining $92 million at term a loans with cash on hand.
Total net leverage through the holding company at quarter end was 3.27 times on a trailing eight quarter basis, excluding the ear non guaranteed debt and net of cash.
The first lien indebtedness ratio on a trailing eight quarters was 1.08 times on a covenant of four in a quarter times.
We repurchased 500000 shares in the second quarter, we have 743 million remaining on our share authorization.
As Chris mentioned, we successfully closed our bond offering and syndicated financing commitments to acquire the all assets.
On August 2nd for the Rs and silo, we raised $3.050 billion of secured notes due 2026 priced at five and three 8%.
And $1 billion $825 million of unsecured notes due 2027 priced at 6.58%.
These two note issuances had been funded into escrow pending the acquisition close.
And for the our Sn silo, we also raised $3.3 billion of seven year term b loans priced at LIBOR, plus 325 basis points.
The term loans are committed and subject to customary closing conditions will be drawn at the closing of the acquisition.
In addition, the RSM silo raised a 650 million five year revolving line of credit initially priced at LIBOR, plus 300 basis points.
Meanwhile, the Sinclair silo raised $700 million of seven year term b loans that will be drawn at the Rs in closing.
The cash capitalized Drs and silo.
The term loans will be priced at LIBOR, plus 250 basis points Sinclair also intends to increase its 485 million revolving credit facility.
To 660.
To $650 million, which will mature five years. After the closing date and is initially priced at LIBOR plus 200 basis points.
Due to the high demand for the debt issuances, we expect to increase the Sinclair term b loans by an additional $600 million it will be used to redeem the Sinclair five and three 8% notes due 2021.
Debt redemption and funding is expected to occur on August 13.
As we think about net leverage on a going forward basis. After the Euroscan acquisition closing.
Our near term target leverage for the Sinclair Silo is high threes low four times, which we believe we will achieve within 12 months of closing.
For the RSM silo, the near term net leverage target is low to mid four times, which we expect to achieve in 18 months.
Longer term for the consolidated company, we are targeting investment grade, which is where a diversified media companies are levered and believe that will align our equity value with where those companies are trading.
Steve marks will now take you through our operating performance. Thank you Lucy and good morning, everybody.
Not only did we exceeded the low end of our media revenues for the second quarter core advertising was up low single digits.
Automotive all slightly repeat that automotive all slightly.
For the third quarter core advertising is expected to be flat to bulk.
While we are seeing some slowdown in the automotive category through that as being or six.
Our strength in insurance legal and home products categories.
Fourth quarter and full year core advertising are still expected to be positive.
On the political front, we are seeing campaigns spend sparingly.
Actions, we witnessed in our second quarter results and even in our third quarter outlook.
As I've stated on prior calls we expect 2020 could be our biggest political year on record, especially when you consider that campaigns impacts our raise more money at this point in the election than previous presidential elections.
Our digital business continues to perform very well with revenues growing 30%.
Revenues growing 30% in the second quarter as compared to the same period last year.
Turning to our outlook.
The third quarter, we were expecting media revenues to be approximately $695 million of $703 million.
Down 4% to 5% as compared to third quarter 2018.
This assumes $3 million to $4 million of political versus $70 million last year.
And includes between 363 and $366 million in distribution fees versus $331 million last year.
On the expense side, we are forecasting media expenses in the third quarter to be approximately 500.
Two 502 million versus $458 million in the third quarter of 2019 with the majority of the increase coming through reverse retrans and growth initiatives.
For the year media expense guidance is estimated between $1 billion $979 million and $1 billion $981 million versus 200 versus 2018 media expenses of $1 billion 821 billion.
The year over year increase is due primarily to higher reverse retrans annual compensation increases and growth initiatives as Lucy stated our full year expense guidance is 8 million favorable to our last outlook.
Adjusted EBITDA in the third quarter adjusted for 34 million, a nonrecurring costs for legal regulatory and transactions is expected to be approximately 159 million to $165 million.
Versus third quarter 2018, EBITDA of 234 million.
The decrease is driven primarily by the reduced political revenues.
Growth initiative.
The investments and tennis rights, partially offset by an increase in net retrans.
Initiative expense.
As Lucy Commerce, we are reconfirming, our free cash flow guidance with that I would like to open it up to questions.
Thank you the floor is now open for questions. If you have a question or comment. Please press star one on your telephone keypad to join the queue.
If you are using a speakerphone. Please pick up your handset to provide the best sound quality.
And we'll take our first question from Marci Ryvicker from Wolfe Research. Please go ahead.
Thanks, just curious on the Q3 guidance for distribution revenues. We thought 18 key comes up in August . So we're curious why there's no step up from Q2 to Q3.
