Lucy A. Rutishauser - Sinclair Broadcast Group, Inc. Jill Hecklinger - Sinclair Broadcast Group, Inc. Christopher S. Ripley - Sinclair Broadcast Group, Inc. Steven M. Marks - Sinclair Broadcast Group, Inc. Stephen J. Pruett - Sinclair Broadcast Group, Inc..

Marci L. Ryvicker - Wells Fargo Securities LLC Aaron L. Watts - Deutsche Bank Securities, Inc. Alexia S. Quadrani - JPMorgan Securities LLC Daniel L. Kurnos - The Benchmark Company, LLC Kyle Evans - Stephens, Inc. Leo Kulp - RBC Capital Markets LLC.

Greetings, and welcome to Sinclair Broadcast Group's Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.

Lucy Rutishauser, Senior Vice President and Chief Financial Officer. Thank you. You may begin..

Thank you, operator. Participating on the call with me today are David Smith, Executive Chairman; Chris Ripley, President and CEO; Steve Marks, Executive Vice President and Chief Operating Officer of our Television Group; and Steve Pruett, Executive Vice President and Chief TV Development Officer.

David Amy, our Vice Chairman, is on vacation this week. Before we begin, Jill Hecklinger will make our forward-looking statement disclaimer..

Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors.

Such factors have been set forth in the company's most recent reports as filed with the SEC and included in our second quarter earnings release. The company undertakes no obligation to update these forward-looking statements. The company uses its website as a key source of company information, which can be accessed at www.sbgi.net.

In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website later today and will remain available until our next quarterly earnings release.

Included on the call will be a discussion of non-GAAP financial measures, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements, but are provided as supplemental detail to assist the public in their analysis and valuation of our company.

A reconciliation of the non-GAAP financial measures to the GAAP measures in our financial statements is provided on our website under Investors, Non-GAAP Measures. Chris Ripley will now take you through our operating highlights..

Thank you, Jill. Before we go through the results, let me review some of the more meaningful activities that have taken place since our last earnings call.

In May, we announced the largest transaction in our company's history, a definitive agreement to acquire Tribune Media Company for an aggregate purchase price of $3.9 billion plus the assumption of $2.7 billion in net debt. The expected acquisition of Tribune would transform our company on many levels.

In particular, it gives us access to top 10 markets and establishes a nationwide platform to deploy next generation advanced services. For the consumer, the acquisition would represent increased content choices and better local programming. For our shareholders, this would be an accretive transaction with over 40% free cash flow per share growth.

The transaction is expected to close at the end of this year, subject to approval by Tribune's stockholders and other customary closing conditions, including approval by the Federal Communications Commission and antitrust clearance.

We expect to fund the purchase through a combination of cash on hand and by accessing the capital markets, which is backstopped by a fully committed debt financing. We are extremely proud to announce that two of our newsrooms recently were honored with a prestigious National Edward R.

Murrow Award, KOMO, our ABC affiliate in Seattle for sports programming; and KTUL, our ABC affiliate in Tulsa for best news cast. Additionally, our newsrooms won a combined 36 Regional Edward R. Murrow Awards, and over the past year, 90 Regional Emmys.

Circa, our video first news source, delivering original content on mobile, digital and social platforms, which has only been operational for a year, won two Regional Emmy awards for investigative reporting. Such recognition is a reflection of our commitment to and investment in local news.

We would like to congratulate everyone in our news organization on their relentless pursuit of the truth, and alerting and empowering our viewers. In June, we reached a multi-year agreement with CBS on the renewal of four affiliations and OTT carriage on CBS All Access and YouTube.

We also entered into a deal with ABC and NBC for carriage on YouTube, and with ABC for carriage on DIRECTV NOW. We continue to work with the networks and virtual MVPDs for compensated broad distribution. We also continue to expand our Ring of Honor distribution, most recently adding 70 million homes in India on DSPORT.

During the quarter, we acquired certain assets of DataSphere Technologies, which provides digital marketing services to small businesses across the country, and is complementary to our digital agency business component.

