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

We're going to get started. Very happy to have E.W. Scripps back with us this year. On the desk with me is CFO, Jason Combs; and Treasurer and SVP of Tax, Rebecca Riegelsberger. Guys, thank you very much for being here.

So it has certainly been a topical year in the space. This is a time we sit down to discuss not only Scripps, but also industry things as a whole. Scripps has a unique setup versus some of your peers, reaching viewers on a national and local level via a variety of distribution methods. Jason, perhaps kick us off with a quick overview of those different dynamics, how you think that sets you up for success in today's evolving media landscape?

Yes. So thanks for having us. Glad to be out here. Always nice to come out to the warm sunny weather out in Scottsdale. I'll first start by reminding everybody about -- sort of the makeup of our company. So we have 2 primary operating segments, we have our Local Media segment, which consists of 63 different channels in 41 different markets. And then we have our Scripps Networks division, which consists of a large portfolio of national brands that kind of span coast-to-coast. You recognize a lot of the names, ION, Core TV, Scripps News, Bounce amongst others. And so to your point, Aaron, when you think of the brands we have, the mix of both local versus national, we approach our brands with what we call our all of the above strategy, which is to ensure that wherever the consumer is looking to consume their media that those brands are available there. So we focus on ensuring ubiquitous carriage and pay TV in the over-the-air space and in connected TV space. And so when you think about the kind of the mix we have of local versus national assets, I think it is a little bit unique for our industry, probably sets us apart a little bit and from some of our other competitors who, frankly, are probably are a little bit more tied to the pay TV ecosystem than we are.

Yes. Okay. So we're going to dive into all of that throughout this discussion. I wanted to start with an area that I think a lot of handwringing went on amongst investors recently around the Disney Charter dispute that ultimately got settled a couple of weeks ago. As we've now had time for the dust to settle, it would be great to hear your thoughts on the new template set by the 2 companies, obviously, includes both DTC and linear and seems to preserve the cable bundle for now. What does it mean for local TV broadcasters broadly, and for Scripps specifically?

Yes. So first and foremost, we're glad that there was a resolution there. Obviously, that created a lot of turmoil in our industry, and frankly, what I viewed as some knee-jerk reaction to the dispute. So we're glad that it's concluded. We do think that the resolution that came to help solidify up, we view as the value that broadcasters bring to the overall pay TV ecosystem in the pay TV bundle. I think, implications, I think the question -- I think there's an expectation or hope that, that provides a little bit of a stickier bundle and certainly keeps the charter pay TV ecosystem whole longer. And so we're hopeful for that. I think time will tell. I think the other thing that I kind of took out of it was one of the things that broadcasters have been saying for a while is that, in order to support the ongoing growth for the broadcasters and some of the larger cable players, the overall bundle was going to have to get a little skinnier. And some of the lower-performing, lower-watch channels were going to need to get dropped. And you certainly saw charter push on that, and that was 1 of the things that they really pushed Disney on are certain networks that they no longer wanted to carry. We think from our perspective, that is a positive because it kind of hones in that bundle more on the brands, including our brands that we believe bring the most value to them.

So it sounds like you do believe that this setup can perhaps slow the rate of churn amongst the subscriber base or at least, maybe stabilize it? Is that...

Yes. I think that's certainly our hope. It will take a little while to see how that plays out. And even the -- my understanding is the work that they're going to include some of the streaming services into that broader bundle now will actually take a lot for them to operationalize. So I think it will be a little while before we actually can see that play out. And then I think everybody in the room knows, we also get information on a lag, too. in terms of subscriber churn, but that is certainly our hope.

Do you feel the outcome of dispute tilted negotiating leverage in any way, either more towards distributors in discussions going forward, whether from a pricing standpoint or otherwise do discussions get tougher from here on out?

I don't think so. I think from our perspective, we believe we still have the same leverage we did before that dispute. We have a really good [ retrain ] story, which I'm sure we'll touch on a little bit later. But what we've seen during our negotiations is the continued value that we bring and the leverage that, that provides us in those negotiations. So I don't necessarily think that that's an outcome where the leverage tilts away from us.

