Sinclair, Inc. (SBGI) Earnings Call Transcript & Summary

Great. Well, good afternoon, everybody. And again, thank you for joining us at JPMorgan's TMC Conference. We are thrilled to have Chris Ripley, President and CEO of Sinclair, with us today. Thank you very much, Chris, for joining us.

I thought we would start off just on the headline that we saw earlier today about the -- ask you just about the bond swap offering for your RSN debt that was announced today. Maybe you can just sort of walk us through the rationale behind it? Why was this necessary? And sort of the implications for your leverage and cash flow and everything like that?

Great. Well, thank you, Alexia. Thanks for having me at this conference. So the exchange offer that was announced yesterday was opportunistic. We didn't have to do it. But given the market dislocations created by COVID-19, the bonds were trading at around 52, which is really low. And so we are making an offer to those bondholders at a 7- to 8-point premium with cash and secured notes, new secured notes, so that they can get a premium to where it's currently trading. Only if they want. It's completely optional. And the result of this is they will get some cash, they will get a better security, and Diamond will reduce its debt outstanding and even reduce its interest expense by a small amount. So we're excited to get it launched. Obviously, it's unfortunate that the markets had the securities trading where they are. But given where they are, we thought it was appropriate to offer another alternative to our bondholders.

Okay. Great. Well, let's stay with the Diamond Sports Group for a bit and jump to that side of your business. What visibility do you have at this point for conclusions to the NBA or the NHL seasons? And do you expect participation from RSNs if game are played in remote locations?

Yes. So I don't have a crystal ball on that. I -- you probably know just as much as I do, reading some of the trade rags and the newspapers. Specifically yesterday, I think it was, there was a leak that MLB had voted on a plan to start July 4. So America's past time on America's holiday -- I mean, birthday. So that, I think, probably could have some legs if that truly is accurate, which I can't confirm that specifically. But if it is accurate, I do believe NBA and NHL, which I know I've been looking at many, many options for how to pull this off. So they're definitely -- they're very focused on getting their seasons back up and running and finishing them off and there's no shortage of creative ideas that they're working on. But my sense of it is that this summer, call it, July or August, we will see the return of live mainstream sports and just -- as an MLB, it's not the full season. It's not a regular season. There may not be for NBA and NHL exactly what's left on the schedule. Some things could change. But I do expect them to return in some fashion this summer.

Hopefully, you're right. I think we all want that to happen. But I guess assuming the NBA or the NHL seasons were canceled, I guess, what would be the financial risk to Diamond given the seasons were actually largely complete before this happened?

Well, really, that's the operative point, I think, is the one you just made is that the regular seasons were almost over when they were suspended. And so we are very close to our minimum guarantees in terms of game delivery so that the financial impact would be minimal.

And then jumping to the MLB, I think we all hope it will start on July 4. But it sounds like there's a good chance the number of games will be significantly reduced, maybe cut in half. What -- how would that impact, given the minimum guarantees of the team and the virtual -- and your relationships with the MVPDs?

Sure. So the model at the RSN side is remarkably well-hedged. And the idea of not a full season being delivered or even a full season being missed had already been contemplated, not by us, but by FOX and others. And they are mainly -- these types of events were largely driven by the notion of labor disputes and strikes, and that has happened in the past. And whole seasons have been missed, and I think hockey missed an entire season because of the strike. And so it's been contemplated. It's built into the contracts. And at the RSN side, we do expect there to be less games. We do expect there to be some rebates to the MVPDs, and we do expect then there also to be rebates from the teams to us. And so those 2 very closely offset each other.

Okay. And with have major sports currently suspended, I mean, some political figures have called for the MVPDs to provide relief to the consumer for the consumer bills. Have any distributors broached this idea with you? And sort of what's your -- legal sort of recourse you have?

Well, look, we share the concerns generally about giving relief to the consumers. We're all in favor of that. And as I mentioned, our contacts do spell out how to deal with shortages of games. And so -- and as I mentioned also, we do expect there to be some rebates. So what the MVPDs do with the rebates is up to them, though I have heard publicly, many of them say that if they do get rebates, that they will pass them along to consumer.

