The E.W. Scripps Company (SSP) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the E.W. Scripps session at the 2020 UBS Global TMT Conference. I'm Alex Iosilevich with UBS. I will be moderating this session. We are joined by Adam Symson President and CEO of E.W. Scripps. Adam is joining us after announcing a really strong Q3 and the acquisition of ION. He's going to run through a brief presentation, and then we'll switch over to the Q&A. If anybody in the audience has questions, please submit them to the system, and I will do my best to run through them. And with that, I would love to introduce Adam.

Thank you, Alex, and good morning, everybody. Thanks for joining us. Let's start on Page 3 of our presentation. This morning, we're going to cover some recent business highlights, bring everybody up to speed on the results of the strategy that we have been executing to remake the company and then we'll discuss at great length, the transformational acquisition that we announced a few months ago, the acquisition and integration of ION Media that Alex just referenced. And we'll do our best to make sure we have time for some investor questions. And I believe by the end of the presentation, you'll recognize that the value of the moves we have made and why we're exceptionally positioned to create shareholder value as we head into 2021. Turning to Page 4. Let me briefly touch on operating results. To start, company is doing very well, navigating the pandemic. I could not have imagined back in April, actually that today, I would be in a position to tell you that we continue to see the local and national advertising marketplaces rebounding as quickly as they are. And in fact, Scripps has had a banner year, and we now expect to generate $280 million in free cash flow, far exceeding the guidance that we had shared last year of $225 million to $250 million. In a few minutes, I'll talk more about the 2 main drivers of that success, the work we have done to remake our portfolio to maximize our retrans revenue growth opportunity and through this year's political advertising cycle. Let's turn to Slide 5. Let me set the table by describing our company. Today, Scripps is one of the nation's largest independent local broadcasters, delivering news and local and network programming in 43 markets across the nation with our 60-station footprint. Unlike most of our peers, we're diversified and also operate national Media businesses in television and digital audio. And when we get to the ION Media acquisition, I'll share with you how we're transforming this business into a new fully scaled network television business, positioned well on the growth platforms of over-the-air and over-the-top television. But first, let me describe the work that we've already done and the results of this strategy that we're delivering. Please turn to Slide 6. Last year, we doubled the size of our local broadcast portfolio, growing our footprint to reach 1 in every 3 American households. And the timing of those moves, it was not coincidental. We did sell ahead of 2020. When we knew this year, we would have had -- we had the opportunity to renegotiate rates with the MVPDs for more than 40% of our subscribers. And I can now tell you that through our negotiations, we have resulted in rates that were an affirmation of our investment thesis. Turning to Page 6. We can cover the other major driver of this year's revenue success, political advertising. Last year, through our M&A, we were also very choiceful in the markets that we were looking to enter, focusing specifically on strengthening our political advertising footprint. And here, too, I'd say we succeeded. This year, we generated a pro forma record-setting $265 million in political revenue. Now 40% of that revenue came from markets that we acquired just last year. And as I look ahead to 2022, I expect we'll be really well positioned for another terrific political advertising cycle. You can see there on the slide, the breakdown of the different rates as we expect next year and in 2022. Turning to Slide 8. I'm also really pleased to report that our national media strategy continues to pay out for shareholders as well. We are building significant value as we grow media businesses that operate in the marketplaces where we see the highest organic growth. Specifically, the future platforms for television of over-the-top television, or OTT, and over-the-air, free over-the-air broadcast television. The success we're seeing with this strategy supports our thesis behind the ION Media acquisition. So we're going to get right into that and jump to Slide 10, starting with what ION Media is. ION is really a unique asset in today's television landscape. Today, ION owns 71 television stations with FCC licenses to broadcast in 62 markets. It also has affiliation agreements with another 124 TV stations. So altogether, this national TV network reaches more than 100 million homes through over-the-air and pay-TV platforms. Rather than relying on retransmission revenue, ION elects must-carry, a congressional mandate that requires pay television services to carry a broadcaster signal. This gives ION the most ubiquitous distribution in both pay-TV and over-the-air broadcasting. As we turn to Slide 11, I can put it a little bit more plainly. ION is a distribution double threat. It looks like a cable network, and it reaches the nation's cable and satellite TV households like a cable network, but at its core, it's an over-the-air business, where it reaches cord cutters and cord nevers on the growing free over-the-air television platform. We'll talk a lot more about this in a moment. But because of the growth of the over-the-air broadcasting marketplace, that's where we see -- that's what we see as the critical strategic benefit in this acquisition. Turning to Slide 12. Most people do not realize how powerful a platform ION network is. ION's programming slate focuses on the most successful shows on television in the crime and justice genre. Procedural dramas like the Law & Order franchise, CSI and NCIS, it's a lineup of proven winners that has driven ION to become the fifth most watched broadcast network in prime time, and top 5 in cable and top 10 across all of television, outperforming the CW, MyNetwork and many cable networks that you probably thought were bigger. ION almost exclusively sells advertising nationally, like the big 4 broadcast networks, cable networks and our own Katz multicast networks. And while ION is a top 5 network, it's actually around 25th in revenue share, opening up significant growth opportunity for continued -- for the continued growth as we see in the future. Let's turn to Slide 13. While there is growth ahead for ION's revenue, the business today is already putting up very compelling operating results. 