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

Okay. We will get started with the afternoon session. I'm Aaron Watts, the media credit analyst at Deutsche Bank. I appreciate everyone being here. Next up, we have E.W. Scripps back with us. And on stage with me is Jason Combs, Chief Financial Officer; and Rebecca Riegelsberger, who's Treasurer of the company. Thank you both for being here. So I'm going to turn it over to Jason to run through some slides and talk his story, and then we're going to open up for Q&A.

Yes. Absolutely. So thanks, Aaron. Excited to be here today to walk you through a brief update of the company. As Aaron said, he's going to have, I'm sure he has some questions for us, but we'd also love any questions that you guys have out there as well. And so we always like to start these off by just giving everybody, especially those who are newer to our story, just a quick reminder in terms of the makeup of our company. So if you look at this chart and you look across the left, you see a couple of bubbles. And those first 2 ones, those are 2 primary reporting segments that we have, our Local Media segment and our Scripps Networks segment. And then the 2 bubbles to the right, those are 2 enterprise brands that we have, that support both our Local and our Networks segments. So Scripps News is both a channel within our Scripps Networks segment, but it's also heavily used within our Local business. Scripps News content is used within our local news broadcast. It is simulcast in non-news hours as a way to save on syndicated programming, and it is also used extensively within our connected TV apps for all of our local television stations. Scripps Sports, the one you see over to the far right, that was started over about 2 years -- a little under 2 years ago, I should say. And our Scripps Sports business really supports the acquisition and the ongoing operations around all of the sports properties for both our local stations as well as for ION, and we'll talk a bit more about our sports and our sports strategy in a few slides. And then going across the bottom, you see Tablo. So Tablo is our set-top box that we own, that combines both free over-the-air television, along with a large collection of free ad-supported streaming channels. And so Tablo is a great way for Scripps to remain connected to those who are cord cutters or who are cord nevers, unable to be able to kind of keep them in the ecosystem and monetize them. Turning to the next slide. This just talks a little bit more about our local TV segment. So from a local perspective, we have over 60 television stations across 42 markets. This slide specifically focuses though on our approach to news within our local television stations. Local news for all broadcasters continues to create a significant amount of connection with our communities. And I think Scripps, in some ways, is taking a little bit of a different approach than some of our peers when it comes to news. About a year ago, we began implementing our local news initiative. And that strategy is really focused on having more feet on the street, covering the stories that matter in our communities. I would say it's more about storytelling, less about the traditional live anchored new setup behind the desk. And we believe that this both creates a compelling product and that the net economics of implementing new technology and reallocating resources are a positive for our bottom line within our local segment. We started in the smaller markets, but throughout this year, we've progressed and moved it into our larger markets as well. You will continue to hear us talk about local news, its importance as a piece of our broader local strategy and certainly, one that benefits us when we talk about political and the political season and having that local news content to attract potential voters in political advertising. And we'll talk more on that in a bit. This is our Scripps Networks segment. So as a reminder, Scripps Networks is a collection of 8 national networks, available pretty much ubiquitously across free over-the-air television, pay TV and connected TV. Each of our networks generally target a specific demo, and we sell them together in the upfronts as well as through the scatter and the direct response marketplace. So let's talk a little bit about the plan that we're in the middle of executing right now. So the combination of the increased debt load we took on through a period of acquisitions several years back as well as, I would say, the impacts of inflation and interest rates on the national advertising marketplace has put a lot of pressure on our leverage. And so our top focus right now is on both reducing the overall quantum of debt that we have outstanding, but also decreasing our net leverage. And you see here 5 specific things we're really focused on that we think will help us in those efforts. The first one, political advertising revenue. It will be significant in the second half of this year, and all those proceeds will go towards debt paydown. Portfolio optimization remains a focus for us. The biggest one and the one we get asked by this crowd, the most about is the Bounce sale. And what we said there is that progress continues on the Bounce sale. We had previously said our target was to announce something towards the end of Q3, might push a little bit past there, but we're pleased with the progress we continue to make there, and we continue to believe it will be a delevering event. We've also talked about real estate and the potential for some sale leasebacks of some television station and potentially a tower or two as well, and we've kind of sized that up in the $50 million to $100 million range. The third bullet you see on there, connected TV. Connected TV continues to grow for us. Roku, during the most recent quarterly earnings, reported that viewing grew in the second quarter by 75% versus the year ago