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

Ladies and gentlemen, thank you for standing by, and welcome to the Scripps First Quarter 2023 Earnings Call. [Operator Instructions] And as a reminder, the call is being recorded. I'd now like to turn the call over to our host, Ms. Carolyn Micheli. Please go ahead.

Thanks, Brad. Good morning, everyone, and thank you for joining us for a discussion of the E.W. Scripps Company's financial results and business strategies. You can visit scripps.com for more information and a link to the replay of this call. A reminder that our conference call and webcast include forward-looking statements, and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. We do not intend to update any forward-looking statements we make today. Included in this call will be a discussion of certain non-GAAP financial measures that are provided as supplements to assist management and the public in their analysis and valuation of the company. These metrics are not formulated in accordance with GAAP and are not meant to replace GAAP financial measures and may differ from other company's uses or formulations. Included in our earnings release are the reconciliations of non-GAAP financial measures to the GAAP measures reported in our financial statements. We'll hear this morning from Scripps' President and CEO, Adam Symson. Chief Financial Officer, Jason Combs, and then Scripps' Chief Operating Officer, Lisa Knutson. Here's Adam.

Thanks, Carolyn. Good morning, everybody. I'll start this morning with some of the news we've broken over the last few weeks in sports. Less than 6 months ago, we launched Scripps Sports because we saw the opportunity to leverage our unparalleled national reach and local market depth. Free over-the-air broadcast and all that comes with it is the most ubiquitous and fan-friendly of distribution; platforms. Since then, we've been exceptionally busy. Two of the deals we've been working on are now public. The announcement we made yesterday with the Vegas Golden Knights are thriving, National Hockey League Franchise and of course our partnership with the WNBA. We're very pleased to be launching our first Scripps Sports programming this month. The WNBA Friday Night Spotlight on ION begins on May 26. What the WNBA gets from us is full nationwide reach through free over-the-air, connected TV services and cable and satellite. Next week, we expect to announce a high profile -- sponsored for our WNBA Friday Night franchise, a blue-chip advertiser that believes as we do it's high time women sports like the WNBA are given the same visibility as men sports, which these athletes, teams and fans deserve, the broadest of reach and appointment viewing consistency. We are thrilled to be providing these benefits to the WNBA at a time for burgeoning appreciation for and interest in women sports. And why wouldn't there be great interest? WNBA games are a display of intense compensation while the players, athleticism and personalities make for the very best television. It's no wonder that last season, WNBA viewership was up 22% and even with limited reach. Now the vast distribution on ION will give the league maximum visibility. So fans everywhere on any television platform will gather together every Friday night for this franchise TV event. While the WNBA deal takes advantage of our national reach, yesterday's announcement with the Vegas Golden Knights is intensely local. Scripps Sports and our stations KTNV and KNCC in Las Vegas will, starting next season, be the exclusive local media partner for this incredibly popular NHL team ending the RSN model in Nevada and bringing hockey to the television platform, a big win for NHL fans, the Golden Knights and Scripps. It's important for investors to hear those. From the beginning, we've pledged to be very financially disciplined to our approach to live sports even willing to walk away if an opportunity doesn't pencil for us. Every one of our partnerships will enhance the value of our linear television business, be another catalyst for the continued growth of free over-the-air television and create shareholder value while representing a new model for the way teams and leagues can grow their fan bases and continue to create immense value for their stakeholders. There is no argument that live sports is the biggest driver of linear viewing and commands the highest advertising rates in television. We see our expansion into live sports as not only a value creator with the actual games but another important way to engage audiences with our TV stations and news brands. We launched Scripps Sports as part of a larger strategy to enhance the value of our core assets, our scale and distribution. We are positioning our company to capture opportunities in 3 principal ways: first, in the industry growth areas of news, sports and entertainment; second, with existing and emerging TV distribution platforms; and third, with data casting and other businesses enabled by ATSC 3.0. We are now in the midst of a company-wide reorganization of roles and responsibilities that centralizes management functions so our executives have the broadest possible view of Scripps' opportunity in these 3 growth areas and are able to move quickly to create value. Scripps Sports is a good example. The WNBA makes use of ION's existing national reach, while the Golden Knights partnership opens up the opportunity for us to launch a new independent station in the growth market of Las Vegas with valuable live sports as an anchor tenant for programming. Both cases are examples of us seeking the best and highest use for our spectrum to increase yield. In Scripps news, you see another good example of our focus on a content genre critical to creating value in linear television. After centralizing operations, we've now deployed our national news resources as the foundation for a company-branded network. Scripps news reaches nearly every U.S. household over the air and on connected TV. And it's designed to fully serve our local stations news consumers with objective, fact-based reporting. Scripps news now becomes an important driver of high-quality journalism across the entire company while helping us also avoid additional cost. In addition to building value with journalism and live sports, we continue to focus on both existing and emerging TV platforms. Our sports distribution and high-quality Scripps news content will bolster the use of free over-the-air television, and we continue to build our connected TV distribution as well. And we're seeing significant gains in advertising revenue there. And as you'll hear in a moment, we continue to leverage our strong partnerships with cable, satellite and virtual pay-TV service providers who, by the way, capture nearly 2/3 of America's 120 million TV households. Our third strategic focus is the use spectrum for alternative business opportunities through ATSC 3.0. We are well into a collaboration with Nexstar, HPE and Sony. Together, we've built and are deploying a core network that leverages the new television standard to open up new data casting business opportunities. Combined, Nexstar and Scripps represent the single largest broadcast spectrum platform, unduplicated reach of nearly 90% of U.S. population. That includes significant contiguous spectrum along key transportation corridors, a major selling point for data casting services. Now this is not a case of a hollow press release. but it's also not yet something to put in your financial models. Now that we have a core network, we'll next develop out the marketplace, testing with the auto industry, energy, agriculture and logistics among other potential customer bases. In addition, we are encouraged by the FCC's new future of TV initiative, several task forces created last month to accelerate the 3.0 transition and ensure that every American will continue to have access to free over-the-air television. While there's still much work to be done to create what BIA/Kelsey says could be a $10 billion to $15 billion marketplace for broadcasters, I am increasingly bullish about this new industry catalyst. And we'll make sure investors know when we have the first customers on board, as a signal of the potential to accelerate the opportunity. Scripps' recent sports distribution announcements, the scale of our national news brand, Scripps News, and the opportunity we see ahead with our spectrum should catch investors' attention. The company is doing what it has done so well time and time again over its 145-year history, creating shareholder value. Economic cycles are short-term hurdles, but our strategic focus is long term, and we will move into the next economic upturn as we have in the past as a stronger company with a better operating profile, stronger margins and greater growth ahead. Now here's Jason.

