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

Thank you, everyone, for tuning in here. I'm really glad to have Lucy Rutishauser from Sinclair Broadcast Group. What we'll do is we'll do some Q&A, and feel free at the bottom of your screen there to send over any questions that you have. But before we get -- I'm Ryan Vaughan, I work as a TMT desk analyst at Needham. I've been here for about 4 years now. Really glad to have Lucy with me here as well. Lucy is the Executive Vice President and Chief Financial Officer of Sinclair, a role she's held since 2017. I feel like you've been there for 20, 25 years in various financial roles. We've known each other for a long time. And again, thank you for joining us, and let's get started.

So Lucy, look, obviously, the topic of the last couple of months has just been this COVID-19. No one saw this coming, especially this effect. But it looks like you're in your office, it's a step in the right direction. But what would you say, just kind of big picture, how was COVID kind of changing your business? Anything that you've learned? And any sort of kind of long-term changes you see coming out of this?

Sure. So first off, Ryan, thank you for having me here today. I just want to say that the company has done a great job of adopting to the change in a very different environment than what we experienced in the past. So whether it's our new staff, reporting from home or 10,000 employees working remotely, we're very proud of our employees who have helped make the changes as seamless as possible. As expected, in times of national macro events and as discussed on our earnings call, the advertising revenue is down due to the pandemic, economic weakness, the shelter-in-place rules and sports postponement. While the sports division has natural offsetting costs, the broadcast division, not so much. So having an experienced management team that has navigated through several downturns in the past has enabled us to react quickly, to identify cost savings to defend against those ad reductions. We had so far identified about $130 million of OpEx and CapEx savings and deferrals for this year so far and we could do more if necessary. We are also starting the process of gathering insights from the field on what we've learned from remote working and what improvements we can adopt longer term. That includes how to use technology better and to become more efficient. So we're just starting that process a lot more, but I do expect meaningful changes and savings there for us longer term.

This leads me to the next question, and that's also why I wanted to say you've been there for 20-plus years. You've seen recessions. This one is obviously a little bit different, the magnitude and how fast it happened. But I do think it's going to end quicker than others. But just if you can, the most recent one that comes to mind is 2008, 2009. You've been through this before. What can you tell us? Obviously, it's encouraging, the $130 million of cost savings and being able to operate without actually being in the offices and newsrooms and all that. But what would you say, what's similar, what's different, versus the last go around in '08, '09?

Yes. So you're correct. I was here through the Great Recession, I was here through the 2002 downturn as well as the post 9/11 impact. What I would say is the Great Recession was a financial crisis, while this is a health care crisis. And while you have spikes in unemployment and economic downturns in both, this time around, the government has injected monies into the economy and to the SMBs much sooner. So we don't have the liquidity crisis that we had in 2008. But I think the biggest change here is for Sinclair. We are a very different company than in the past recession. So for one thing, we are much more diversified. We have a greater geographic footprint. We're now in 89 markets. Back then, we were in 39 markets. Our stations are higher ranked with strong award-winning news operations. In 2008, we were pretty much concentrated with FOX, CW and MyNet. Today, we are one of the largest affiliates for all of the networks, including the big 3, so a much higher-quality portfolio that we have. We didn't really have digital assets back then. Today, we have best-in-class digital businesses that at pre-COVID were growing about 20% to 30% per year. In 2008, 2009, 85% of our revenues came from advertising. Today, it's only about 25%, 30%. So we have significantly de-risked the enterprise, and our credit is a lot stronger. We have lower net leverage and no major maturities. Also, what I would say is, with this being a political year, that will help offset weakness from COVID that we're seeing in core advertising. And while it's difficult right now to assess just how quickly advertising recovers, we have run and are prepared for a number of scenarios and don't anticipate liquidity issues. Certainly, we've learned a lot through all of this, and we can take that knowledge as we just talked about to make us a better company going forward.

Yes. I believe you guys talked about it on the earnings call as well as some of your peers that your ratings, your viewership, even the demographic has started to skew a little bit younger. What have you seen over, call it, the last month or 2, just in a bunch of [ sitting here in ] markets that you've done today as far as what you're seeing from some of the measurement companies and who is watching?