quarter. So the eyeballs are continuing to shift there, and the connected TV ecosystem continues to grow. And our national networks are very widely deployed across the ecosystem, and we believe that will benefit us as we move forward. The fourth one, our sports rights. We continue to execute our sports strategy, and we're seeing tremendous value there. We talked in the last earnings call about our upfronts within the Scripps Networks and the growth we saw in linear volume, we were up in the low single-digit range. And on the CTV upfront, we were up by over 60%. And I would say that upfront experience is different than what you've heard, some of our peers who don't have sports, what you've heard them talk about. So we continue to see that our sports strategy allows us to bring in new advertisers and maintain existing dollars. So it's kind of an offensive, defensive play. And then the last line you see here, expense management. We're focused on aggressively managing our expense structure as we start to look through the rest of this year, but also into 2025. I spoke earlier, specifically about what we're doing within local news to create a more economically durable model and local news. But we're also very focused on the expense structure within our network segment with plans to expand margin as we look into 2025. On the last earnings call, I actually talked about how Q3 expenses were expected to be down low single digits and then be down by more than that in Q4. And I think those are the first steps we're taking in our expense management plan, and we continue to evaluate other levers as well. So let's just talk through a couple of these in more detail. So let's talk political. Sure, you've heard from our peers, and I think we're having a similar story. Political is going to be really big for us this year. We gave a guide in February. We took it up in May. We took it up again in August, up to $270 million to $290 million. That compares versus 2020 revenue of $265 million. So even on the bottom end of that range, that would be a record for us. And what we've seen sort of since then is continued strength. When you talk Senate races and the push for the Republicans to try to flip the Senate red, there are 7 highly competitive Senate races out there right now. We're in 6 of those states. And so when you talk about Ohio, Montana, Michigan, Nevada, Arizona and Wisconsin, we continue to see enormous strength in all of those states. On the presidential front, the Vice President, Harris, moving into the Presidential candidate role for the Democrats has brought a lot of fundraising, very well documented in. I think it's also expanded the scope of the states that are in play as well. If you would ask me early in year, I would have said there are 5 toss-up states. And as you see on this map here in front of you, we would actually say there's about -- there's about 8 toss-up states right now, and we're in 4 of those states. And so I think as you look at what's shaking out with the Senate, the presidential race and then some contentious ballot issues, we've got them reproductive rights on the ballot in 5 of our states. I would say that we have a strong footprint in this election cycle, and we're both very confident and optimistic about the revenue and cash flow that we'll be able to generate there. Touching again real quick on connected TV. This is a map of our national networks and where they are deployed. As you can see, we are widely distributed, but there is still some opportunity within YouTube TV and within Pluto and not shown on here, there's some virtual MVPD carriage, things like Hulu and other things like that. So when we look at connected TV and the ecosystem there and we look over the next couple of years, we think we can drive growth through expanded distribution through the strong upfront results that I just talked to you about. There's a demand there. We saw our CTV upfront up by 60% in volume year-over-year and just the general growth in the viewing hours within the connected TV ecosystem. I know there was a lot of noise about the impact that Amazon and Netflix caused kind of across the ecosystem in Q2. But as you see that pie continue to grow, you're going to see those who have large footprints in connected TV to continue to benefit from that. And that's one of the reasons why we believe, as you look out over the next couple of year time horizon, this will be a double-digit growth revenue line item for us. And then last slide before I hand it over to Becky to kind of walk you through the financials in our cap structure. So we continue to believe that sports drives a very unique connection with a viewing audience, especially in the linear space and that Scripps greatly benefits through the partnerships we've established thus far in sports. On the local TV front, we have 3 NHL deals. And in the college sports side, we are the broadcast partner for the Big Sky conference. These deals generate incremental ad revenue for our sales to generate incremental retransmission revenue for us, and so value to our local stations. And over on the national side, we have contracts with both the WNBA and NWSL for franchise nights on Friday night and on Saturday night. We just concluded last week, the last -- the end of the regular season for WNBA for our second season. We were really ecstatic with the results. We had 7 weeks of more than 1 million viewers on the WNBA perspective. Last year's WNBA finals averaged 728,000 viewers and -- which was a 20-year high at the time. And we had 7 of our weeks, half of our weeks, we exceeded 1 million viewers. And full year viewership was up 133%, and we saw 3.7 million combined hours of connected TV viewing. So we are seeing the benefit in year 2 of WNBA. We are excited about the rest of the season that we have with NWSL coming off a strong Olympic bid by Team USA, and I'm looking forward to Season 2 with the NWSL next year.