Okay. There have been recent headlines suggesting Disney may be willing to sell all or parts of its linear TV business. A couple of broadcasters have put themselves in the mix as potential suitors. Is there any interest level from Scripps around that? And how high a hurdle would there be from a regulatory standpoint, from a financing standpoint?

I guess first thing I would say is we don't comment on speculation. So nor on kind of any potential M&A pursuits. I will also reiterate what we say all the time, our #1 capital allocation priority is debt paydown and deleveraging. And I think that's where you'll see us continue to focus, kind of for your sort of macro level question there, I think anybody who pursues that deal, there probably is going to be some level of sort of escalated scrutiny there because of the pure size of the transaction. But again, our focus is on debt paydown and delevering.

Yes. One last question around this topic that's come up a lot in my discussions was whether the new template now makes it possible or easier for distributors and their subscribers to access network content, including nationally televised sports even if there's a dispute with a local affiliate, the obvious implication of this would be, distributor not feeling as much pressure to meet an asking price from the local affiliate or settle a blackout dispute expeditiously if they can access that content like Monday Night Football via the direct-to-consumer apps, that would be a part of the bundle. Do you -- what's your thoughts around that? Maybe you can touch on some of your protections or if anything has changed now versus what it's been for years?

Yes. So I guess, first thing I would say there is that our network and our cable agreements prohibit the duplication of a [ indiscernible ] platform. From that standpoint, we have protection built into our contracts that protect us against something like that. I would also say that from our perspective, the economics of sports on Big Four networks don't work without the component that is the affiliate fees. And so even if there was a work around, I think the -- there would be kind of potentially eating into part of the overall revenue stream that support those economics and making them worse in big picture. So we continue to see the value we bring. We believe we have protections in place -- and so from -- I don't have any concern coming out of the Disney-Charter dispute specific to that.

Okay. So let's shift gears to retransmission fees because as you pointed out, it's been a big year for you. You had 75% of your traditional pay TV subs up for renewal. As we announced it in October, I believe you're through most of that. Can you give us a sense for how those discussions went versus your expectations? And remind us what your outlook is for net retransmission fees over the near and medium-term horizon?

Yes. So from a retransmission perspective, we do have 75% that were up for renewal, and those were all up for renewal in the first 3 quarters of the year. And so we're really pleased to have gotten through that. We -- the net result of that is going to be a significant growth on the top line and the bottom line. Our net distribution revenue is going to grow by more than -- or I'm sorry, mid-teens, I should say, year-over-year. And net distribution dollars are going to grow by more than 40%. So a really strong story for us. We're pleased with the way those negotiations went. And there were really from our perspective, no surprises. If you're talking a little bit longer term, we -- our cadence of renewals is 75% this year, really, nothing next year. And then 25% in 2025. And so that kind of sets you up for kind of the growth in -- that will restart as we get into our next renewal cycle starting in '25 and then '26 will be another 75%.

Got it. Okay. On the network affiliation renewal side, can you remind me what you've completed recently, if there's anything major upcoming? And what are your expectations in terms of Network comp growth rates?

Yes. So we're kind of -- right in the middle of all of our network affiliation agreements. We don't have anything coming due this year or next. What we've talked about has been the fact that during our negotiations a year or 2 ago, we were able to really push back on the historic -- kind of really big first year increases you would see in affiliation expense. And a lot of that is tied to the loss of some exclusivity as our partners have moved some of their content to their streaming apps. And we were successful in that, and we've talked quite a bit about that. You can see it really flow through on our P&L. Our programming expense line in our Local Media division, which is made up of both affiliate fees but also acquired programming has been virtually flat year-to-date this year when you look through our P&L. So we were pleased with the outcome of that, and we have a little bit of a runway before we enter into those discussions again.

Okay. Let's talk about the advertising environment. It has been a sluggish year plus for advertising, most notably on the national side. On your earnings call, there was cautious optimism around the outlook for 3Q and 4Q. Does that optimism still exist as you sit here today? And are there any finer points you can highlight that give you confidence in that assessment?