Turning to ATSC 3.0, since our last call, Univision and Northwest Broadcasting joined the Sinclair and Nextstar consortium, bringing the consortium reach to 90% of the country.

The consortium's mission is to promote spectrum aggregation, innovation and monetization, and we are continuing to invite other broadcasters to join as we enhance our industry's ability to compete in the wireless data transmission sector. In addition, we are working with Nextstar to coordinate the transition from ATSC 1.0 to ATSC 3.0 in 97 DMAs.

This is an important step to ensuring a speedy rollout of the next-generation advanced services for our viewers and advertisers. More broadcasters will be added to this planning process as they join the consortium. Now, Lucy will take you through the second quarter results..

Thank you, Chris. Before getting into the financial details, I am pleased to report that for second quarter, we met guidance for media revenues and beat both our EBITDA and free cash flow guidance. Turning to the details, media revenues for the second quarter were $632 million, an increase of 4% or $26 million higher than second quarter 2016.

On a pro forma basis, second quarter 2017 media revenues were 4% higher than pro forma second quarter 2016, primarily due to increases in digital revenues and retransmission fees. Political revenues in the second quarter were $5 million versus $17 million in the second quarter of last year, which, of course, was a presidential election year.

Media operating expenses in the second quarter, defined as media production and media SG&A expenses before barter, were $396 million, up 6% from second quarter last year and up 6% on a pro forma basis.

The increase on a pro forma basis was primarily due to higher reverse retrans fees on network renewals, startup costs related to our revenue generating initiatives, and system upgrades. Of note, our normal operating expenses were down, and our reported media expenses were $6 million favorable to our second quarter guidance.

Corporate overhead in the quarter was $25 million, including $6 million of one-time legal and acquisition costs related to the Bonten and Tribune acquisitions. For 2017, corporate overhead is estimated to be $89 million, an increase of $16 million, primarily on $15 million of estimated one-time legal, spectrum auctions and acquisition related costs.

Research and development costs were only $1 million in the quarter, and for 2017, we are estimating $13 million in ONE Media expenses relating to the transition and implementation of ATSC 3.0.

During the quarter, we sold one of our commercial real estate investments and received proceeds of approximately $6 million, and that represents a rate of return on that investment of over 20%.

EBITDA was $190 million in the quarter, a decrease of 7% or $15 million lower than the same period last year, and that is primarily due to the absence of political revenues, but that number is higher than our guidance.

Net interest expense for the quarter was $49 million, down $4 million versus second quarter last year on scheduled debt amortization, which includes the repayment of debt on Alarm Funding, which we sold in the first quarter.

Our weighted average cost of debt for the company is approximately 5%, and for 2017, we are estimating net interest expense to be $206 million. Diluted earnings per share on 103 million weighted average common shares was $0.43 in the quarter and in line with consensus. We generated $59 million of free cash flow in the quarter.

And as you know, one of the reasons broadcast TV is an attractive investment is because of the free cash flow generation, and we continue to convert over 50% of our 12-month EBITDA into free cash.

Our 2017-2018 free cash flow yield pro forma for the Tribune acquisition is approximately 19%, and our annual dividend yield is approximately 2% based on our current share price.

We are reconfirming, reconfirming, our 2017-2018 free cash flow guidance pre-Tribune of $975 million to $1.05 billion, which equates to $4.75 to $5.10 per share of free cash flow on 103 million shares. Turning to the balance sheet and cash flow highlights, capital expenditures in the second quarter were $13 million.

For 2017, we are lowering our CapEx guidance to be in a range of $85 million to $90 million versus the prior guidance of $90 million. This excludes expenditures related to the repack and ATSC 3.0 deployment.

Cash programming payments during the quarter were $29 million, and for 2017, we are reconfirming our cash programming payment of $112 million, which would be flat to 2016. Net cash taxes paid in the quarter were $77 million, and this excludes the $13 million of taxes relating to the first quarter gain on the sale of Alarm Funding.

At June 30, total debt was $4.068 billion, including $28 million of non-guaranteed and VIE debt. Cash on hand at June 30 was $796 million, and we had $484 million available on our revolver for total liquidity of $1.28 billion.

