Lucy A. Rutishauser - Sinclair Broadcast Group, Inc. Unverified Participant Christopher S. Ripley - Sinclair Broadcast Group, Inc. Steven M. Marks - Sinclair Broadcast Group, Inc. Robert D. Weisbord - Sinclair Broadcast Group, Inc..

Marci L. Ryvicker - Wells Fargo Securities LLC Aaron L. Watts - Deutsche Bank Securities, Inc. David Scott Farber - Credit Suisse Securities (USA) LLC Barton Crockett - B. Riley FBR, Inc. John Janedis - Jefferies LLC Barry L. Lucas - Gabelli & Company Kyle Evans - Stephens, Inc. James Davis Hebert - Wells Fargo Securities LLC.

Greetings and welcome to Sinclair Broadcast Group First Quarter 2018 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.

It is now my pleasure to turn the conference over to your host, Lucy Rutishauser, and she is Senior Vice President, Chief Financial Officer with Sinclair. Thank you. You may begin..

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

Before we begin, Felicia McIntyre (0:58) 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 first 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, Billie Jo (2:20). Before we go through the results, let me review some highlights. We are nearing the final stages on the Tribune closing. We have reached agreements on the divestitures and are awaiting government approvals. We expect to close the Tribune acquisition and related station divestitures in late Q2, early Q3.

As previously announced, there will be a total of 23 stations sold, consisting of 14 Tribune stations and 9 stations that we own, operate or provide services.

The stations are being sold for a combined $1.6 billion in gross proceeds or $1.5 billion in after-tax proceeds, including about $100 million of working capital that we will retain at closing that will convert to cash.

The combined package is being sold at a 9.7 times multiple of the stations' 2017-2018 average EBITDA adjusted for market rate network programming costs.

The Tribune assets we are keeping are valued at $4.6 billion of enterprise value, of which $2.4 billion pertains to the TV and entertainment assets that are expected to generate $390 million to $410 million of 2017-2018 pro forma average EBITDA.

The final Tribune acquisition reflects an EBITDA multiple of 5.9 times better than the under 7 times multiple we reported a year ago.

The remaining $2.2 billion of enterprise value includes $500 million of real estate assets held for sale and $1.7 billion for the TV Food Network stake, which generates approximately $200 million of annual cash flow for Tribune.

Furthermore, in a recent 8-K, Discovery valued the Tribune stake in the TV Food Network at $2.1 billion, which would reduce the TV and entertainment multiple further from 5.9 times to 4.9 times.

The combined Sinclair-Tribune entity post divestitures is expected to generate $1.550 billion to $1.575 billion of pro forma 2017-2018 total free cash flow, which on 123 million shares represents an average of $6.35 of annualized free cash flow per share.

In another move, alleviating investor concerns, we finalized multi-year renewals on all FOX Network affiliation agreements expiring through the end of this year, including the Tribune stations, and have FOX's approval to transfer the Tribune affiliations at closing.

On the distribution front, we renewed our distribution agreement with Cox for carriage of our TV stations, Tennis Channel and our national networks. In an effort to increase transparency, we are now disclosing our distribution revenues. These consist of our retransmission fees, affiliate fees and any other subscription direct-to-consumer revenues.

About 45% to 50% of our media revenues come from distribution fees, depending on the political revenue levels.

At a time when audience fragmentation and uncertainty about the economy are on the rise, investors should take solace knowing that almost half of our revenues are sheltered from advertising volatility, and for the half that are not, our content, network, wireless, distribution and marketing services initiatives are reducing our reliance on the local spot market as a source of those ad dollars.

As part of our community outreach, we recently awarded seven Broadcast Diversity Scholarships to applicants studying in broadcast-related fields.

Finally, I want to thank our employees for their continuous commitment to helping us achieve our vision of connecting people with content everywhere, and our award-winning newsrooms, who are dedicated to impactful journalism with a local focus.

Since the beginning of 2018, Sinclair stations have won 160 local news awards, including 45 regional Edward R. Murrow Awards across 21 newsrooms. Three of those same stations were also recognized nationally for awards in outstanding journalism.

Our Baltimore flagship, WBFF, won the Investigative Reporting Award from the Society of Professional Journalists and a National Headliner Award. WJLA in D.C. won a National Headliner Award as well as the June L. Biedler Prize presented by The American Association for Cancer Research.

And in Portland, Maine, WGME won a Gracie Award from the Alliance of (sic) [for] Women in Media for exemplary news programming created by women.