Okay. Okay. Can you also -- I think you have a big renewal coming up on the RSN side with a -- or I should say, renewal of a larger distributor sometime around this summer. How does the suspension of baseball league so far and other leagues potentially complicate that negotiation?

Right. Well, I think you're referring to Comcast, and they do have both the RSN side and the broadcast side coming up this summer, so they're basically co terminus. And they also happen to be the second largest owner of RSNs, only second only to us and many other sports properties that they own. So they intimately understand the dynamics and importance of sports content, which we think bodes well for our renewal discussion. In terms of the games not being on right now, it hasn't really complicated anything. I would say if it's changed anything, it's really just timing. If we had a -- if the regular baseball season had started already, I think we would have already had a renewal with Comcast done. Since that hasn't happened, we will do it on sort of a more normal time frame of around when the expirations happen this summer.

Okay. Maybe you can also update us on your ongoing talks with DISH and how maybe the COVID-19 crisis is impacting those negotiations, if at all?

Well, look, we currently don't have an agreement with DISH, as you know, and we have not put it in any of our guidance. So really don't have a specific time line for when and if we might get a new deal with them. However, we do continue to engage in talks with them, I would say, in terms of the impact of COVID, if that has had any impact, what it has done is remove some of the urgency. I think the urgency will renew once it becomes clear when sports will return.

Okay. And on the -- I know it's on a huge portion, but can you remind us your ad exposure to the RSNs? And what percent of this is tied directly to live games or indirectly through sort of bundled inventory?

So the RSNs -- and this is true of the tennis channel as well, have about 10% of their revenue in advertising. And so if the games or the matches don't end up happening, then there's going to be less ad revenue because they tend to be the main reason the advertisers are placing ads on those channels. And so we do expect there to be less advertising revenue in both tennis and RSNs. However, again, sticking with this sort of naturally hedged situation, there are offsetting costs that go away when you don't have games or matches. And those costs related to direct production are pretty close to the same number as the advertising revenue. So again, you've got this offset, this hedged situation when it comes to ads.

Okay. And then can you maybe talk broadly about Diamond Sports Group in terms of the cost actions you have or can take to mitigate the impact of the crisis? You mentioned, obviously, the cost of sports. But beyond that and in the long term, does this potentially lead to just maybe structural changes in how you operate?

Right. So look, I think, as I mentioned, there are already these naturally occurring cost offsets. So we didn't really have to do a whole lot to make that happen. Those just happened by themselves pretty much. But we did -- we were early and proactive in addressing discretionary costs like travel, entertainment, open hires, promotional spending. And we did tighten our belt on many of those areas to get additional savings, given the downturn that we foresaw coming with COVID. So those are sort of the more short term, easier things. And we're working on many things on the long -- in the long term, like, for instance, redoing our entire production infrastructure, which is currently outsourced to Disney. And that will essentially rewire the company into the cloud and will make us much more efficient, and that's probably more like a 3-year process. But it will have a significant impact. And some of the learnings that we're getting out of COVID-19 on how to work remotely, especially from a production perspective, which is generally not done on a remote basis or at least from a home basis. And so all those learnings are actually being very helpful in terms of how we can make the next-generation, cloud-based production system that we're currently working on.

And you've spoken, I think, a lot in the past about alternative revenue lines that you think you can develop out of the RSN model, I guess, including on the interactive side, on the gaming side. How does COVID-19 impact the time line for rolling out those measures, both in the short and the longer term?