Yes. So we -- so that's all correct. Our local news always does very well in ratings at some of our highest rating dayparts. But once COVID hit, we were seeing our local news ratings up significantly. On average, 30% in the month of March and during peak periods, we were close to 60% up. Our digital impressions, as I mentioned, we have best-in-class digital assets. Our digital impressions have been almost double. We're also seeing gains in many of our other dayparts, our syndicated content as well, given the stay at home rules. And then when you look at the ratings on STIRR, and STIRR is our free streaming app, we just launched it just over a year ago, so it's still very nascent. But they've seen a 50% increase in unique viewers in April versus March. So again, a lot of people at home, a lot of people watching TV, a lot of people watching the news on all platforms.

Just to follow-up on that. In some of your earlier comments, you had mentioned 89 markets. I know you're in some big markets, but you're also in a lot of midsized markets that hopefully weren't as affected, as you know, I mean, New York City as well as the West Coast shut down very early. But particularly, the East Coast that's been hardest hit, have you noticed -- or maybe another way to think about it of your markets, how many have opened up just over the last couple of weeks that maybe as we start thinking about the recovery, is that -- did those markets come back faster, do you think, versus the New Yorks of the world that are still under a pretty large shutdown?

Yes. So what I would say there, again, we are in 89 markets across the entire country, coast to coast. And so the different parts of the country are in different phases of COVID. As you mentioned, the coastal states got it first and have been probably hit the hardest. But we're seeing shutdowns and shelter-in-place rules across all the states. Now the good thing is they are -- the states are just starting to open up. We are starting to see some of the businesses open up and that will be good for us. So we think -- and in the guidance that we publicly gave for second quarter, which was for core ad to be, on the broadcast side to be down, call it, 32% to 39%. That's our estimate for the quarter. And built in there is for the core advertising to improve as the quarter goes on. And so having states start to reopen and having sports actually start up even though they're to fanless venues, should all be good for us going forward.

Before we jump to sports, let me just ask you about political, very strong first quarter that obviously having [ a form at ] Uber in there helped. It seemed like everybody -- I think there was a call out, but also just very competitive. We expect it to be quite strong. Then came the virus, and it seems like things are going to slow down. Maybe just the internal optimist, it's maybe good timing that this happened as you start thinking about May, June, July. Correct me if I'm wrong, but those are generally slower political months before you get into September, October, where political really starts to take off. But any sort of change on your view, the -- a lot of your broadcast peers, a lot of investors were very excited. January, February and March and even before that, just given how strong this year should be, Trump has more money now than he spent all the way through October of 2016. But just your expectations, have they changed at all as far as this being a record political year? And then if you could just remind us of the cadence of when those dollars tend to...

Yes. So look, you got it all right, Ryan. We had a record first quarter for political, and we still expect a record political year this year. From a cadence standpoint, you're correct. The bulk of the political dollars will start to come in late August through Election Day. So we're still very early on in the process of really seeing those dollars. But what we know is that there are large amounts of political funds that are being raised. Now where this COVID will actually help a little bit is that since campaigning and gatherings are limited by social distancing rules, the expectation is that local TV will gain share of those dollars. And that's really because of our local news presence, which historically, is the first place that political dollars typically go. Then you add on to that, our digital assets, add on to that our large audiences and add on to that, the fact that we've spent the past couple of years adding additional news dayparts and additional news inventory. And then when you think about in states where we've overlap with the RSNs, right, where you could have -- because of spillover, right? So as the TV station gets filled with political, right, we can also pass some of that onto the RSNs. And depending what happens with sports, we could be running sports at the same time as the peak political hitting. So this really all does hold together for the year. And so again, the takeaway is we still expect this to be a record political year for us.

Let's jump over to sports. I think everybody is starving for sports at this point. A couple of organizations have found ways. UFC got a few fights off, was it last week or the week before, we saw a couple of things last weekend. Look, you guys own a lot of rights to sports, major organizations, obviously, baseball, just -- I mean, look, you have to have a decent handle just from your conversations with teams, the distributors, et cetera. What's the latest? What are you hearing on the sports front, what's next, what's coming? Any sort of time line?

Sure. So really not much different than what you're hearing out there in the media. The leagues very much want to resume the games. They're still trying to work out the logistics of how to do that. The big thing people want to know is what does that mean for us? And so our contracts with the teams already contemplate the possibility of [ fewer leagues ] and there's mechanisms in those contracts to address scenarios where not all the games get delivered. Again, if we have fanless venues, that would be a positive for the RSNs because that will be the only place then where you could watch your local team. So anyway, we're -- but you are correct. Sports have just started, NASCAR had done something. In fact, Tennis Channel aired the start-up of some of the tennis tournaments. We not only aired that on Tennis, but on RSNs and on the broadcast stations. So we're starting to see that up and some of the early ratings data that I've seen on those, the sports have been very high. So yes, people are starved. They want to watch sports. And now we just got to get it started again.

