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

Good afternoon, everyone, and thank you for joining us. My name is Marlane, I'm the high yield cable and media analyst here at Bank of America Securities. We're happy to have with us Chris Ripley, President and CEO of Sinclair, here with us today. Chris, thank you very much for joining us today.

Thanks, Marlane. Great to be here.

Great. So Chris, just starting on a high level, obviously, it's been very unique past couple of years. So heading out of 2020, working through 2021, what are the kind of the main priorities for Sinclair heading into 2022?

Yes. Well, look, I think we're very focused on growth for 2022. The ad market is set up exceptionally well. It's just been one of the robust bounce back we've seen from a recession in terms of many, many categories coming back stronger than prerecession. All of our admin rate ex auto is up over '19. Now obviously, there are [indiscernible] around auto and other supply, especially overseas supply categories like, say, furniture. But those I think are going to get worked out. So growth for the core business looks to be setting up exceptionally strong for 2022. Then you've got political for next year, which looks to set new records for midterm elections. You've got a much more robust situation at least for us for net retrans growth in 2022 given the dynamic of our, how many subs we have up for renewal on the TV side versus the network side. And we also have many exciting new growth businesses hatching in the portfolio like Impulse 60, which is our digital marketing services SaaS platform or sort of what sometimes call desk for local, which will be growing fully. Now that it's gone proof of performance this year. And of course, we've got direct into sports. Well, so next year was gonna be bigger for us and an exciting year for growth.

The rest of this conversation. So starting with advertising trends. Obviously, there has been significant recovery from last year's growth, so can you talk about what the recovery has looked like across categories, highlight some of the standouts that you've seen. Obviously, auto has been a topical -- has been topical. So any commentary there would be helpful.

Yes. Well, all of our major categories came back very quick and very strongly post pandemic. And auto was an outlier due to the shortage, furniture stores due to supply gains have underperformed -- But as I said, I think with us will get worked out here as new supply as new supplies come in and supply chain issues get worked out. And a lot of that weakness for us has been mitigated by new categories of strength along with services, which is now our largest category, and that's quite a statement to say, and it used to be and years that auto was undoubtedly our biggest category across all of our properties and now services eclipses audit. And then sports betting has been a major standout where it literally just was virtually nonexistent in 2018 and now is a significant category in 2022 and 2021 and set for even more growth in 2020.

Great. And then moving on to retrans. Can you talk about the trends you're seeing and any repricing opportunities? And can you just, on top of that, share your view of kind of a longer-term trend that you think we'll see in retrans?

Well, there is still a massive gap in retrans in terms of the value delivered by the broadcast to the Pay-TV bundle vis-a-vis their viewership share and quality of the programming that they bring to the table and the exclusivity of the programming that they made to the table versus the share of the Pay-TV part. And that's been exasperated over the last few years by degradation in appeal of general entertainment channels. What they delivered relative to the broadcast channels I think has been degradating in a relative perspective. And it just makes the broadcast stations just that more valuable in terms of what offering is when you consider our mix of news, live, superprime sports and entertainment programming and talk shows and game shows. It's just very, very powerful mix and on a real basis becoming just that much more important in terms of Pay-TV bundle. So we certainly like the set from a long-term perspective. And then in the short-term, we had a challenging year in 2021, where we had a significant number of network step-ups at the end of 2020, which impacted us for full year 2022. On the retrans side and very and only 1 major distributor halfway through the year renewing on the grocery trans side. So we'd not grow net retrans this year. But that brand looks set to verse into 2022. So this is much better for us going forward in terms of, I think, 2022 the mix of renewing network subs versus distributor services about the same.

Got it. And then moving on to streaming and kind of direct-to-consumer. Can you provide us with any updates on timing and the content you expect to include?

Well, our timing expectations have not changed in terms of direct-to-consumer sports. It is targeted for the first half of 2022. And as we get closer, we'll release more specific details on that. The product that we're working on right now will include all the NHL teams and the NBA teams and the more recently renewed MLB team that we have that direct consumer. And so that's scheduled launch next year, and we're excited about it. It should be quite groundbreaking.

Great. And then have you been able to secure any more rights with Teams since we last spoke with you in terms of 3Q?