And then can you confirm that when charter kicks in we know you renegotiated and then I have a follow up.
Yes, So 18 key does come up.
Later this fall.
Here in this quarter.
So.
So you only have a partial quarter that would be in the numbers and then don't forget as Chris mentioned, we also have.
The gay assays, which we don't negotiate for that are dark right now and then you also have.
CBS Directv now, which is also currently dark and that's on the CBS negotiated contract, but all CBS affiliates.
Once they got dropped are also dark.
And I would just add to that.
Marci that when you.
Your gross was a bit higher than our guidance in Q3, but.
The reverse was was also higher so the net number is still.
In line and and our guidance for net Retrans is still the same as it was before low teens for.
For 2019.
And then just charter come in October .
No charter is already in effect.
Okay.
Recent charter and announced that one in a few weeks ago, but it really kicked in as well.
Q2.
Okay and then.
You reiterated the $12 $13 pro forma guide I assume that that assume the our esensor picked backup by dish correct.
We assume that those will be carried.
Okay.
Thank you.
Okay.
Our next question comes from Aaron Watts with Deutsche Bank. Please go ahead.
[noise] everyone. Thanks for having me on.
Couple of questions, let me start with that.
Advertising it sounds like you're expecting stable.
Even improving core advertising going forward, despite a little bit of a mixed bag from auto, whereas the auto softness coming from and is it your expectation that even if auto is kind of.
Give or take up or down.
That you can still grow core over the kind of near to medium term.
Well I think auto quite frankly for the first six months for us as an up and down it's been all.
And I'll repeat that it's been up and I'm not sure you're hearing that from other broadcasters and we've been saying this for a few quarters now.
We mentioned a few quarters ago that we have the secret sauce than we do.
And our numbers are up.
Now, we do expect third quarter to take a little bit of a turn and we expect third quarter to be slightly down, but our automotive category for the first six months is up and I'm not sure you're going to hear that from anybody else in these other categories that you're mentioning retail.
And goods and services is right on top of the automotive category in terms of dollars and were plus so between retail and services.
Top three categories. We're pumping along so we do expect core to be positive by the end of the year and that's a good story for us. So the core advertising has been consistent hasnt been robust, but its been consistent and it's been positive.
And Aaron if I can just reiterate that at that point, but Steve smoking so.
Second quarter, we were up low single digits or looking for third quarter to be up flat to up and fourth quarter, we would expect to be up as well so.
Again, I think the companies get if we are not not seen any trend.
Okay now that's helpful and then just secondly.
Maybe a little bit of a follow on to that prior comments, but it seems like.
There are several programming disputes going on right now, resulting in content going dark not necessarily just for Sinclair, but across the industry.
It seems like those disputes are becoming a little more common place of late.
Why do you think that is and.
Are you still confident I mean, Lucy you talked about your expectations for net Retrans growth. This year and next it sounds like you're still confident you can get that growth, but is it going to become more difficult just given the environment right now.
But we are still very much confident in our guidance that we gave I think what you're seeing right now it's really.
All coming from a TTM dish.
And they have.
A few different motivations right now it certainly.
A time of year when there is a lack of active programming.
On broadcast so it's there is a good time to get a good time to go dark and certainly this time of year that changes in short order here in a few weeks.
And then there is also some political motivations with this stellar.
Bill that's that's come up for renewal is a big push.
By I think many lawmakers just let it expire it's really not needed anymore and.
18 T in.
And dish.
Very much would like to see it renewed and so they have.
They have sort of they have a number of motivations to.
To add to it and the way that they are so I think that's what you're seeing right now and ultimately.
The the incremental economics that.
Revpar represented by carrying.
Broadcasters and the subscribers that we support on their systems will ultimately win the day.
Okay. Thank you very much.
Our next question comes from Alexia Quadrani with JP Morgan. Please go ahead.
Hi, This is David Karnovsky on for let's just to follow up on all the distribution questions can you provide just any additional color on how your underlying subs are trending from Q2 into Q3, both on the linear and virtual foot.
Yes, so all in for the pay TV universe, and our our stations we saw very very slight declines in the quarter and we don't we don't break out between traditional and virtual but we are seeing as you'd expect the growth on the virtual offsetting.
And most of the declines which are coming from most of the clients are coming from the satellite players.
Okay, and then just one store that we saw the announcement of 1 million downloads I don't know if there's any incremental color you can provide on how many of the.
These are regular using the product and how that's trending over time and maybe what channels within the application to get into most consumption.
I understand it's still early but is there any commentary you can provide on what type of advertising demand or since you killed a service. Thanks, So I'll I'll speak to the users and then maybe Rob you can speak to the advertising.