Total net leverage through the holding company at quarter-end was 3.7 times on a trailing eight quarter basis, excluding the VIE and non-guarantor debt net of cash. The first lien indebtedness ratio on a trailing eight quarters was 1.4 times on a covenant of 4.25 times.

We estimate our two-year average holding company net leverage to be in the mid-3 times by the end of 2017, which is below the low end of our target leverage. Pro forma for the Bonten and Tribune acquisitions, total net leverage at year-end would be in the high-4 times, as previously disclosed.

During the quarter, we repaid $15 million of scheduled debt amortizations and distributed another $18 million in dividends. Now, Steve Marks will take you through our operating performance..

Thank you, Lucy, and good morning, everybody. For the second quarter, political revenues were $5 million versus $17 million in the second quarter of 2016, typical of a non-election year. We are starting to see indicators that 2018 mid-term elections are heating up, especially in markets in Ohio, Alabama, Oklahoma and Illinois.

We believe we will be in a strong position to gain political advertising share through the balance of 2017 and into 2018, ripping returns on our increased investment and our commitment to local award-winning newscast.

Core advertising revenues, which exclude political, were down slightly in the second quarter, which was consistent with low end of our guidance. We grew share in the second quarter, including political revenues, a reflection of our Network Sales division.

Our digital business continues to outpace the industry, growing 30% in the second quarter, excluding new digital investments. Turning to our outlook, which does not include Tribune, Bonten or the spectrum repack.

The third quarter, we are expecting media revenues to be approximately $623 million to $630 million, down 1% to 2% as compared to third quarter 2016 due to the absence of the Summer Olympics, political and for-profit technical schools.

Third quarter guidance includes a political revenue expectation of $8 million to $9 million versus $45 million last year.

Pro forma core advertising revenues in third quarter, excluding the effects of the absence of political and for-profit technical schools, are expected to be flat to up low single-digit growth percents versus the same period last year. This excludes digital advertising revenues generated from new digital investments.

As in the first half, we believe we are guiding for some of the best performances in the industry. On the expense side, we are forecasting media expenses in the third quarter to be approximately $397 million versus $370 million in the third quarter of 2016, with the majority of the increase coming from acquisitions, initiatives and system upgrades.

On a pro forma basis, third quarter expenses are estimated to increase 8% on reverse retrans acquisitions and initiatives. Of note, normal operating expenses are expected to be down. For the year, media expenses are forecasted to be $1.574 billion and $1.563 billion on a pro forma basis versus 2016 pro forma media expenses of $1.454, an 8% increase.

Of that, over half of the increase is from acquisitions, initiatives and system upgrades, and the remainder is from high reverse retrans, offset by a decrease in normal operating expenses.

For the year, normal operating expenses are expected to be down low single-digits, primarily due to the lower sales commissions in a non-political year and disciplined management of our operations.

EBITDA in the third quarter is expected to be approximately $177 million to $183 million versus as reported third quarter 2016 EBITDA of $233 million, and versus pro forma third quarter 2016 EBITDA of $232 million, primarily due to the absence of political and the Olympics revenues.

Free cash flow in the third quarter is expected to be approximately $87 million to $93 million. For 2017 and 2018, consistent with the disclosures we made in late May, we are reconfirming our combined free cash flow, including the Bonten acquisition, of $975 million to $1.05 billion, or $4.75 to $5.10 per share on 103 million shares outstanding.

This excludes the $202 million of after-tax auction proceeds and the $55 million on the sale of our Alarm business combined, which represent another $2.50 of cash per share. With that, I'd like to open it up to questions..

Ladies and gentlemen, at this time, we will be conducting a question-and-session. Our first question comes from the line of Marci Ryvicker with Wells Fargo. Please state your question..

Thanks. I just want to be clear on the Q3 guide.

When you include the for-profit schools, are you flat?.