Well, COVID-19 did slow down the sport betting operators a little bit, not dramatically. They obviously don't have sports to bet on, but many of them have horse racing exposure. And so that's continued to go on. I would say it had a minor slowdown in our process as people just naturally were focused on what's going on with COVID-19 and what had to be done to keep their employees safe, et cetera, and make sure the business is sound. But the sports betting operators have actually rebounded quite nicely. You've got players like [ Rackings ] out there who are trading at record valuations and despite the COVID-19 downturn. So really, despite maybe adding a little bit of time, our focus is very, very keen on this. We're talking to all the all the relative parties within the industry about how we partner, how do we go about building a next-generation, consumer-engagement and betting platform. And we really believe strongly that there will be a convergence between gaming and sports, and gaming could be for money or not for money. But the gamification for sports will be a big megatrend, and will be a big part of how the next generation experiences sports. And we intend on being on the forefront of that. And hopefully, we'll have some more to talk about on that topic later this year.

Okay. Great. Let's slip over for a little bit on the broadcasting side, and maybe you can walk us through sort of the current environment for local advertising?

Yes. So look, I think the second quarter is not going to be good. There's no way to get around that. The first quarter was obviously -- well, not obviously, but it was -- January and February were going quite well for us. And then at the end of March, things just started to fall apart. And as we stated on our earnings report, we believe Q2 core advertising will be down some -- between 32% to 39%. And that's assuming some amount of uplift in the back half of the quarter with the new -- with the states reopening. So there's some chance that, that doesn't happen, that it could be a little bit worse. But the good news from our perspective is the company is so much less dependent on advertising than it ever was. In fact, if you take a look back in 2009, the company got 85% of its revenue from advertising. Today, it's 25%. And the broadcast silo is only for 45%. So it enables us to weather this storm very well. And so there's no doubt that the ad market, as I mentioned, in Q2, is going to be down significantly and auto is challenged. Many -- pretty much all categories are expected to be down. But I will note that the bright spot in all that is political spending. We had a record Q1. There's not going to be as much activity in Q2 because the primaries are over, but we have every reason to believe that it will be robust in the -- in Q3 and Q4.

Staying on advertising with some of the states reopening, I guess, anything you can share in terms of early signs of a pickup?

Yes. It's too early to tell right now. The states that are opening up are generally doing so slowly. So maybe a few more weeks, we'll have some more data on that. But I'd say right now, it's too early to tell. And this is such a unique situation in that, it's a health-driven shutdown, which we've never really had in our modern economy. So we don't really have anything to compare this to. And then also the record amount of stimulus that's come in from the federal government and from the Fed also is unprecedented. So just to give you a small example, but the SBA PPP program, which has been in the news a lot lately, a lot of our advertisers like auto dealers, for instance, got those loans, and they basically floated the business for 2 months for the forgivable loan from the government. So that could set up well for a recovery because these entities that normally might be weak in a recovery, because they've been drained financially, will essentially be bridged by the government. So we don't know how that dynamic is going to play out yet, but it certainly is an interesting setup, one that we haven't seen before and one that could certainly surprise us to the upside.

Just, I know the visibility is limited for Q3. Actually, I think advertising decisions are made so short term nowadays anyway. But is it fair to say that Q2 is probably the trough, though, from what you can see?

Look, we certainly hope so. And we really don't have visibility at this point in Q3. But if you follow the time lines of what the states are doing, when they're doing it -- the logical conclusion is that Q2 will take the brunt of the shutdown, and every quarter after that should be better.

And then just staying on auto. I know you touched upon it briefly. I think auto sales in -- for auto in April appeared to be around $7 million, even with the shutdown of auto dealers nationwide. I guess with many sales moving online, does this create longer-term risk in your view that some local ad dollars may shift online as well?

Well, look, the auto industry and auto dealers specifically already spend a lot digitally. That's one of the reasons that we have digital marketing services tailored specifically to the industry because that's -- there's already more dollar spent there than there is on TV. So every good marketing campaign has the right media mix, and that includes digital, it includes TV, it includes brand building. And we think the notion of having showrooms for people of requiring your brand to be built, will be needed for the foreseeable future. So we don't really see that creating any shifts, if you will.

I guess any other longer-term local ad -- risk to local ad sales that investors may view or including market share for some sector shifting? Just I know from small and medium-sized businesses to more national ad dollars?