No, nothing has changed there. We have active and renewal negotiations with NHL and NBA. We have the -- and then we have 4 teams that we've recently renewed from MLB. And of course, the Cubs and the Yankees have their, they are since have their respective [ easy ] rates as well. And so nothing's changed from the third quarter. But I do think there will be some news around some of these renewal positions shortly.

Got it. And just to be clear, like will the content include NBA or NHL? Or are those types -- are those right for something that would be in the work?

Yes. that's our expectation is that we would launch with NHL, NBA and the teams that we have, the MLB teams that we have.

Great. And last, I've read the MLB, it looked like there was a pending lockout. So do you see any impact from that? Any comments there?

Yes, there could be an impact. We -- I don't have insight into the labor negotiation there. So like it's pure speculation what may or may not happen. And -- but obviously, if the easing is delayed for MLB, then we won't have a key 10-hole to support both our linear channels and any new DTC. So that definitely would have an impact on the start.

Got it. And then shortly after you released your third quarter results, it was announced that an agreement was reached with DISH. So can you talk about the positives and maybe from the negative takeaways from the agreement? For example, we did not see the RSNs included in the agreement. So any commentary there would be appreciated.

Yes. Well, we had a very lengthy complex and difficult negotiation with DISH. We're pleased to have gotten to a new deal with them without any loss of carriage or having to go dark for any period of time. And that is unusual for DISH. They are known for blackout players. And I think the challenge with only RSNs, they had been off for over 2 years and had dropped pretty much every other RSN that they had in the portfolio that they could. And so it was not going to be possible to get.

Understood. And what would you say are kind of some of the key positives with the agreement just in terms of -- for both sides?

Well, I think it was a good renewal. Obviously, for the broadcast side, there was no carriage RSNs. But -- and we didn't black out another day. We didn't franchise [ consumers ] through a key period of time during the NFL season, and we were able to come to an agreement that was beneficial to both sides.

Great. And next, I wanted to touch on and get a better understanding of Sinclair's relationship with Bally's outside of the RSNs and Diamond Sport and just get a better understanding of what the opportunities there are?

We are a significant stakeholder in Bally's. We have options and wants to acquire up to, I think, it's 12.8 million shares in Bally's. So, if we were to do so, it would be the second largest shareholder within Bally's. So there's a significant economic opportunity there with Bally's and Bally's has a great brand of regional casinos, which would then bound back hard off the pandemic, but also give it this terrible footprint or access for our sports betting access. And beyond footprint of regional casinos, which gives us access in many states, it also has won access and so other digital-only states like [indiscernible] for instance, which is the highly priced. And that, combined with its recent merger with [indiscernible] which will bring over best-in-class technology from Europe to power its offering here in the U.S., we think it will be a very powerful combination. And some of the things that we're working on with Bally's include watch and play experience, which is a cornerstone of where we think sports is going in the future. It's a secret that sports has a graphics problem in terms of people who are interested in watching these games. There is a lot of affinity for the sports itself. But when you look at viewing patterns, it's really the older cohorts that are sitting and watching a game from start to finish and the younger ones are perhaps just watching the highlights or catching the summaries of other digital platforms. So the solution, in our opinion, that is to make it interactive to make sports like playing video game because that, that's the type of experience that the young duration is looking for. And that's just not our opinion. We've seen significant research on this as have many others. And that's why sports betting is still attractive to the younger demo. There's already significant participation that has been pruned through not only black gray market activity, but fantasy activity has significantly prime to that market. And video game activity in general significantly primed in that market. So there's a huge desire for the cohorts to engage in sports betting. And our thesis is that it's more broadly about interactivity. It's about having a lean forward experience other than lean back experience. And in cooperation with Bally's, we've started Tennis first. We are working on a watch and play experience where you can watch and interact and have exciting graphics and rewards given to you while you watch Tennis, and Tennis by the way is the second most bet-on sport in the world. It's just not very bet on here in the U.S. will change that. And once we roll out a Tennis watch [indiscernible] we'll move on to some of the major sports, but we're really excited about giving the consumer and integrated all exciting interactive live betting experience. And that's probably one of the biggest things that we're working on in cooperation with Bally's.