Yeah. So, let me kind – let me walk you up this Q3 guidance. So, just on what we expect to report, we would be flat on the core. When you add back in the loss of the for-profit schools, we would be flat to up low-single digits, and when you take into account the absence of Olympics, we would be up low-single digits to kind of low mid-single digits..

Okay.

Now, let me ask you this, will core – do you think the core will be up for the year this year?.

Yes..

Okay. And then, one more clarification – sorry..

Yeah. Marci, let me just add to that. So, we as we progress through the quarter, each sequential – as we progress through the year, each sequential quarter, we expect the core to improve..

Okay.

And can you remind us when you cycle through the for-profit schools?.

August – September is the first month, two of the three months of the quarter we still had the benefit of the tech schools..

Okay. And then a question on the Tribune deal. Chris, you reiterated a year-end close, but the FCC shot clock, I think, goes into January.

So, how should we think about this?.

Well, year-end close, January, to me, that's pretty similar, where we have no reason to believe it won't close around year-end. And FCC has been very constructive in terms of its review. So, just because of the shot clock, doesn't mean it can't finish its review sooner than that..

Got it. Thank you very much..

Thank you. Our next question comes from the line of Aaron Watts with Deutsche Bank. Please state your question..

Hi, everyone. Just want to start with one more question on advertising, thinking about the auto category. How did that look for you in the second quarter? And obviously, a lot of negative headlines over the last week or two.

How is it shaking out in the third quarter?.

Well, second quarter for us was flat. And I think if you take a look specifically at our performance here at Sinclair, the automotive category for us for, I would believe, about 12 quarters running has been really, really positive for us. Flat actually may be the worst performance we've had in three years, and flat's not bad.

So, as we look at third quarter, right now, we're pacing to, again, an increase. So, it looks like we're turning the flat into an increase. And I've got to tell you, that's not an easy thing to do because, again, we're going up against the Olympics.

And a lot of car dealers poured a lot of money into the Olympics last year, but yeah, we're pacing, presently for third quarter, ahead of last year. So, we continue to look at this category, and it's been a terrific category for us for an extended period of time. And the performance now is pretty consistent.

So, we're optimistic that this category will continue to show growth for us because that's what it's been doing over the last three years..

Okay. That's helpful.

And then, as we watch the primetime C3 ratings decline at the network level, are you seeing any impact yet or expect to see any impact on your local lead-in, lead-out programming?.

Well, I think that whenever the ratings go up or down, it definitely has a benefit one way or the other on the lead-in. So, in particular, over the last handful of years, for argument's sake, you take a look at FOX with American Idol going away, our ratings in the 10 o'clock news had an effect over the years on their decline and then their departure.

So, there's always a factor of a strong lead-in and strong lead-out, definitely has an effect on the following program..

But I think what's also important to add is that less than 30% of our ad revenue, not our total revenue, comes from primetime, and that's becoming a ever smaller portion over time. There is some halo effect, as Steve said, but that's even less than the direct impact of your prime revenue. So, it's just becoming a very small piece of the business..

Understood. Okay. And one last one, maybe for you, Chris. Just to the extent local media ownership rules are relaxed, how should we think about the opportunity set for you to enhance your footprint with in-market flops and purchases? Thanks..

Well, we're quite excited about that. Overall, we think the industry needs to consolidate to two or three large broadcasters, and really just one to two strong local players in each market. And right now, in some of the larger and even medium-size markets, you've got anywhere from three to five local players, and to us, it doesn't make sense.

And so, if there's relaxation, there'll be a consolidation at the local level, there'll be greater scale at the national level. And there's significant savings to be had putting local content players together on a local level. We're talking anywhere from 20% to 50% of the expense load that can be synergized and made more efficient.

And then you've got – and after that, you've got stronger local content producers which will be able to spread their content and their resources across multiple platforms. So we see that as an evolution of the industry as dereg sets in here and you end up with more consolidated, stronger local content players that are more efficient.

And so the economics will be great, and the strategic output will also be great for the industry. Did we lose you, Aaron? Okay..

The next question comes from the line of Alexia Quadrani with JPMorgan. Please state your question..