Look, I think the main risk that we're focused on, and where we have been focused on for quite some time, but this is now, I think, going to show up more strongly, is in entertainment specifically. Entertainment has not held up its share of viewing compared to things like sports and news. And it's obviously being affected by all the on-demand OTT offerings out there for the consumer. And because of the slowdown now, I do have some concern that the primetime schedule in the fall will not be as robust. So entertainment, I think, continues to be the weak point in the ecosystem because of this increased competition. And now for -- because of the production shutdown, you could argue that production shutdown should affect all players, including OTT. So we'll just have to see. But in terms of your point on local to national consolidation, look, we sell our spots to local businesses. We sell our spots to national businesses. So it doesn't really have an impact. Those advertisers, those national advertisers advertise just as much as the local advertisers do. And our inventory is just as relevant to them because it has the eyeballs. So I think that the world is a little bit more consolidated than it used to be, but we don't see that adding some sort of headwind.

Just to your point about maybe not having a robust entertainment schedule at least the beginning of the fall, and with the suspension of at least some sports, if not all, at that point, does that raise the risk in your view of maybe an acceleration of cord cutting? And I guess do you have any data that you can potentially share to us in terms of the Pay-TV subscribers at this point?

Well, I don't have any data since most of our data is about 90 days in arrears. So I like -- I'm sure you were, we're watching all the earnings reports for -- from the big MVPDs. That's the latest and greatest data out there as to what's going on with the Pay-TV Bundle. And my takeaway in listening to them is that they don't see an impact in their numbers yet, but they are concerned that perhaps there will be some economically driven cord cutting as people lose their jobs and they can't afford to pay their cable bill anymore. So certainly, that, I think, is a potential issue out there. But on the other hand, usage is way up. And so our ratings on the local news side system-wide are up almost about 40%. And overall, TV consumption is way up. And so all of our digital sites are up. They just -- everything is up across the board, everyone's at home. I think this whole COVID downturn is a big negative for out-of-home entertainment, a big positive for in-home entertainment, and that's what we are. We're an in-home entertainment. And I think the usage patterns coming out of this, will persist for quite some time. So it's not just going to go back to the way it was when COVID is over, which should auger well for in-home entertainment. So on the one side, you've got sort of the hard reality of economics and can people pay their bills. And on the other side, you've got a service that's being consumed more, it's in demand more, that's essential. People rely on things like our local news to keep them safe and informed. And so those are the 2 sort of trade offs, and we'll just have to see how the market unfolds.

Do you think there's any impact on negotiations on the station side for the fact that live sports have been suspended for now?

No impact that we can see so far. I mean I do think it's worth noting that we are much more than just sports, specifically on the broadcast side we're local news, we're syndicated talk shows, game shows, prime time -- I mean, you go from strength to strength in terms of audiences and product when you look across the schedule on a broadcast station. So not having sports, of course, sports is important. It's a pillar within the schedule, but we have other pillars as well. And we don't see that affecting the negotiation position right now of the broadcast stations.

I've got a bunch more questions, but I do want to make sure people in the audience know that they can submit questions either through chat or through the Q&A function here, and I can go ahead and read them out to Chris. I do have one here, Chris, which I'll jump into. If ratings for local news are up sharply since COVID, then will there ever be some monetization of that either on retrans or on ads?

Well, yes. So ratings are way up. We have -- we try our best, obviously, to sell every spot, but sellouts are way down. Demand is way down. So the short answer to that is, it's not going to come through in the numbers because of the lack of demand. But there's a more nuanced answer in that those extra impressions, we use those for other purposes. We use those for promotional purposes. We give spots away to our best advertisers to keep them, to bonus them and keep them loyal to us. And we're even using some of our empty spots to promote or we're going to be using some of our empty spots to promote the benefits of the Pay-TV Bundle. So the inventory doesn't go to waste. It gets used. But at least as it relates to Q2, it's not going to necessarily turn into hard dollars and cents.