Good morning, everyone. We're pleased to be reporting Q1 results that met or outperformed the guidance we gave back in February despite the challenging economic climate. In our Local Media division, revenue was down 4.5% and core advertising revenue was down 10% as local and national businesses continue to deal with ongoing inflationary pressures on consumer spending. However, excluding the impact of the Olympics and the Super Bowl in Q1 of last year, core revenue was down only 6%. Distribution revenue was up 2.4% to $163 million, fueled by growth in virtual pay TV households and contractual step-ups. As of April, we've renewed 1/3 of the pay TV households we are resetting this year. Local Media expenses declined by about 2%, aided by moderated network programming costs by our move to comScore and by tight expense management in this economic environment. Local Media segment profit was $46 million. Turning to the Scripps Networks division. Revenue for the first quarter was $216 million, down 9.5% from the prior year quarter when we reported industry-leading revenue growth. Network segment expenses were $165 million, a 7% increase tied to higher costs for distributing the networks. Segment profit for the networks was $52 million. In Other, we reported a loss of $1.5 million. Shared services and corporate expenses were $23.4 million. The loss attributable to shareholders of Scripps was $31 million or $0.37 per share. Restructuring costs for the quarter increased that loss by $0.15 per share. We announced in January that we are undergoing a company-wide reorganization and the restructuring costs are related to that work. It also includes a write-down of some programming we were using for our former network True Real. We are now leasing the spectrum to Jewelry Television. As of quarter end, cash and cash equivalents totaled $16.5 million. Our net debt at quarter end was $2.9 billion and our net leverage was 5.1x per the calculation in our credit agreements. That's a bit higher than the end of the fourth quarter because in our trailing 8-quarter calculation, we've begun to lose the benefit of several quarters where the economy was bouncing back after the pandemic. In the 2 years since we acquired the Ion network, we paid down nearly $900 million in debt. Looking ahead to the second quarter of 2023, we expect total Local Media revenue to be flat to up in the low single-digit percent range. We expect Q2 local core ad revenue to be down mid-single digits. For the full year, we now expect local media distribution revenue to increase in the mid-teens percent range. That's a revision upward from February when we said we expected the full year to be up in the low teens percent range. In addition, we now expect 2023 net distribution dollars to increase by more than 40%, up from the 30% we guided to last quarter. Also for the full year, we are bringing down our guidance for CapEx as we shift some cash spend into next year. We now expect 2023 CapEx to come in between $65 million and $75 million. Turning back to the second quarter. We expect Local Media expenses to be up in the low single digits. In the Scripps Networks division, we expect Q2 revenue to be down high single digits and expenses to be up mid-single digits due to higher distribution costs and the start-up costs for our WNBA agreement. Second quarter shared services costs are expected to be about $25 million. That's higher than normal for the second quarter because we shifted stock compensation costs from the first quarter of this year due to the reorganization. We expect about a $6 million loss in other in Q2. For the full year, we expect our free cash flow to fall in the range of $50 million to $100 million. We continue to place our highest capital allocation priority on paying down debt. Finally, we're on track with our expectations of realizing at least $40 million in annual savings from our company reorganization. We expect those savings to be mostly operationalized by the middle of next year, and we expect to reach a year-end 2023 run rate of around $20 million in savings. Excluding the programming amortization write-down, we expect to take about $15 million in restructuring charges this year. This includes $2.9 million in restructuring recognized in Q1 and the expectation that Q2 and Q3 have the largest charges of the year. Now here's Lisa to share highlights from both the Local Media and the Scripps Networks operations.