On the same lines, yes, just reading about the MLB, for example. It does seem like they are pushing forward. Just remind us if it's -- whether or not they operate in Yankee Stadium, for example. Obviously, you have an interest in the YES Network. But just if you could remind us, how does this work if the Cubs are playing in Arizona or if some of the other teams that you have the rights to? Does anything change there for your rights if it's -- the game is actually being played outside of your market?

No, no. So nothing changes there. If you're a Cubs viewer, as an example, regardless of where the Cubs are playing, you would still get that game.

And then as far as the Cubs, obviously, you're very excited about the launch of Marquee, and then came the pause of the season. But any sort of how things are going, what you expect from the Marquee side of things as the season opens up here?

Yes. So we -- look, we've been working for the past year to get Marquee up and running. It is a start-up RSN with the Chicago Cubs. So we spent last year building out the studio. It's a fantastic-looking studio. We've been working with the MVPDs for the distribution, and really have most of the MVPDs. Comcast is the one that we were in process of working on when baseball got postponed. So those conversations have slowed down a little bit. But we do have our other -- the rest of the RSNs and our TV stations to come up this summer. So I would expect that they all kind of get bundled up into one conversation. But Marquee is -- it's live, and we're airing a lot of other Cubs content on there right now.

You mentioned Comcast, that's this summer, right, that the other ones come up?

Yes, the broadcast assets come up in -- beginning of the third quarter and the RSNs at the end of the third quarter.

Let me just jump back on the other side of the business quickly. Just can you remind us on just how the programming fees are working as you share in some of those costs for sports, for example? Is it fixed fees, percentages, just how most of those agreements are working in 2020 and beyond.

Yes. So what I would say is most of the networks have moved to some type of fixed fee programming. But when we think about the network affiliation agreement, I want to point out, and I know that the Street always wants to talk about whether you call it reverse, retrans or a programming fee and focus just on that piece. But that's not really how we think of it. Because when we negotiate for the affiliation agreement, there's a lot of value in those where value is changing hands across the table. And so we think about what is the total affiliation agreement, value offer as opposed to one component of that.

And then just as far as, can you remind us how it works in a particular market if there is an OTT offering or if there's an app offering from one your stations, how all that works to get the live feeds for OTT, specifically?

Yes. So I think what you're referring to there, Ryan, is -- are the virtual MVPDs. And so they work a little bit different than the traditional. So when you have the traditional, we negotiate with those MVPDs, and then there is a payment back to the networks. With the virtuals, the networks negotiate those agreements and then they give us the payment back. So what happens on the virtual side is we don't really know what the network is getting, we just know what our share is. And then the affiliates opt in or opt out to those deals.

Segue into the traditional versus the virtual. We've seen some really nice growth on the virtual. It's offset some, but not all of the churn that we've seen on the traditional side. This quarter, in particular, was -- we -- by our math, we count that the industry subs dropped about 5.5% year-over-year. As you guys have alluded to in the past, we run the same numbers. Obviously, one distributor in particular makes up a huge chunk of that. But they are a large player. Let me ask you, how much of this do you think is driven -- just -- and I know it's very live, and we projected 2Q to have a similar number of losses. I think AT&T will get a little bit better. Comcast are getting a little bit worse in the virtual, so continuing to grow a little bit. But how are -- what do you think is driving near term the customers from live linear? Do you think it's economic? Do you think it's -- there are no sports, and sports make up half of the -- of your video cable bill. Just how are you thinking of that real time on a 5.5%, 6% year-over-year drop?