Thanks, Jason. So I won't spend a lot of time on this. Just some recent business highlights. Jason covered most of these. Again, political has been a great story for us. A few other bullets on here, Jason dived into. But as we talk in a minute about the capital structure, I just kind of wanted to touch more on the Bounce transaction that is progressing well. We announced that in May of this year. And as we had a significant level of interest, just wanted to make sure that we were spending the right time to get the right buyer for those assets, and to make sure we're getting -- extracting the appropriate amount of value out of that. So expecting again for that to be in early fourth quarter. And given that we don't have a lot of SEC regulation requirement, there's the HSR regulatory requirement that we would anticipate having those proceeds in the fourth quarter, so prior to us going to market to refinance. Flipping to the next slide. Just again, I won't spend a lot of time here, but this is just our guidance for Q3 that we issued in the second quarter. So local media revenue is expected to be up 20%, expenses up low single-digit percentage. And then on the network side, revenue is expected to be down mid-single digits, expenses down low single digits. And for our shared services, it's about $21 million for the quarter, which is down from the first quarter. So flipping over to our capital structure, our favorite topic for the year, and it seems like we've been talking about forever at this point. But we have been talking with lenders since about April of this year, just kind of looking at the structure of what is the best for -- to push out our maturity wall. Since we have the Bounce transaction that, again, we're feeling very strong about, we've got political, which is a great story for us. Looking to have those proceeds in and free cash flow in by early in the fourth quarter to set us up for really good momentum to go to the market to refinance. So we would look to address both our '26 and '27 as a part of a kind of full refinancing and then looking at what our interest rate would be increasing by would be about 1/3 of our debt stack that we'd be looking at. So not looking to address the '28s at this time and kind of leaving that in place. We ended the second quarter at 6x net leverage, total net leverage that Jason mentioned on the last call that by the end of the year, we would be projected to be in the low to mid 5x with the proceeds from Bounce and the free cash flow from political coming in. And with that, we will open it up for questions.

Okay. Maybe I'll kick it off, but if anyone in the audience has questions, just raise your hand, and we'll take those. Let me ask you, as I think about sequencing you've said Bounce, we may hear something in October. Hopefully, not too long a closing period for that, depending, I guess, who are the buyer is. But how do you think about getting that done? Is the next thing, then the capital structure addressing those maturities that you just mentioned? And when do you start to have those conversations with investors?

Yes. So I mean we have been talking with lenders since, I guess, at April of this year and have continued to have pretty constructive conversations with lenders. But with -- we would expect the HSR filing and completion to have the proceeds in by the end -- by the time we announced third quarter earnings. So we announced that on November 8. Again, we'll have political cash in by that time. So we look to go to market pretty shortly after that, given those tailwinds.

Okay. And remind us the tax basis of Bounce and how should we think about the tax consequences of that?

Yes. So we will have some tax leakage on that. Our basis is about $75 million to $80 million. And I would consider in models probably about a 15% effective tax rate.

Okay. Got it. And on the capital structure, you mentioned kind of the layout there. As I think about Berkshire and their investment, how have they been helpful? And could they potentially be helpful in the future as you think about a solution for what you're looking at now?

So I don't see them coming in to participate in this refinancing. They are a good partner. We have a good relationship with them. Our CEO, Adam, has a really good relationship from a business operations, but they don't have any oversight, any say in our management or Board governance. So I think that structure will stay in place. The preferred -- just for a reminder, that $600 million that we decided to pick early this year, that rate went from 8% to 9%. And the first time we can call that is January of 2026. They don't have any put right. So outside the call, that will stay in place into perpetuity. And we wouldn't plan to call that until we get closer to our mid-3 target leverage.

Okay. On retransmission fees, you renewed 75% of your traditional pay TV subs last year. Your distribution revenues were up 9% in the first half of this year, though a little bit more flat in the second quarter specifically. I believe you had minimal subs up for renewal this year. What percent come up in '25 and '26? And maybe you can touch on what the trend has been with your underlying sub counts?

Yes. So we have 5% up this year. We have 20% due at the end of Q1 next year, and then we have 75% in 2026. So that's kind of the cadence. And so you do see a little bit of that ebb and flow. You have a big step-up. Given that we have 75% every 3 years, you see a big step up there and then things moderate the next 2 years. Our underlying sub-churn on a net basis has been down mid-single digits. It's been down mid-single digits for a while now. That's been a pretty consistent trend for us. And so sort of the combination of rate step-ups, growth in virtuals that has more than negated the headwind we would see from the sub-churn on traditional side, which is what's driven our growth over the last couple of years. And we've talked full year this year kind of on both the gross and in net side that we would expect low single-digit growth on both gross and net.