7% growth over the last several years pre-COVID with consistent margins north of 50%. The acquisition of ION Media will catalyze the transformation of our company with the creation of a new powerful Scripps national television networks business when we combine the Katz multicast networks, Newsy and ION together into a fully scaled national television network business that will reach nearly every American on over-the-air, pay-TV and OTT television platforms. This transaction and subsequent integration sets our company up for significantly better near-term operating results and opens up greater paths for long-term value creation. Our company will generate about $2.5 billion in revenue and will double its EBITDA in our first full year of ownership. After regulatory approval, this business makes Scripps the largest holder of broadcast spectrum through ownership of 107 broadcast television stations. I want to discuss the logic behind the combination of the Katz Networks, Newsy and ION on Slide 14. The integration of these 3 businesses together, ION, Katz and Newsy into a powerful new Scripps television networks business, makes for an incredibly compelling strategic combination. Katz and ION are really in the same business with 1 key difference. Katz reaches its 93% of the country by today broadcasting over the digital subchannels or multicast spectrum that we lease from other broadcasters. And those leasing payments are one of Katz' largest expenses. ION, on the other hand, owns stations. And it broadcasts primarily on the main HD signals. So without impacting the powerful ION network, we can migrate many of the Katz Networks onto ION's digital subchannels as Katz's lease agreements expire. And that contractual savings brings about the most significant synergies, what we describe as the distribution synergies. Those distribution synergies are contractual, as I said, they come from moving the Katz Networks off of leasing arrangements as they expire with other broadcasters and onto the ION spectrum that we will own. There are also, of course, normal consolidation and corporate synergies that you would expect from a combination of 3 businesses, mostly in the same industry. And then there are finally some other less material synergies. Turning to Slide 15. Let's talk about the over-the-air broadcasting marketplace. Key to our interest in the business and go-forward strategy is ION's significant role in the over-the-air marketplace. Whereas once upon a time, over-the-air broadcasting was a platform reserved for folks who couldn't afford Pay-TV. Today, it's actually a totally different story. And while most investors are focused on the variety of Internet options for television, over-the-air, has been growing right alongside digital and OTT platforms. What's old is new again, and broadcast linear television is seen by younger audiences as the perfect pairing to subscription services like Netflix and Hulu. People are plugging in digital antennas and tuning into free over-the-air television, just like we did when I was growing up, before my family had cable. Today, about 20% of U.S. homes are considered over-the-air homes. In some markets, it's as high as 30%. The over-the-air audience is fully 10 years younger than the cable audience, and it's growing. So unlike, say, a traditional cable network that has only cable to reach an audience, ION is a distribution double threat, so to speak. It is carried across the country on virtually every cable system and it reaches cord cutters and cord nevers on that growing over-the-air ecosystem. As we look ahead, we see over-the-air broadcast television, free over-the-air television as a growing and important part of the consumers television bundle. Here's why. Let's turn to Slide 16. Back in 2015, before over-the-top and digital delivery of television was really mainstream, consumers were paying hefty fees for their combination of cable, satellite, broadband and early SVOD services like Netflix. So by 2018, when digital services like Netflix, YouTube TV and Hulu were gaining greater acceptance, people saw cord cutting as a way to save money. While they have to still pay for Internet access, the few subscription services out there provided an economically efficient alternative. But today, as far more brands are holding back their content for their own direct-to-consumer services, like NBC's Peacock or CBS' All Access or last week's announcement of Discovery Plus, the bundle itself is growing less and less economically efficient. This new supposed skinny bundle has now significantly fattened up and now often rivals the costs paid by consumers in the old days. Instead of 1 feed to a cable company, we're now paying many smaller fees all over the place. In addition to still paying for Internet access, families are paying for 1, maybe 2 general subscription services on demand like Netflix or Prime. They have to add a linear product like YouTube TV if they want a cable-like lineup for Discovery. If there is sports fan, they add on ESPN+. If they have kids or fans of Star Wars films, they are on Disney+ and on and on until one day, they realize that their a la carte bundle is giving them access to more choice, but it's also costing them as much, if not more money. It's in this new predicament that consumers find themselves in that we are seeing the growth opportunity for free over-the-air network television. Because when consumers plug-in a digital antenna, they get not only local network affiliates in HD, like our local broadcast media, but they also get ION and the multicast networks, of which we already own the 5 biggest and most popular, the Katz Networks. Broadcast television is experiencing the renaissance and growth because of this consumer proposition. It's free and free is very compelling. Additionally, on the national ad marketplace side, agencies are recognizing that their best chance of reaching cord cutters and cord nevers is now through this free over-the-air network television opportunity because cable's relevance is in decline. Slide 17 wraps up my prepared remarks and summarizes some of the benefits of this transformational opportunity for Scripps, which we expect to close in the first quarter of 2021. This opportunity truly repositions our company to be a leader in television with incredibly compelling economics that will pay out near and long term. This transaction is immediately accretive. We expect free cash flow per share accretion of more than 60% per share in the first full year. It makes us a stronger and more durable company for today, and opens up significant options for our company for the future as the largest holder of broadcast spectrum and leader in the growing national and over-the-air network broadcasting marketplace. And now, Alex, let's take some questions.