And I wanted to jump back to your comments earlier on political advertising, where it's taken a pause a little bit in Q2 after a very strong Q1. It should kind of rebound in Q3 and early Q4. Do you think it can't -- I guess, one consideration, which was a question I got from somebody is, if -- given the current environment, will the candidates maybe stay away from maybe negative advertising, be a bit more -- a bit less aggressive maybe because of that? And maybe you won't see quite as much? Or is that not realistic?

We see no signs of that. We're still getting lots of political advertising despite the primaries are essentially over, but we're still getting ads that -- I think one broadcaster is actually getting sued by Trump over one of these ads. And so that doesn't appear to be any sort of COVID-19 truce going on, if that's what you're asking about. And the thing about politicians that makes them such great advertisers is that they have -- they raise a whole bunch of money and they spend every last dollar. And they only have a small window of time to do that and make an impact, and we are the best outlet for them to make that impact. So a lot of the dollars end up going to players like ourselves because of the value that we offer in that and ability to scale their message in a short period of time. So they're -- really what we focus on more than anything else when it comes to political advertising is how much money is being raised. And so far, it's record amounts. And could COVID slow down that fundraising? Maybe a bit. But if anything, I think it will catalyze people in one way or the other to act and back their candidate that they are interested in.

And just -- I do want to jump over this, but for both sides of your business, Diamond Sports Groups and the broadcast side, maybe you can just remind us of any liquidity or any relevant covenant concerns that investors might be interested in?

Sure. So on DSG, plenty of liquidity there. At the end of Q1, we had about $483 million in cash. That included $225 million that was drawn on the revolver. We have another $425 million of availability beyond that, and we're likely to repay that revolver. We just drew that out of an abundance of caution. Wondering if the financial crisis could ensue, it doesn't look like that's going to be the case, given the actions of the Fed, so I'd say we're very likely to pay off that revolver in the not-too-distant future. And with 40% of our annual rights payments, behind us, the heaviest period of the year, January to April for the RSNs has already -- we've lapped that. And so from a cash perspective, the cash balance should continue to grow. Liquidity should continue to grow through to the end of the year. On STG, great liquidity situation there. We had $844 million of cash on the balance sheet at the end of Q1 that did include money from a fully drawn revolver of $648 million. Again, that was just a precautionary move, make sure that there was no financial distress in the banking system. And we have actually since paid that revolver down to a $225 million draw. We did that in April. And as I mentioned, on the DSG side, likely to pay it down to $0 because we don't really need all that cash. At the end of first quarter, STG had a senior secured first lien leverage of 2.5x, so very low and very manageable.

How should investors view Sinclair as sort of the parent company allocation, I guess, between the 2 silos? Can, for example, broadcast, allocate cash over to the sports side?

Well, it's possible but not likely. Our intent is to keep the silos separate. They both are free cash flow positive, they both have financial flexibility, avenues for financings. And so no reason to believe that they can't be self-funded.

All right. We have a ton of questions here, but only have, I think, 2 minutes left. Let me just ask 1 more. I'll sneak one more in. If MLB plays an 82-game season, how many games will the RSNs have the right to air? I'm assuming some of the games will be preempted by FOX's national broadcast.

So it depends. It's not a hard number. It depends by team. But generally speaking, in any given season, we'll lose 10 to 20 games to the national broadcasters in a regular season, which I'm not sure if that will be the case in a shortened season, whether those national games will also be shortened. That's to be determined. But what I think is important to understand is the point I made before, about having a hedged operating model that, for whatever reason, a game is not delivered because of COVID, because of a strike, because it went to a national player, there are contractual protections for us as it relates to those.

And I'll pick the shortest question as we only have a minute. Target leverage for Diamond Sports Group?

Our target leverage remains unchanged, which is mid-4s, low to mid-4s. And so we're obviously in an elevated situation right now with DISH not being on the books anymore, but we think that will resolve itself at some point. And we're working hard to delever the balance sheet there.

All right. Well, we just made it. We're out of time. Thank you so much, Chris, for joining us. We really appreciate it. And thanks, everybody, for listening.

Thank you, Alexia.