I know it's early days, but Charter obviously changed the model a little bit last year with Disney and putting some of these streaming services into the bundles. DirecTV and Disney just reached an agreement where we might see some genre-specific or smaller bundles at lesser prices. How do you view that as impacting the rate of cord cutting that we've been seeing?

I mean I think it's our hope that anything that ends up coming out of those negotiations that creates a stickier bundle is good for broadcast because broadcast is widely deployed across the bundle. And so I think that is our hope. I also think that those negotiations also highlight why across the industry, we pretty much agree. We believe we should be negotiating directly on the virtual MVPDs because in those discussions, the -- in the case of the Disney, as an example, Disney Charter, they're negotiating for the most value they can get across their enterprise and then they're allocating the value, and they're going to allocate the value to the pieces where they control all the chips and often at the expense of local broadcasters.

And on the other side of the coin, I think you had NBC up earlier this year, and what else is upcoming? And what are your priorities going into those discussions? What can you say about maybe what was achieved in your last renewals and what your expectations are in terms of reverse comp growth rate?

Yes. So we have 2 of our renewals up at the end of this year with NBC, so not up yet in CBS. I would say that as we approach those renewals, it's -- for us, it's about -- I mean I think it's well known. We don't comment on the specifics of any 1 contract, but it's well known, some are fixed and some are not. What we are looking to do is better align the economics of the affiliate fee with the trends of the traditional -- sub-decline in traditional retransmission revenue. And so I think that's a focal area. I think if you rewind 3 years, every time we would go to do an affiliate fee renewal, we would see an enormous step-up in year 1, 10%, 20%. And we made a pretty big shift 3 years ago to move to where if you look at our programming line during our last renewal cycle, it was fairly flat, flat to up low single digits. So we've kind of made that move initially, but I think the next move is that, that as more of the dollar shift to the virtual side, I think that we need to see declining affiliate fees on the traditional side.

And just on that point, with the virtuals, is there any reason for optimism as we sit today on you being able to negotiate those agreements differently than how it's structured today or have more control over it.

I think we believe it's in the best interest of the industry, but we're also not holding our breath for something to change there anytime soon. So we need to operate amongst sort of the regulations that are out there right now. And so we'll move forward with that.

I'm sorry if I missed this, but have you given any framework or goalpost around as you think about the retrans and the reverse or the network comp, how to think about net growth of retrans over the next couple of years?

We haven't given anything in terms of specific dollars other than this year where we guided to the net dollars being up in the low single-digit range, gross and net being up low single-digit range. What we have said is our target is to try to maintain margin from a net perspective as we go forward, and that will ebb and flow somewhat as the revenue and the renewal cycle happens on the top line.

Okay. Let me pause for a second. Does anybody want to jump in? Okay.

[indiscernible]

So yes, I mean altogether, yes, but not necessarily just one big like secured tranche necessarily, but our bonds have been trading up a bit compared to what they have been -- they were at over the last year. We anticipate that they will likely trade up a little bit more with that news because I know there's a lot of hesitation around belief that we'll be able to execute on a Bounce deal, just the lack of transactions that's happened in the market. So continuously assessing what the best structure is. But yes, coming out on the other side of that with both the '26 and '27s addressed.

[indiscernible]

We would love for it to be alone, but I think that when we were talking about -- when we started this conversation kind of back in April, we were looking at both a bond and a loan, a secured bond and a loan. I think it's going to be based on what is available in the market from an accessibility standpoint. So yes.

Is capturing discount something that is a focus through this process as you look at doing this refinancing?

That would be the optimal situation as if we could capture the discount. We unfortunately were not -- just given the transaction, we're not able to be active in the market from a bond buyback standpoint to take advantage of that discount. But that would be great for us if we were able to deleverage a little bit more just by capturing a little bit of the discount.

Right. All right. So I wanted to ask a question about advertising. You're in a somewhat unique position of having a more local sales skewed business on the station side of the house and then a more national skewed business on the network side. National has by most accounts been slower to recover than local and more volatile. There are some concerns I've heard and that I have that the sluggish and uneven recovery may be due to secular pressures rather than just cyclical in nature. So I'm curious how you think about that given the unique viewpoint that you have? And should there be a concern that this weakness can ultimately on the national side, can bleed into the local side as well, the local marketplace.