Adam, thank you for this. I'll start maybe on the ION topic, and thank you for spending time on explaining that acquisition for us. I got a few questions. Maybe starting with -- you've announced some numbers for the ION performance through June. Can you talk a little bit about how ION has performed just since COVID with its national advertising strategy?

Yes. I mean, I would look to the Katz Networks as an example. I mean, quite frankly, we've seen CPMs really rebound and hold up. We've been very satisfied with what we've seen through third quarter and frankly, fourth quarter as well. I think advertisers and marketers have recognized right now at this moment, that they need to continue to get their messages out in front of large audiences. I think as far as we can see, ION's rates have, I think, rebounded nicely, and we expect the performance in fourth quarter to be very consistent with what we're seeing with the Katz Networks.

Terrific. If we understand it correctly, ION's historical strategy in terms of programming has been primarily downstream windows of network products. Can you talk a little bit about how you see the strategy going forward? As it appears that some of the networks are obviously launching their own direct-to-consumer services and maybe holding back some of those downstream windows in the future?

Sure. So first of all, this is a programming strategy that we know very well. It's a similar programming strategy to the one we execute with our Katz Networks. And we've been operators in the national syndicated marketplace for a long time through that relationship. This is also something that we get a tremendous amount of diligence around. And here's what I would say about the syndicated and national distribution marketplace. While we have seen some of the content creators pull back the rights for their programming from other OTT platforms. They have not done so from the cable and broadcast marketplace because this is a tremendously valuable way for them to monetize some content -- some costs. I think they see linear broadcasting as a terrific opportunity for them to continue to keep those labels out there. And so while it's true, I do think we'll see exclusivity windows practiced for OTT platforms. There's no indication we're seeing that in the broadcast marketplace. And in fact, even since our acquisition, ION has announced the renewal of several major and key programming hits for the lineup from CBS. So we look at, first of all, the fact that we have long-term contracts for these procedurals as key to the near-term economics. Secondly, we think that these content creators probably make more money in the national distribution and international distribution marketplace than they do and maybe then they can hope to in merely reserving that content from other OTT platforms for their own OTT platforms. And so we expect to continue to see both of those things work together. We've also done a lot of diligence with respect to understanding the role linear plays in the on-demand marketplace. And I have to say, I expect that we'll continue to see linear be an important marketing platform, even barker channel, for the popularity of this programming. So you can see that over the last couple of years, even as shows like Seinfeld and Law & Order, and How I Met Your Mother, have been preserved for specific branded OTT platforms, they continue to be renewed in the cable and broadcast marketplace because there's just so much money in that marketplace for the content creator. And frankly, it's good, I think, for the on-demand marketplace, too. They work really well together.