Thanks, Jason, and good morning, everyone. Work at Scripps continued diligently through the first quarter on the company's restructuring plan. As Jason said, we are on track to realize the $40 million plus in savings we previously outlined. We are focused on both aggressively tackling the near-term challenges in the media marketplace and creating a more efficient, cost-effective and high-performing business, one that is well positioned for long-term value creation. While this has been a time of uncertainty for our employees, we are very proud that our teams have remained focused on the work at hand, to serve our audiences and communities and to deliver strong financial results. The country's economic malaise continues to put pressure on our businesses. Local advertising remains relatively stronger than national largely due to the return of automotive spending, but we do feel pressure across the whole advertising marketplace. In Local Media, we continue to see softness in our largest core advertising category services. Services was down 14% in the quarter, with banks and insurance companies showing the largest decline. Our 2 strongest performing categories were Home Improvement and automotive. Auto hit its third consecutive quarter of year-over-year growth, driven by local dealers and domestic dealers group who finally need to move inventory off their lots. We see local dealers as the best opportunity for continued growth in auto this year. In addition, the chip shortage is about half of what it was at this time last year, which is another good sign of spending to come. Another highlight of the quarter was the NCAA basketball tournament, which brought in nearly $2 million local core, up 13% from 2022. Now we are looking ahead enthusiastically to the NBA finals in June and the promotional dollars we expect ahead of that big linear television event. These 2 examples highlight the power and value of live sports. Local Media distribution revenue will continue to build this year as we move through the renewal of 3/4 of our subscriber households. We've already completed 1/3 of those renewing this year, and we're well underway with other big contracts. We continue to maintain strong partnerships with both legacy and virtual pay TV services as they recognize the value created for them by local stations. Turning to Scripps Networks. We once again are outperforming our peer group in terms of ad revenue. Across the portfolio, we saw increases in top general market categories, including pharma and restaurants; and declines in CPG, retail and media as well as a 20% decline in direct response advertising. DR is very sensitive to inflationary pressures as consumers tighten their spending. However, our hope is that the easing of inflation will bring back that important category quickly. And in the scatter market, we are seeing a sequential increase in dollars from Q4 to Q1 and, again, as we move through Q2. Bright spots in the quarter included a 33% increase in year-over-year revenue for core TV, which continues to benefit from high-profile trials. And for the full portfolio, connected TV revenue grew nearly 46% from Q1 of last year due to the growth in audience numbers and hours watched and the timing of our network launches. Another Q1 highlight comes from where our original series actor Age launched March 4 as the most watched new half-hour series in the network's history. We continue to draw more than 1 million viewers a week for this terrific sitcom. Another recent bright spot for the network is our agreement with the WNBA. Our teams are now preparing to air WNBA games on ION beginning on May 26. This includes marketing the WNBA Friday Night Spotlight on ION franchise night, selling advertising and sponsorships for the games and ramping up our distribution network. We see this arrangement as similar to the way Cable Networks integrated sports into their entertainment programming. Viewers have adapted easily. The difference here is that audiences can get these games free over the air from us, which will both draw new eyeballs to ION and allow the WNBA tremendous new reach to its growing fan base. Another big event coming for ION is the Scripps National Spelling Bee. Please tune into the finals on Thursday, June 1 at APM Eastern to be wowed by some amazing young sellers. As you know, Scripps brought production of the spelling bee in-house last year, and we've built a high-quality production of the national competition, which reached more than 7 million viewers in 2022. That was up 150% from the year before. For this year, we've secured premium blue chip sponsors, including Tyson, Sonic, P&G and Bristol-Myers Squibb. Scripps is proud to be the steward of this iconic American educational program, which is nearly 100 years old. A final business highlight comes from our local newsrooms. We have been working under a number of initiatives over the last few years to gain new consumer insights. We are learning -- what we are learning is informing our efforts to reinvent the way local news is created and delivered. We know our audiences want deeper, more contextual news, and they want us to engage them authentically. We also are using technology to plan and produce the news more efficiently and to get more reporters into the field. In addition, we're fostering greater collaboration between our local newsrooms and Scripps news to provide our communities with objective, fact-based and high-quality local and national news and information. All of this work supports our commitment to creating a better informed world and raising shareholder value. And now, operator, we're ready for questions.