Hi. Thank you. Just a quick follow-up on the advertising, and then I have one other. I think on the last earnings call, you called out some weakness in food and retail.

I guess, any update on how they performed in the quarter and what you expect for the third quarter back half of the year? And then my follow-up question is, I think you renewed some affiliates with CBS in the quarter.

Any update on your net retrans outlook for 2017-2018? How should we think about the gross retrans growth (25:38) the Comcast deal last year?.

Yes. I'll do the retrans piece first. So the guidance hasn't really changed on the net retrains. We're looking at net retrans to be up by teen percents this year, single digits next year, and then back into the teen percents in 2019.

And then, Steve?.

What categories again were you looking at, retail and what else?.

The food and retail, I believe you called them out being a little bit weak on the last earnings call. I want to know if you saw any inflectionary change there..

Yeah. Food, the food definitely bounced back, and bounced back in a good way. And retail still has a ways to go. So one out of two bounced back..

Okay. Thank you..

Thank you. Our next question comes from the line of Dan Kurnos with The Benchmark Company. Please state your question..

Great, thanks. Good morning. I don't know if you'll answer this, but obviously, some of your peers have been talking about possibly seeing the book on divestitures related to the Tribune acquisition. I know you guys thought you wouldn't have to sell anything, I don't know if your stance has publicly changed.

And then, obviously, you filed the 8-K talking about the 10 overlap markets. So, just any update you could give us there first. Thanks..

Sure. So, there really is no economic or competitive basis for divestitures. But as we all know, old habits are hard to get rid of, and so the regulatory process has to take its course. And we did agree to sell stations that we need to sell in order to get the transaction.

That's not going to stand in the way of us closing the transaction, and we factored in the worst case scenario in our analysis.

But when you really look at the marketplace today and the concentrations that you already see of market share or that already exist in many, many markets today, the types of market shares that we have in the overlap markets are standard course of business for most markets.

So, we really think we have a very, very strong case that nothing needs to be sold, but we did agreed to sell to the extent we needed to. So, that's why there's a process that we may launch in anticipation of that..

Got it. And then, just shifting course – thanks for that, Chris – just shifting course to a couple other things.

Is there any impact on your food network stake from the acquisition of Discovery other than, I guess, the modest evaluation uptick?.

Yeah. There's really no impact. We – as we said when we acquired the asset, we think it's a marquee brand and probably one of the reasons that Discovery wanted to buy Scripps. And it really just reinforces the value. When I look at that transaction, it looks to me about 11 times the seller multiple and a 9 times buyer multiple.

And that sort of reinforces the value. In fact, it's a higher value than what we had penciled in for that stake. And so, – and I do think that food will benefit from being part of a larger entity overall. So, from our perspective, it's all positive..

Got it.

And then, on tennis, I know this is really more of a distribution story, but has there been any impact from Serena being out, Djokovic is now out for the year, and number ones haven't fared particularly well? How's kind of tennis trending?.

Well, that does tend to affect some of the viewership, and which translates into the ad side. But the ad side of Tennis is so nascent. And just getting – we're just getting that side revved up now, so just a small impact overall..

Okay. And then, if I could just ask a quick housekeeping on expense, because it seems like a lot of the expenses were pulled into Q3. We knew there'd be some seasonality, but Q4 is a lot lighter than it's been historically.

Is there any thought process behind sort of that decision on expense timing?.

Yeah. So it's not really so much decisions on the expense side. One of the things up against last year is we had all the political revenue, so the variable expenses this year will be less just on sales commissions in Q4..

All right. Thanks for the color. Appreciate it..

Thank you..

Thank you. Our next question comes from the line of Kyle Evans with Stephens. Please state your questions..

Hi. Good morning. Thanks.

Could you take a minute and maybe tease apart some of the drivers that are behind the very strong digital growth you guys put up in the quarter?.

Well, we've been putting up quarters like that on digital pretty consistently over the last several years. And it's really been driven by the investments that we made in the new content management system and video management system. When we harmonized what we're doing across the board, we got rid of the confederation of various legacy systems we had.