Perfect. Thank you. I think you've laid out really clearly the cost synergy case in the presentation. Can you speak a little bit about how you see the potential for top line growth coming out of this acquisition?

Absolutely. So when we did our modeling, we were pretty darn conservative. And the synergies we've modeled are mostly contractual synergies. But you're right, there's a lot of opportunity for these businesses to perform better as they come together. And here's the way that's going to happen. First of all, we've been operating 5 multicast networks, 5 networks now for quite a while. So when we approach the national advertising marketplace, we do so as a bundle. That's really what brands and marketers are looking for. You can see the same thing with the other cable networks. They're really not selling individual networks anymore. They come to the advertising marketplace and reach specific demos for advertisers as a bundle in the upfront and scatter marketplace. ION, on the other hand, has been a single network. And so now the opportunity to bundle it together with our Katz Networks and Newsy and bring that to the upfront and scatter marketplace, I think it's going to provide us tremendous upside. The other thing I'd point to is the expertise that we've developed in the direct response marketplace. Direct response has actually been one of the main drivers of our success at Katz. So when we acquired Katz more than several years ago, we talked about the fact that we expected growth in the mid- to high teens. We've actually experienced mostly growth north of 20%. And prior to COVID, the last 2 quarters, we saw growth of north of 30%. And a lot of that has been on the back of our ability to maximize yield, especially when we think about how direct response works with scatter and upfront. Direct response is often misunderstood by investors. In the old days, direct response stood for sort of those mesothelioma or bath fitter ads, right? You're sort of lowest of the low CPM remnant ads. It's really not that anymore. Today, direct response is just a different way of placing advertising. And direct response advertisers are big advertisers like Procter & Gamble and Lenovo and Anheuser-Busch, advertisers that are looking to use both direct response efficiency along with ratings to place their buys. In fact, in our experience in the podcast industry, we saw an entirely new class of advertisers emerge. You had advertisers like Casper mattress and Squarespace. These are advertisers that built their businesses on the back of digital audio direct response, and they're now moving into television. So when we think about yield management at Scripps, we think about looking at our inventory and really essentially making a decision in order to generate the highest CPM and the greatest yield. So there's no ego involved. From our perspective, it's about managing the upfront, the scatter and direct response in order to manage that yield. And we think there's a lot of opportunity with ION. There's an old saying in the ad sales industry and that is that nobody becomes the head of sales by being the best at direct response. We don't really look at it that way, right? From our perspective, direct response is an equally important way to manage yield along with the national upfronts and scatter. So today, the national advertising marketplace is about a $42 billion marketplace, ION and the Katz Networks take real share out of that marketplace. And we actually see significant upside ahead when we bring these businesses together and move them from, I think, operating in silos to a bundled approach for greater share.

Adam, terrific. Maybe last question on ION from my side. Can you talk a little bit about the regulatory process? It's obviously an interesting time for that. Any surprises, any timing expectations that you can share with us.

Yes. Actually, no surprises whatsoever. We've been moving through the regulatory process. Yesterday, we went through and closed on the public comment period. My understanding from what I heard this morning was as of last night, midnight, there was no opposition filed to the acquisition. We expect to seek FCC approval, and we are in the midst of seeking FCC approval, and we would expect that to come any time between now and the end of first quarter. Frankly, at Scripps, this is constructed as a very, very clean deal. We will be divesting of a number of the different -- of the TV stations in order for there to be no complication for it. We approached this acquisition in just the way Scripps approaches all television station acquisitions. We don't flex the rules. We don't bend the rules. We're really considered the boy scouts of broadcasting, so to speak, and so from -- and we have a stellar reputation in front of the FCC and regulators. So from our expectation, we don't see any complication. We did already receive expedited review and clearance on the Department of Justice. And so we're just now in the midst of waiting for this acquisition to get FCC approval, so we can move to close.