It's been it's been a great start we're only six months in.
We're well ahead of budget I think who were up low right now on the usage basis monthly average users are in excess of a half a million people.
So you know that's ahead of our expectations in terms and usage times are quite long.
In terms of.
In terms of what people are watching it's really dominated by the local channel, which is the key differentiator in store or where we give you your local news and increasingly worse you can start more adding more syndicated product that we that you would normally see on our air and that channel, which we call Star City, which is localized to your area is is far and away the largest.
Viewership, but where we're currently over 40 channels and growing every every month, we're adding new news channels, which adds to the to the variety of the viewership.
I would say, we're we've launched 41 channels into the very short period of time, which creates some month after month, we've seen the demand increase we're seeing increase.
Well its over a month in the Cpms that we're driving and we expect that to continue throughout the rest of the year as the store brand is recognized on the national and local level and we'll see the combination of sales growth.
Nationally programmatically and through our local sales staff as well so it's all boding well and I were ahead of our plan year to date.
Thank you.
As a reminder, ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad.
Our next question comes from Kyle Evans with Stephens. Please go ahead.
Hi, Thanks, Chris maybe an update on the launch of marquee I was lucky enough to attended an event, where you guys are pitching.
Ladies and I'm, just like you know kind of how that's going early on.
It's going well we are we had a great event for that wasn't NCTC event.
In Chicago, where they NCTC conference was there and we are we hosted all the small cable companies on really.
And and so you know the the build out of the studio is is Ah well under under way. So we're we're we're on track to be fully operational for Q1 of <unk>.
Of next year, and you know conversations are going well.
I'd also add that we did a deal with home town sports to nationally represent more acute.
Oh, they represent the majority nationally of all our us and so the sales efforts are underway as well.
Great.
Uh huh.
I'm, a little confused about which Fox Arsone deals you guys can and will negotiate it sounds like you've got chartered done, but you're not doing the dish on what what determines.
Whether or not you can negotiate the deals yourself.
Yeah, that's really governed by our contract with.
With Disney and specifically.
Yeah charter was still a little bit different than that it was a prospective contingent renewal, whereas you know dishes being actively negotiated by the team right now like we said we are expecting to close shortly here were in Q3 so.
You know after dish that exact deal with all the other deals going forward to be handled by us.
Great. Thank you.
Our next question comes from Zack Silver with B. Riley FBR. Please go ahead.
Okay, great. Thanks for taking the question just wondering if you could address the networks recent lawsuit against low cost and how you think that plays out.
And also whether our low cost emergence and also some growing I guess, okay household usage is pressuring any of your retrans negotiations.
So we're certainly happy to see the networks Act a you know low caste, although not of any significance in terms of.
Size their subscribers you think it's just sort of Aereo 2.0, and it's it's a.
It's a really a commercial entity masquerading as a nonprofit.
And so it should be shut down and we think that lawsuit will will be the start of a.
That process and in terms of over the air viewing you know eating into our subscriber situation is certainly over the air viewing is growing its only growing slightly.
And there's no evidence that it necessarily you know contributes to people quote unquote cutting with cutting the cord. So you know it's it's the other streaming options that are driving that.
And so we don't really see over the air as having a big impact on that overall trend.
Got it and then just one on they are assigned side, if you could talk about.
Whether you've had an opportunity to sit down with any of the teams engage and what they're interested in becoming an equity partner in their respective artist and then if you maybe see that as a mechanism to keep.
Right the escalation us somewhat subdued overtime.
So while we're in this period of waiting for close.
Nick Tapia that that type of discussion is not something we really can do until after we've closed we already do have significant ownership with with key teams and a lot of the our sands, which we like it aligns interest to variablize as more of the cost structure and that will be a key.
[noise] tactic in renewals going forward.
To do that so I'm not necessarily expecting teams to proactively.
You know go buy into there are since day, one, though I do know there is some interest out there, but we just haven't been able to have those discussions yet while we're in this intervening period waiting for close.
But so maybe there are some some that do happen, but on renewal I I think you'll see more and more teams.
You know have ownership.
Okay, great. Thanks, Chris.
Thank you.
And our next question comes from David Joyce with Evercore ISI. Please go ahead.
Thank you on the digital revenue front being up 30% can you talk about the components there like how much is compulsory contributing to that.
And sort of what the cadence.
It is for for growing that thank you.
Well I'll start with the cadence for growing we we've struck deals with media ocean. So each local broadcast station.
TT front will show up and they can buy.
In a market specifically by call others.