[Operator Instructions] We can first go to Steven Cahall with Wells Fargo.

Maybe first, Jason, so it sounds like net retrans is going to be better for the year and then definitely an improvement, I think, in your free cash flow expectations. And it sounds like maybe a little bit of an improvement in your EBITDA expectations in the first half of the year. So I can't do all the math this quickly. Do you expect to get any net deleveraging by the end of the year? Or as you swap out those stronger 21 quarters for '23, does it still like it will sort of stay in this low 5s? And then secondly, for Adam, so you've got a couple of the sports deals now done, which look really solid. We've seen one of your peers do a deal with a team that was on Diamond Sports Group and they've also said that there could be some litigation associated with that. How do you look at the Diamond sports portfolio? Do you think it creates opportunities? Or are you going to kind of wait and see how some of those things play out since those situations seem a little more complicated.

Thanks, Steve. So on the leverage question, so the headwinds we're facing in are certainly putting pressure on our leverage. You saw that with the move from 4.7 at the end of last year to 5.1 at the end of this year. And as you referenced, that's going to create some challenges on our rolling 2-year EBITDA. So given those headwinds, I would expect to see leverage move up a bit more in the back half of this year. But as you kind of fast forward to next year, you look towards at the end of 2024, we'll have the benefit of a really strong and robust political cycle. The full year impact of all the distribution step-ups that we have cycling in this year and a rebounding economy, we'd expect to be at a much better leverage point next year -- in 2024 than we are right now.

Thanks for the question, Steve. Yes, I think we are off to a fast start. I think we've told investors from the beginning we expect to do deals that are accretive for Scripps and that create additional profit for the company. And thus far, all things look exactly as we promised. I don't want to comment on anybody else's deal. I would say Diamond Sports in general and the collapse of the RSN model does open up significant opportunity for us and broadcasters. And I think there are a number of opportunities continuing to present themselves, whether they be because the RSN is not going to be in a position to continue to carry a team's sports or because a league is looking for an alternative vehicle to reach more Americans. You saw that with the WNBA. The WNBA was looking to expand reach. I would tell you that certainly, the Golden Knights wanted to talk to us about the breadth of our reach because they recognize that engaging more fans, both in their core market as well as in their sphere of influence, is essential for the growth of their sport. So we bring that beyond just the collapse of the RSN. If you continue on with an RSN or with cable, you're essentially looking at a declining audience on that platform regardless because of cord-cutting. We would continue to look at opportunities to expand Scripps Sports locally and nationally. And I expect we'll have more say about that to come.

If I could just follow up with one for Lisa. Lisa, on the Connected TV revenue growth and the guidance for the year, as you then think about what the company is doing in sports, it seems like the sports audience is a very kind of connected TV first type of audience. So is there anything that you're doing to have that content sort of front and center for the connected TV world, whether it's app launches or branding or marketing on connected TV platforms?

Steve, it's Adam. I'll take it. First of all, I think you're spot on. I mean the opportunity for us to bring sports to ION or to any of our local stations is not just about bolstering OTA. It's about bolstering linear television. And we see our distribution in the connected TV marketplace as linear television. It's not on demand. It's live, it's linear. It's just being delivered over a digital platform versus OTA versus pay TV. And you know we execute that all-of-the-above strategy. We are definitely working with our CTV partners to ensure that they recognize the opportunity we bring to the table when we're bringing this live sports. Because as you know, live sports is not something that has historically been available on the fast platforms. Well, now it will be on Ion, and now it will be with any local sports deals that we do. So we're really ambitious and really excited about the opportunity. We'll certainly be doing some marketing of the WNBA on all of the platforms where the WNBA's existing fan base as well as the ION and WNBA fan bases that we want to expand into are, whether it be on social, on linear television in the connected TV marketplace.