Sure. Maybe switching gears to the broader industry. Let's talk first a little bit about what you're seeing after your earnings announcement in terms of rebound of the ad market? How is December pacing? Any specific categories that are ahead of expectations or a little bit slower. I would love to hear that perspective.

Sure. Yes. I mean, Alex, things look really good. Frankly, I feel like we've moved into an era during which we have figured out how to both manage through the trauma and it's real trauma that's happening, I think, in our economy and on Main Street with respect to the public health crisis. While simultaneously recognizing a way to manage the local and national economy and frankly, the national advertising and local advertising marketplace. So we're seeing the rebound continue. I check daily, even despite some of the spikes in cases and hospitalizations, even despite some of the I think additional measures, some local markets are seeing, we haven't seen any indication that we're returning to a period like we saw in late March to April when we really had what I would consider not a recession but a business disruption. As soon as we came through that business disruption, I think advertisers recognize the need for them to get their brand messaging out there. Sometimes they change that messaging to be particularly relevant. Sometimes it was really about making sure people recognize that they were still open for business. But I think one of the things that we recognized through this pandemic is that broadcast television, local and national, remains the most critical way for advertisers to get their messages to large audiences. It's the most relevant way for them to reach advertisers with messaging. And we see that again and again. And so I think that's what's behind the rebound we're seeing. With respect to categories, obviously, we have some categories that we think will continue to rebound through next year. I feel pretty good about where we are with auto. Today, the auto rebound is real. I think the difference here and what we're waiting on is inventory. In many cases, there's just not enough inventory. The demand is real. And we're just waiting for the supply, the manufacturing supply to catch up with the actual demand. So the advertising, I think, scales with that. On the other hand, there are some categories, I think, that are going to be a bit slow like travel and leisure. It's going to be some time before we see the travel and leisure category really come back. Through this pandemic, we've also seen new categories I think, even grow beyond our expectations. I will tell you, sports betting has come on very strong. Last year, sports betting was something that for us was in the hundreds of thousands. And this year, we're moving through the single-digit millions and into the double-digit millions as a result, and I expect we'll continue to see that grow as more states on a geography -- on a sort of market-by-market basis, change the rules around sports betting. And I see sports betting is a really terrific opportunity not only to support the value of live television viewing, but also when we look at the way sports betting has impacted television in other countries, it becomes a very, very powerful broadcasting, broadcasting category, and I expect we'll see the same for us.

Very helpful. Switching to a little bit of a longer-term view. Obviously, the pandemic seemingly has accelerated. A lot of consumers adopting streaming as their primary choice of entertainment. Just talk a little bit about what your view on the industry, what you and your peers need to do to continue staying relevant?

Yes. Look, I mean, I can't answer for our peers. We are not a company that plays defense. We are a company that for 142 years, has identified ways to create value through disruption. And so we just made a big move, a big 5-year move with the acquisition of ION. And it's essentially about exactly what you're describing. There's no question that the television ecosystem is changing. Consumers have more and more choices. Now I think we deliver very, very valuable programming in every one of our local markets through our local television segment. And frankly, we've seen that value hold up, even increase through the pandemic and through the civil -- the unrest that we've seen through the course of the summer. More people have been tuning to our product, local television news than we've seen in the last several years, and that's holding up because people recognize, especially as we've seen, I think, a lot of sort of the destruction of the newspaper industry that today, more people rely on local television news brands on air and online than ever before. It's the most relevant form of news and information. Likewise, network programming, very, very important. Live sports coming back very, very important. At the same time, we've obviously benefited from the growth in retrans revenue tied to pay television. Now pay television and subscribers are certainly under pressure. And I'm glad to see that some consumers are choosing to turn also to virtual MVPDs like YouTube TV and Hulu for their cable-like lineup. And of course, we benefit when they do because we get the same kind of retrans pay on a choice when a consumer goes from a traditional MVPD or pay-television platform on cable or satellite to a virtual MVPD. But the decision we've made to invest in over-the-air television with ION is all about recognizing that we can create tremendous value ahead by identifying ways that consumers are looking at television. From our perspective, it's not going to be about OTT or pay-TV or over-the-air broadcast. It's really going to be about all three. And as far as I'm concerned, right, my job is to identify ways for this company to get our brands in front of consumers on all 3 and to make sure our brands bring valuable audiences to the advertising marketplace on all 3. The move we've made with free over-the-air television is all about that. I mean I really see OTA as a tremendous efficient complement to subscription video-on-demand services. Several years ago when we acquired the Katz Networks, I would meet with investors, and they would say, I don't understand, who's watching broadcast television? It was at the time when people were just discovering the power of plugging in a digital antenna. Today, when I meet with investors, particularly younger investors and analysts, 3 quarters of the time, I hear people say, oh, yes, I have a digital antenna. I'm a cord cutter. I plug-in a digital antenna. And so this company is uniquely positioned to create value from the continued stability that we see in the pay-TV ecosystem and the growth that we expect from the over-the-air marketplace. I think that's unique about our name right now.