Yes. So let me back up to the historical numbers first. And you talked about sort of mid-single declines for the total Pay-TV universe. And you're correct, if you exclude just -- there's really just one distributor that's driving the declines. When you exclude them, the Pay-TV universe has really been flattish over the past several quarters. And I think that's important to understand. The other piece that's important is that there are lags. So if it's a virtual because those payments first run through the networks before they come back to the affiliates, it could be 120 days before we see what those actual numbers are, so whereas a traditional, maybe they're more like 60 days. So there, you have this mismatch as well. Where you might be seeing the churn before the virtual actual catches up to the same place and time as the traditional. But when I think about going forward, and this is going to be pretty interesting to see how this plays out. On the one hand, you have economic concerns and unemployment, which could lead to more cord cutting. But on the other hand, you have the COVID stay-at-home rules, which could lead people to either potentially adding more subscriptions or even be in a hedge not to cut the cord because there is no other form of entertainment available right now other than TV. And I believe there is one distributor who has already indicated that their subscriber decline rate has moderated. So again, interesting to see how this plays out over the next couple of quarters.

And just given just the importance of the RSNs. And as we've talked about, the contracts and the minimums that you highlighted earlier on, maybe just refresh there for us, if you don't mind. Just there are -- if I'm not mistaken, the terms of the contracts contemplate minimums and rebates. If you could just clarify. I feel like you've talked about it a couple of times now in the last couple of weeks, but just exactly, how you're thinking about that and if it's a nice hedge. I think that were his words, but just touch on that. And then I have a question of what you're most excited about from the RSN side of things over the next 3 to 6 months?

Yes. So I've have talked about this quite a bit over the past probably 60 days. So there are natural hedges in the RSNs. So if you don't have games that are being played, as we've forecasted in the [ second ] quarter, the advertising revenues decline, but you also don't have the production expenses, so that's a natural hedge there. Then what happens on the contractual side, we continue to pay the teams as though the games are being aired and the MVPDs continue to pay us as the games are being aired because as I mentioned earlier, the contracts already have mechanisms to address if you don't deliver all the games, what will happen. So everybody pays according to the contract. And then when you get to the end of the delivery period, and that could be maybe the end of the season, it could be the end of the year, the contracts are all different. Then you look at how many games were delivered and you have true-ups. And what I would say is we are not going to pay a rebate back to the distributor without having an offsetting rebate from the team. Now those -- are those going to match up perfectly remains to be seen because each league has different game minimums and how they calculated, and each MVPD has different game minimums and how they're calculated. But again, I think the important thing for people to walk away with is that there are these natural offsets for the direct cost as well as the contractual cost.

And then just on the RSNs, what are the, either next milestones, major milestones that you're looking for? What are you most excited about over the next, call it, next 3 to 6 months

Yes. So look, certainly, we're very much looking forward to live sports returning. That would be the first milestone for us. But we also have a lot of initiatives that we're implementing on the RSN side to drive future growth. For instance, we're rebranding the RSNs and developing a new app to replace the Fox Sports Go. The app that we're looking to build will provide a better experience for the viewer, more interactivity, customization, personalization, and we intend to add sports betting capabilities to that. The RSNs also have about 700 million annual impressions, which currently are not being monetized. And as I mentioned, our digital assets pre-COVID, were growing 20%, 30% per year on the broadcast side. So it's something we know how to do, and so we can use these existing annual impressions to drive monetization. We're also integrating the RSNs onto our systems and training their sales staff on our CRM, customer relations module, digital agency services, which we have Compulse. It's a fast-growing product for us. They really don't do any digital agency services. We also have the $100 million of the estimated annualized production and programming synergies that we mentioned when we bought the RSNs, and we're working to achieve those over the next couple of years. But the biggest growth driver is really going to come from legalized sports betting opportunities. So there are now 22 states where sports betting is legalized, and we expect, as a result of COVID, more states to act to push that legislation through. We have proposals from many companies that are looking to partner with us. And when you think about the sports betting opportunities, the benefits could take the form of adding a new advertising category, gamification, interactivity, new programming around sports betting, targeted opportunities, sponsorships, and these are just a few that I name. So these are some the things that we're looking forward to and the reasons we're very excited about the RSNs.

Let me ask you about free cash flow. It's hard to imagine even going back to my early days in the space in '08, '09. We still have you generating about $700 million of free cash flow this year. And on a couple of year basis, it's $20 a share, let me just look at where your stock is today. But how are you prioritizing cash and free cash flow? Also, do you think that even on the broadcast side, do you think there will be some TV stations that come available coming out of this for some smaller operators, but the question is really just around the use of free cash flow in 2020?