Great. And then kind of moving on to Diamond Sports specifically. Obviously, there's been -- can you -- one, can you talk about subscriber trends? Two, can you talk about the potential path for improving the leverage profile there? What type of levers could you pull? For example, a couple of quarters ago, you talked about some of the parts of Sinclair stock and how it's -- a couple of times undervalued. Could that be part of the equation here? Just any kind of higher level thoughts on how you can kind of get to an improving leverage profile at Diamond Sports and then just taking it back a bit and talking about subscriber trends there?

Well, subscriber trends for the RSNs hovering around high single digits. It have improved post-pandemic. So we have seen an improving trend across all of our properties post-pandemic, which makes sense during times of uncertainty, especially economic tends to fuel more or cutting. And so we're seeing a recovery from that. And then in terms of leverage, we remain optimistic that we can get a new money transaction done with the creditors, and we remain in discussion with advisers and co-partners around that.

Thank you, Chris. And then kind of turning towards the capital allocation strategy at Sinclair. What do you view as kind of an ideal leverage target range there? Outside of that, what's the priority thereafter? And then as a follow-on, how should we think about Sinclair's commitment to Diamond Sports, especially in light of the AR facility that was recently assumed by Sinclair?

So Sinclair target leverage is high 3s, low 4s, and that's where we currently sit. We're very comfortable from a Sinclair leverage standpoint. So next year is a position to beginning. It's really -- we're really focus on growth and growth via acquisition, growth via organic investment like RSN in new, The National Desk to name one project. We're doing with Compulse360 to name another and direct-to-consumer sports. And so that's for 2022, and Sinclair's balance sheet is in great shape to help fund. In terms of support for Diamond, they are 2 separate [indiscernible] many times, and I'm sure everyone knows. They are responsible for their own funding. We did step in and assume the AR financing from Credit Suisse for Diamond because that transaction that aid economic sense for Sinclair to do. It is going to return to provide that financing in a very better advantaged way. So going forward, Diamond is very focused on deleveraging. They're talking to all stakeholders, as I mentioned, and support from Sinclair would have to make sense for Sinclair from an armament perspective.

Got it. And Chris, is it a possibility that there could be discussions kind of going back to DISH on the topic of the RSN? Is that something that you could possibly see down the road?

There's always a possibility. Yes. No, we've never -- we never give up from a carriage or otherwise perspective. And we're pursuing opportunities not just with DISH but with others as well, who don't take the RSNs. And so we're always open to those discussions, and there is always possibilities.

Great. And obviously, this is a leveraged finance conference. But just kind of going back to your equity profile, again, you have talked about some of the parts and the valuation of the company and kind of that analysis suggest the equity is undervalued. So one, at what point would you potentially take advantage of that dislocation? And two, what do you think that the market is still under appreciating? And what do you think could ultimately lead to some type of change there that the stock would not underperform, so still below kind of what you've laid out?

Yes. No, it's a great question. It's a bit of a mystery to us why we are valued the way we are on the last 2 calls that detailed what the some of the parts implies, which is 2 to 3x multiple from where we are today. And today, unfortunately, we're lower than ever. And so it is -- as we look forward and we think about how much free cash flow will produce in the next 12 months, which is very, very significant. Balancing those priorities between potential M&A, organic growth, which I highlighted a few projects that were -- that are in operative there and buying back securities that are just incredibly undervalued, the buyback of securities, I think, is becoming increasingly hard to ignore.

Great. And then just going back to the RSN, obviously, it seems that there's always -- you're open to discussions with DISH and to that possibility down the road. I would assume, but is it safe to say that there would be interest or would you have possible discussions with like Apple or Amazon or anyone else, who might be entered in the RSN? Is there enough opportunity kind of with these larger players?

Yes. I think in terms of Apple and Amazon and players like that, that's where the direct-to-consumer product will be more interest for those players. And those -- we already have -- we have relationships with all of those players on many of our other properties, and that will certainly be a topic for them.

Great. Chris, that's all I have right now. You've been extremely helpful, and I really appreciate all the color you provided. So thank you for joining us.

Right. Thank you, Marlane.

Take care.