Great. Can we switch -- maybe speak for a minute or 2 on retrans? You obviously had a spectacular year in that regard. Just talk a little bit about your long-term outlook on that revenue stream.

Yes. I mean, look, I continue to be very bullish on the opportunity for us. Those of you that have been with our company or following our company for a long time know that we started out a little behind the curve as a result of some deals that were done before the split of Scripps Networks Interactive, where our retrans value stayed with our cable networks when we spun off that company in 2008. It was an obvious choice back then because retrans was in the sense at that time. And so it took us some time to catch up. However, I would say the strategic moves we've made over the last 3 years to add tremendous scale to our local media portfolio ahead of our opportunity this year to renegotiate 40% of our subs was all about our opportunity to catch up. And today, I'm very satisfied with the rates we got over this year and the major MVPDs that we negotiated with. Next year, I expect to be much quieter. We don't have nearly the number of subs renewing, but in 2022 and 2023, I again expect significant resets to power our revenue forward. And look, both gross and net retrans this year has benefited from the reset of those 40% of the subs, and I don't see any reason why that would change. Obviously, we expect to continue to see the impact of some sub declines. But quite frankly, I really see stabilization. If you're following what the MVPDs have seen, the MVPDs have described stabilization in their subs and their sub declines. Certainly, I think we've moved through the beginning of the pandemic sort of sparked a heavier, a heavier sort of decline. That's really stabilized. We report essentially a quarter in arrears. And so I think when we get to fourth quarter, I think that the news will be, frankly, met positively. I think we're going to see stabilization in our subs.

We got a couple more minutes left. I'll squeeze in one more question, if I can.

Sure.

Talk a little bit about your capital structure, capital allocation policy with the cash flow generation you guys have coming in and the current leverage. How do you think about the next couple of years in terms of your capital structure and capital policy?

Yes. So our policy is going to be pretty simple. As a result of this transaction and bringing in Berkshire Hathaway as a partner on the preferred side, we've agreed not to issue a dividend after the close of the transaction and not to repurchase stock. And so we'll be very, very focused on value creation through organic cash flow generation and paying down debt. And frankly, that's what I think is ahead for us. Look, I think we're going to have good uses for our cash to be put to work to create value inside this company. And eventually, we're going to get our leverage ratio down to our comfort zone, which is about 3.5x. We chose to bring Berkshire Hathaway in because we wanted to make sure that our traditional debt ratio was really similar to what is an industry standard of around 5x. I think it was the right move for us. They're going to be a great partner for us. You think about why Berkshire is into this investment, it's because they see the same thing we do. Tremendous opportunity bringing these businesses together. They have warrants at $13 a share. Berkshire doesn't get into these transactions to make a modest coupon. The warrants, I think, and the upside they see or the upside we see also, the tremendous value creation ahead for this company as we really integrate these businesses together and generate tremendous cash flow and return from being a real dominant player with fully scaled businesses on the national network side and the scale that we already have on the local media side, and the way we see the television business, along with the auction value we have as the largest holder of broadcast spectrum ahead. So our capital allocation policy is going to be pretty simple. We're going to be paying down a lot of debt.

Okay, Adam. I think that's about all the time we have today. Thank you so much for joining us and hope to see you again next year in person.

Absolutely. Alex, thank you very much. It was a pleasure. I appreciate everybody joining us this morning.