And next, we'll move on to Dan Kurnos with Benchmark.

I have a bunch, but I'll try to limit myself to a handful. Adam, just around sports, can you talk about your ability to potentially increase programming around some of these marquee wins, is that a thought to you to fill in some other hours with original sports betting other stuff that we've seen in the past? And is there any way -- I know the lead generally take on the DTC responsibilities. Is there any way that if you market any the DT stuff and you're able to participate in some of the rev share if they do launch those initiatives?

Yes, absolutely. I'll start with the second question. Every deal is different. And so for example, yesterday, with the Golden Knights announcement, we also shared that we would be partnering together on the D2C opportunity with the Golden Knights. So it's going to be a nuance from market to market or from league to league. But I would expect you should continue to see us work to continue to participate in one way or another in D2C. The premise of our partnership with these leagues and teams is that over-the-air broadcast and everything that it brings with it is the top of the funnel. It brings the greatest reach. And so we recognize the opportunity for both the leagues and the teams to create additional value further down that marketing funnel, whether it be through sports betting, through D2C, through ticketing and merch. And on some of those elements, we expect to participate going forward.

And your thoughts, Adam, around incremental programming around those...

Yes. Did you mean adjacent programming -- or did you mean...

Yes, exactly. So like pre posting, but like even beyond like additional half hours or something just dedicated to that stuff that might replace ION program. Is that a thought or are you just not yet?

Well, no. I mean we're definitely looking at working with the leagues on adjacent programming. They've been very, very open to recognizing the value that, that adjacent programming can have with respect to promoting the product, promoting the live games and their brands in Las Vegas. We'll be producing several different additional shows both with the Golden Knights and through our news operation in order to support the Golden Knights brand and the ratings of the games. We expect to use our ABC station as a massive promotional platform as we stand up that new independent in Las Vegas. The work we've done with the WNBA and the NBA also recognizes that there's an opportunity for additional partnership around other programming, but keep this in mind. We have a really good business in ION. And so when we model these deals, we model them understanding that we expect to beat our hurdle rate. And so likewise, with adjacent programming, we have to make sure that the economics make sense to us. This is not a passion play for us. This is a business opportunity. And we're always looking to identify programming that will draw in a bigger audience, a better audience, more valuable audience, not just put sports programming for the sake of sports programming. So we really want to make sure that any time we transition from, for example, a very popular procedural to sports programming that it's going to benefit our platform.

Got it. No, that's fair, and that's very helpful, Adam. Jason, just on the distribution side, well, actually, first, housekeeping. What's kind of your thoughts on the pace of political after you reported Q1? We've seen a little bit of a downtick from some of the peer group. Is there can be some color on 2Q on political assumption...

Q2 political assumption?

Dan, it's Lisa. So I would say our political forecast for '23 is on par with the last 2 years of off-cycle election year. So we expect to be in the $23 million to $25 million range for the year.

And 2Q is kind of similar to Q1 then, Lisa?

First quarter activity was a little bit ahead, I would say, and I would say Q2, certainly, there are some races in Kentucky and Colorado Springs that are helping us to potentially maybe continue to be a little bit ahead of Q1 of '21, but the quarter is still building, and I think Kentucky use [indiscernible] next week. So that money is being built as we speak.

If you're referring kind of Q1 of this year versus kind of Q2, I would say, generally, we would expect in the same ballpark.

Okay. Perfect. Because I mean, look, with all the pieces, obviously, very strong for 2Q and for the full year. And we know -- I mean, I think you said in the script -- in the prepared remarks or at least in the release that some were roughly 1%. And so we know there's been mix of virtual. Virtual has been outperforming in Q1, and you're raising your guidance after what I think people generally view as a little bit of softness in linear reporting from the big MVPDs. So just help us think through kind of the rate versus sub balance maybe or sort of your sub expectations embedded in the balance of this year given the dynamics in Q1.

Yes. So we -- I think we referenced earlier, we actually had our most recent reporting. Obviously, we do receive information on a bit of a lag was really positive. It was actually up when you netted in the virtual growth against the sub-churn on traditionals. That being said, we -- over a longer period of time, we don't take 1 quarter as our new number that we based our models off of. We, in general, believe that net sub churn will continue in that down mid-single-digit range on a trailing 12-month basis. And that is consistent with what we have baked into our outlook. And so that is kind of baked into the mid-teens on the gross distribution side.

Next, we go to Michael Kupinski with Noble Capital Markets.