Yes. So each silo has its own cash usage prioritization. On the TV side, the cash is earmarked for growth opportunities, delevering and shareholder returns. In fact, in the past 75 days, we bought 14% of the total outstanding shares. It's a lot of shares that we bought, creates almost $10 of share price accretion, which, by the way, since we announced that, is still not reflected in the share price. The dividend yield is about 5%. And then when you think of Diamond, Diamond's cash priority is also for growth opportunities and deleveraging. M&A, look, it certainly has slowed down, unclear how this shakes out. But we were -- heading into COVID, there were M&A opportunities that are out there, so we'll have to just wait and see what happens there.

Yes. I mean look, the share buyback's just staggering. I've seen you do this a couple of times now, or was it a couple of years ago as well as this, like you said, the past 75 days. Also factoring in that the Smith Family owns so much of the company already, we calculate more than 30% of the outstanding shares today. What do you think? I mean you've been doing this for a long time, and you've seen the good, the bad and the other and been through, obviously, a lot of the ups and downs, which is really what we're dealing with right now. But what do you think investors are missing? Where do you think the disconnect is? I'm wondering, you guys are sitting there saying, we'll buy as much as we possibly can. We'll keep buying as shares continue to trade below clearly what you think is intrinsic value. But just your thoughts, where do you think the disconnect is and what investors are missing?

Yes. So I think there's a lot that's not understood, particularly on the RSN side. So investors still don't understand the dynamics of the local sports business, especially how the minimum game guarantees mitigate a lot of the risk from the postponement of the games. We've already talked about that, so I won't go back into that. But I think there's also still these macro concerns for a subscriber churn. But that's really a media industry concern. It's not just an RSN concern or a broadcast concern or a cable network concern. It's a media industry concern that they have. And so in those cases, really, all we can do at this point is make sure that we've positioned ourselves to have the 2 most relevant content genres, local news and local sports and to make sure that both are broadly distributed, which is what we do. So we have the 2 growing content genres that are growing share. And we are broadly distributed, other than DISH right now, across the traditional and the virtual systems. So we've done everything we can to make sure we're participating in this broader ecosystem as viewers move from one distributor to the next. The stock price already reflects the RSNs being off of DISH. So DISH has -- we've been off of DISH since last July, which is before we purchased the RSNs, we've been in conversations with DISH. But since the stock price already reflects that and we've taken it out of our 2020 guidance, that's really just a free option to investors for when they come back. Then when you think about churn and you really -- it depends which camp you're in for COVID-related churn. So are you in the camp that you think there's going to be cord cutting? Or are you in the camp where you think churn mitigates and doesn't accelerate because of the stay-at-home rules. And then I think, too, there's concerns about liquidity, particularly on the Diamond side. And our silos have ample liquidity. We expect both of them to generate free cash flow. We don't have any debt maturities for several years, and we continue to optimize the capital structure to make us even stronger. In fact, last week, we did announce a debt exchange on the Diamond side that we expect will save us some interest expense, lower debt and improved net leverage. I also think that there's really no value being put on the RSNs for the future sports initiatives that we've talked about, and again, those are increased advertising opportunities, whether from core, political or digital, capitalizing on the digital sports impressions, adding the new app offering with increased capabilities, legalizing sports betting opportunities, the annualized synergies from production and programming, and then if we do any DTC opportunities down the road. On the broadcast side, this is a big political year. The industry is implementing this next-generation of broadcast television, which provides for an incredible viewer experience, mobility, personalization, targeted opportunities. So when I think about the investment thesis of why we bought the RSNs, that hasn't changed, and there's no reason they should be valued at a multiple and price that reflects anything other than a free cash flowing entity with upside. And on the broadcast entity, we really are redefining ourself through this new technology. And then when you think about Sinclair in total, the company has evolved from being a local broadcaster to a diversified media company.

Great. Just doing some rough math. Fast forward a couple of years at the rate that you're on, I guess, it's -- Smith family will own over [ 50% ] of the company and free cash flow, you get another $10 of free cash flow accretion, holding all things. But I think that's about -- out of time, obviously [ 5 minutes ] remaining. Yes. So look, I think you covered a lot there at the end, a lot of balls in the air, a lot of ways to win, especially in the sports side, sports betting and some of that stuff. And then, yes, always a great -- greatly appreciate your time in coming on here and, hopefully, things start to open up here and ad dollars start to come back and people are able to get back to a little bit more of their normal lives here. Thank you so much for your time.

Appreciate you having me, Ryan. Thank you.