So I guess I'll start with kind of the secular versus cyclical. I mean I certainly think a lot of we've seen in national advertising marketplace for the last 2 years. There is a cyclical component tied to the inflationary period to interest rates. And as inflation started to ease and now we've had sort of our first rate cut, I do think that provides some benefit as we look forward. I also think there's a secular component. And I think dollars have shifted to connected TV. It's one of the reasons why where we've aggressively pursued getting all of our national networks available in connected TV and bringing the sports in, too, because that's one of the things that the sports -- if you go into the connected TV ecosystem, there's not a lot of sports out there. And so to be able to turn on your Pluto on a -- or your Amazon Freevee on a Friday night watch WNBA for free out there, I think that's a benefit to us. And so that's one of the reasons why we've leaned so hard into connected TV. In terms of kind of the question in terms of the interrelation with local, about less than 1/3 of our core is national core. Most of it is local. And local has absolutely been more resilient, especially when you talk automotive, which had been up for like 8 of the last 9 quarters and home improvement as well. The national piece of core has seen some of the same trends that you're seeing over on the Scripps Network side as well. And so -- and I think it's the same story. We do think there will be some bounce there, but we also think some of that is secular.

And you talked about some of the new video ad inventory coming online from the streamers like Netflix or Amazon. And I believe you lowered your CTV expectations for the year as a result. Do you see that inventory issue becoming worse as you go forward? Or do you see a stabilization taking place in the near term?

I think our view is there's a stabilization that inventory is ingested. I mean if you look at the pie of inventory, a year or 2 ago, Amazon was like a line on the pie, and now they're a huge chunk of the pie. And so I think that does. I also think -- I think we will gain additional CTV revenue through wider distribution. I referenced in the presentation a couple of places we're not carried that. I think if we get carried there will drive CTV growth, the upfronts and the volume growth we've seen there that will benefit us in our CTV growth for next year. It's not going to help us this year. And then as I said, the overall pie continues to grow. I referenced a Roku number in terms of their growth in terms of viewing. We've had on ION, for example, in the CTV space, similar numbers in the mid- to high 60% growth in viewing. And as that pie grows, the revenue that we realize is going to grow as well.

Okay. And then on political, you've raised your guidance this year. If I think back to 2022, things were running pretty hot. And then in the end, money shifted around, and I think there were winners and losers depending on where you're situated. What gives you confidence this time around that the numbers are going to come in the way you expect them to as we sit today?

I think it's just a continued building and momentum that we've seen in the Senate races. There are a couple of the Senate races that I referenced have been hot all year. The Ohio Senate race, I live in Ohio and I see a Senate ad every time I turn TV on and Montana. Those have been hot all year and continue to be hot. But what we've seen more recently, as you've seen the spending really ramp up in some other states as well. And I kind of mentioned some of them with Michigan, with Arizona, and those are states we have big footprints in. So I think from that standpoint, and then there's just been on the presidential side, a huge increase in what I would say is sort of interest dollars coming into the ecosystem as a result of I think two things. I think one candidate being introduced as a new candidate, the other candidate, not currently being -- having legal fees that those fees are going to. I think both of those things are bringing a lot of dollars to the table across a big footprint of our markets.

Okay. Any questions? Okay. I've got a couple more. You highlighted the successes you've had on the sports side, and you've added a variety of different sports rights. I think it's notable that you've been able to keep your expenses in check at the same time. Local media expenses were up just low single digits in the second quarter, for instance, and network expenses were actually flat in 2Q. Can you continue to add to your sports portfolio while keeping expenses in check?

I think we -- I guess, I'll separate those 2 things out. I think we have the ability to further maximize our cost structure, yes, outside of sports. And any new sport we pursue will be additive to the overall cost structure, but it also should be additive to the top line revenue as well. Just in terms of that broader sports strategy, it looks at this point like Diamond is going to move through the season. So I don't necessarily see a lot of sports opportunities coming to fruition for this upcoming season for local broadcasters. I think that will be something that probably likely doesn't happen until after the season, you could see those opportunities. And on the network side, we were very focused in our strategy pursuing women's sports in creating franchise nights. We don't have the expectation that we're going to put sports on every night of the week. And so we're -- I see us there looking to maximize those assets we have today in Scripps Networks with the NWSL and WNBA versus looking to add a bunch of new sports on top of that.

Okay. I'll ask one final one. And I've been asking this of some of your peers as well. But I know your equity isn't valued where you think it should be, nor is your debt trading at levels you think are probably appropriate. So you've highlighted some of the positive aspects of your story and your confidence in the business outlook. What do you think it takes to get the market and investors fully onboard with that view as well?

A successful refinancing. And I think that our leverage is a big overhang that debt and equity holders are definitely aligned on that. I think that, as I mentioned earlier, there's hesitation around belief with Bounce. So I think the announcement for that will provide a lot of tailwinds. And then I think just executing on what we say we're going to do.

Agreed.

Okay. All right. Thanks very much, guys. Very helpful.

Thank you.

Thank you.