We've done a deal with Comscore to normalize the OTI to you all with within the reach and frequency. So when they are buying both RTT or linear we can now show them that one plus one equals 2.5 to three so there's accredo action by buying both mediums.
And as far as where it stands it's our fastest growing vertical and we have 80 different verticals the loss in our tool chest and we have.
Significant resources and people dedicated along with the local sellers to this space.
We're bullish that you know this is an extension of linear TV. So next generation viewers.
Thank you and if I could switch gears to the programming expense side.
How much do we think about how much of that is for your proprietary content and local news.
And then start and what have you.
Yes, so we can't we don't we don't break out our programming expense to that level of granularity.
No not really.
All right. Thank you.
Yeah, but let me just say that we've been we've been doing a great job over the years of bringing down our programming costs.
Particularly on the on the syndicated side.
Okay.
Alright, thank you.
Yep.
And next we'll go to Dan Kurnos with the benchmark company. Please go ahead.
Yeah. Thanks, a slim taking left here, but I'm just a little housekeeping maybe on a it's a Q3 just the headwinds or the the comp difficulty you have maybe with World Cup offsetting some of the.
Benefit you have from crowd out and then maybe Chris just kind of give us a sense youve announced some incremental updates on 18 C to auto so just how that's moving towards commercialization in the test markets that you guys are seeing.
Yeah, no headwinds from.
Good Uh huh.
Didn't really get any revenues incremental revenues from that.
Yeah, The American Dream.
And the U.S. wasn't in there.
[noise] and we should benefit a in Q3 from a from crowd out from the prior year.
So on 80 I see 3.0, you know there there are a number of things happening there.
The industry has a committed to a roll out Cadthree point zero.
Yeah on 62 stations in markets covering 72% of the U.S.. So that Ah you know that that they should be on air by the end of 2020, that's the sort of the accumulation of the industry commitments so far.
And so that sort of solves the chicken a problem with the with three dogs and you need to get the transmission side up a four receivers to start penetrating the market place and on the receiver front, saying our partner Sankey labs out of India or who is the debuted the first mobile.
80, I see 3.0 ship it at CES has made its first sale of those chips to you know there's a number of people interested in or to start testing and developing new products around that so that was another major milestone as as as Oems and manufacturers start to start thinking about how to integrate this in a in a variety of different products.
And then also on the on the International front Ats Eurthree point, though is is set for a full I T U a membership which would make ats, he's repauno and international digital of standard for adoption in other countries around the world. So that's a major step in terms of other countries that would adopt threed, Idaho, and we think some of that would would that our targets for us to focus on our India, and Brazil, who would benefit immensely from the three does standards specifically in India that you've got hundreds of millions of people with low to no connectivity and a an age you HF spectrum, just laying fallow there. So it's an incredible use case for that country and we'd love to see them move forward. In this this is a big step forget the IP you.
To adopt the standard.
Great. Thanks for all the color.
Thank you.
And our last question comes from Davis Hebert with Wells Fargo.
Good morning, everyone. Thanks for taking the questions I've got two here one on the dish Rfn blackout would you expect any I guess near term negative impact on your RF and outlook.
And if so what is that revenue to EBITDA flow through for the affiliate fee revenue.
We we there is no in financial impact to the current blackout, because we don't own it yet so.
In our full expectation is that you know this dispute or gets gets worked out.
Okay and then my second question is you mentioned the satellite companies advocating a stellar renewal.
I'm just curious what you think they're they're hoping to accomplish for that because as I understand that your network affiliation agreements.
Yeah, I guess largely Trump that risks so maybe if you could provide an incremental color there. Thank you.
Sure.
Okay, it's a as it as the agree as stellar exists today, it's not it's not problematic for for the industry. It just it's just really it on arcane piece of legislation that prevent certain orphan counties from from being able to get you know there are local news sort of which there is a handful.
And and so it's really not a big deal what what the what I guess the broadcast industry really doesn't like about it is it is it just creates a hole.
Rigmarole around a retransmission consent to every few years 'cause it because its sunsets so.
It becomes just a an opportunity for everyone to pile on on all our commercial adversaries to basically you know make us think so if it renews at is you know it's not it is isn't a problem as you point out, but it really isn't a piece of legislation that.
Is needed anymore for anything so you know what a in our in our opinion it should just be a love to expire.
Okay, great. Thank you.
Thank you.
That does conclude <unk> session for today.
I'll turn the call back over to Steve.
For any closing remarks.
Thank you operator, and thank you everyone for joining the call today. This really was a.
Because were offered the company exceeding our expectation as well and reconfirming, our future valuation metrics, but as always if you have any questions. Please feel free to give us a call. Thank you.
Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect your lines at this time.
Okay.
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