And then also a focus on Compulse, our local agency business, and the integrated sale. We are undergoing a whole transformation process within our stations to turn our sellers into – from just straight spot sellers into integrated marketing consultants.

And they go in – well, it's a lengthy process to do that across 1,000 plus sellers, but we think it's starting to pay dividends in terms of getting them to go into the advertiser, think holistically about a marketing plan.

And of course, TV spot has proven time and time again to be a great or the best medium for branding, but then you want to support that with various digital marketing prongs of the campaign. And those are the things that we're starting to sell to advertisers in addition to their spot buys to round out the campaign..

Great. Two quick follow-ups. Could you provide a UHF litigation update – actually, we'll just – we'll hold it with that one..

So, I don't really have much of an update there. There, the stay was lifted, and that was the important action from our perspective. At some point in 2018, there will be a hearing. I have not heard of any specific date being set. So, from our perspective, the important thing was the stay being lifted..

Great. Thank you..

Thank you. Our next question comes from the line of Leo Kulp with RBC Capital Markets. Please state your question..

Good morning. Just two quick ones. First, just can you provide an update on when you expect Bonten to close? And then second, can you talk a little bit about your local news viewership trends and what's been happening there over the past year? Thank you..

Sure. Bonten's got a few technical items to finish up before we can close, but I'd expect that would happen in this quarter..

As far as the news, I was listening to Chris's presentation and we won an awful lot of awards. So I think we're doing awfully well. When you take a look at our organization and what we're doing out in the field and the awards reflecting that performance, it's really pretty special.

So with all the news that you've been hearing, the bottom line is people watch us in droves. And not only do they watch us, they reward us with awards because of our expertise. We're on top of our game. And the biggest part of what we do is local news. And we're the best at it..

Let me just add one anecdotal piece of evidence to that reality. In Washington D.C., where we now own WJLA, the ABC affiliate, under the previous ownership, it was essentially a weak third or fourth place television station. And in today's world, as an example, the 6 o'clock news now, that station is the number one station in the marketplace.

And just as a further data point, we've picked up 11 share points in the last year and a half, which kind of suggests that we must be doing something right relative to the marketplace. So we view news as literally the long-term growth opportunity..

Got it.

And I guess specific to last year, have your ratings inflected one way or the other meaningfully over the past 12 months?.

Actually, the ratings have actually been pretty stable, which in this world today is a huge win actually. The ratings have been pretty good. We haven't seen any declines of any note..

Remember, what we're seeing is growth in any number of stations we've taken over the last few years, whether it's Seattle, has gone from one location to another. So it's a significant leader there in (35:38), same thing in Portland, Oregon.

Portland, Maine, it used to be a distant third number television station, it's now essentially the dominant player in the marketplace. So we're growing share and dollars all the way down the line. It's a slow process and it's a methodical process..

Got it. Thank you. If I could just ask one more quick one.

Can you provide a quick update on the tennis channel, specifically where you stand with subscribers in run rate, revenue and EBITDA?.

Sure. So I believe it hit this year 57 million Nielsen subscribers. So, that's a reflection how many households actually get. And as I mentioned on the previous question around Tennis, I'd say they're a bit behind plan on the advertising front, not just because Serena wasn't playing as much, but this is a transition year to Nielsen national ratings.

And we probably didn't model that correctly in terms of how long it would take them to get up to speed on the advertising side, but to me, that's just a timing item, so we'll get there..

Got it. Thank you for answering the questions..

Thank you..

Thank you..

Thank you. There are no further questions, ladies and gentlemen, we have reached the end of our question-and-answer session. At this time, I will now turn it back to Ms. Lucy Rutishauser for closing comments..

Thank you, operator. Before you disconnect, let me just say that we are excited about our results for second quarter and for the progress we're making with regards to ATSC 3.0, growth in our digital business, and strengthening our portfolio.

Our efforts are focused on closing and transitioning Tribune so that we can successfully realize the expected value to be created for our viewers, advertisers and shareholders. Thank you for participating on our earnings call this morning. And if anyone has any additional questions, please feel free to contact us..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..