Yes. So I mean, you referenced our Q2 earnings call, we did talk about how pleased we were with Q2 and how things shook out specific to the national ad space. We saw a stabilization in the decline we had seen in direct response, which is a really big component of our overall revenue profile in the Networks business. We also saw probably the strongest quarter of scatter that we've seen in a couple of years. And in addition to that, connected TV, which is another key growth area for us, we had a really strong growth quarter in connected TV. So all of those things certainly gave us and continue to give us optimism as we move into the back half of the year.

Okay. So one worry that I hear from investors is just the fear that the other shoe is going to drop -- in past slowdowns, we've seen national dip and then local eventually follow lower, albeit less pronounced. While local hasn't exactly been [ eluting ] strength, it has certainly held in better than feared this year. What gives you confidence that the local ad market is set up for continued stability, if not growth from here? And can we avoid that pull down that we've seen in the past slowdowns?

Yes. So from a local perspective, it has certainly been much more resilient during this economic downturn than the national side. And end of the day, local businesses need to get beat in their door. And we continue to be as a local TV broadcaster, really, the best way for them to find a large audience. And so from that perspective, we continue to be optimistic. There are certainly when you look category by category, certain categories that are being more impacted by the current state of the macroeconomic conditions, services, as an example, which is our largest category is -- has been down for the last several quarters. That's heavily tied to the current state of inflation and interest rates, that includes things like mortgage rate services, other things like that. But we've had other upside in categories like automotive. In Q2, we were up for the fourth consecutive quarter year-over-year in automotive, and we got off to a strong start again in Q3, and home Improvement has been really strong for the better part of the year. So we've been able to kind of see a little bit of that portfolio effect certain categories that are -- that have are exuding some strength that have helped to offset the areas that are probably more impacted by the current state of the economy.

One question on auto. Are you seeing any impact of the strikes on spend or commitments? Have you seen any pullback whether it's from Tier 3, Tier 2?

I think it's too early for most people to be seeing any impact yet. I think the real question is how long that drags on because certainly, if that drags on for an extended period, I do think you'll see some impact as we move forward. But I think there was enough inventory generally on the lots where it will take a little while for that to start.

Okay. On the national network side of the house, you called out continued softness in direct response due to inflationary pressures on consumer spending. Remind us what percent of ad sales for Networks is derived from DR? And are you seeing any green shoots there yet that you would mention?

Yes. Direct response is about 40% of the overall Scripps Networks portfolio. We were pleased with the stabilization we saw in Q2, and that does give us some hope as we move into the back half of the year. Also, as we look forward into Q4, historically, Q4 is a really strong direct response quarter for us, heavily tied to the health care industry, things like open enrollment, all of those sorts of things. And so we're looking forward as we transition into Q4 to see that benefit as well.

Okay. Within the networks, the national side, CTV, that ad environment has gotten a lot more competitive. How should we think about the trajectory of growth there as the marketplace evolves and matures?

Yes. So CTV has been a really big focal area for us. From a -- we have worked -- we have all our local brands of [ ION ] CTV, but the real effort last year has been to ensure that all of our national networks are available in the CTV space. And we've deployed across virtually every -- sort of major fast streaming platform. And we've seen the benefit. So in Q2, we have 1 sort of legacy low-margin product that we're sunsetting. If you back out the impact of that product, we were up by 80% year-over-year in Q2. And in the upfront for the most recent upfront, our connected TV business was up about 60% year-over-year. So it will continue to be a real focal area for us and one that we think can certainly help to offset any challenges we're seeing on the linear business.

Okay. What do your expectations for political this election cycle when might we start to see the dollars getting spent in a material way in 2024 expenditures, break records again?

My thoughts are that we won't be giving a guidance at this point yet. We got out as ahead of ourselves a bit in 2022. And I think there's just a lot that still needs to shake out in terms of the candidates, the competitiveness of races in our markets. And so a lot still to kind of work its way out. Kind of big picture, there have been a bunch of reports out over the last couple of weeks that have looked at estimates for the total political advertising pie in television, and it's expected to grow from $9 billion back in 2020, up to $10 billion in 2024. So certainly, I would say, a reason for optimism broadly across the industry.