We are extremely proud to be the local news provider with the greatest number of awarded newsrooms in the industry, and we congratulate all of our news personnel and stations for their journalistic achievements. Now, Lucy will take you through the first quarter results..

Thank you, Chris. Before reviewing the financial highlights, a few items to note. To the thrill of many investors, we are breaking out distribution fees in our financials.

And as Chris stated, the distribution line reflects our retransmission and affiliate fees from MVPDs, virtual MVPDs and OTT as well as any other direct-to-consumer subscription fees earned. The research and development ONE Media expense line is now reflected in non-media expenses in the income statement.

Also as a reminder, reimbursements from the government for the spectrum repack are reflected as a gain on the income statement. Barter revenue and barter expense are no longer included in the income statement pursuant to the revenue recognition rules and trade revenue that had been reflected in barter is now included in media revenues.

Now, to the financial highlights. I am pleased to report that we exceeded our first quarter guidance in all key financial metrics. Turning to the financial details, media revenues for the first quarter were $644 million, an increase of 6% or $37 million higher than first quarter 2017 and exceeding guidance by over $5 million.

On a pro forma basis, first quarter 2018 media revenues were 2% higher than pro forma first quarter 2017 on higher distribution revenue, offset in part by lower advertising as a result of the Super Bowl and Olympics not being aired on the majority of our stations.

Included in our first quarter media revenues is $314 million of distribution revenue, a 14% increase over the prior year period. Political revenues in the first quarter were $7 million versus $2 million in the first quarter of last year, which was not an election year.

Media operating expenses in the first quarter, defined as media production and media SG&A expenses, were $435 million, up 14% from first quarter last year and up 12% on a pro forma basis, in both cases, primarily, the result of higher reverse retrans fees and start-up costs related to our growth initiatives.

This was offset in part by a decline in normal operating expenses. Our reported media expenses were slightly favorable to our previously disclosed quarterly guidance. Corporate overhead in the quarter was $25 million and includes $5 million in one-time transaction costs.

Corporate overhead was below our prior guidance before cash and stock-based compensation. Non-media EBITDA, which includes ONE Media and the R&D expenses, was approximately $1 million in the quarter.

Total EBITDA in the first quarter adjusted for the $5 million of one-time transaction costs was $169 million or $18 million higher than our guidance, reflecting the revenue beat, lower corporate expenses and timing of ONE Media expenses.

We had $21 million of gains on asset dispositions, which includes the $83 million cash gain relating to the previously announced CL Spectrum in Milwaukee, partially offset by a non-cash impairment charge of a non-media related real estate investment that is in the process of being sold.

Net interest expense for the quarter was $67 million, which included $17 million of ticking fees on the Tribune acquisition committed financing. For the second quarter, the guidance includes $36 million in ticking fees, assuming a second quarter end close.

Equity and cost method investments for the quarter were a loss of $12 million, while cash distributions received were $10 million. Diluted earnings per share on 103 million weighted average common shares was $0.42 in the quarter.

Adjusting for one-time transaction expenses, we generated $111 million of free cash flow in the quarter, exceeding our prior guidance by $39 million on the EBITDA beat and timing of CapEx. 34% of the free cash flow was used to pay down $20 million of debt and distribute $18 million in dividends.

Our 2017-2018 pro forma free cash flow, pre-Tribune, we are reconfirming the range of $1 billion to $1.030 billion or a total free cash flow per share of $9.80 to $10.10.

As Chris mentioned, post divestitures, our combined Sinclair-Tribune pro forma free cash flow guidance for 2017-2018 is expected to be a total of $1.550 billion to $1.575 billion or $12.60 to $12.80 per share on 123 million shares. That's a 25% to 30% increase in free cash flow per share. Now, turning to the balance sheet and cash flow highlights.

As a reminder, the announced station and real estate divestitures are accounted for as assets held for sale for balance sheet purposes and will be included in our statement of operation until the transactions close. Capital expenditures in the first quarter were $22 million, including $3 million for the repack.

For 2018, non-repack CapEx is expected to be $115 million, unchanged from our prior guidance, while reimbursable repack CapEx is expected to be $65 million. Cash programming payments during the first quarter were $28 million and for the year remain unchanged to our prior guidance of $110 million.

Net cash taxes paid in the first quarter were $0.5 million and for 2018, we are estimating cash taxes to be approximately $20 million, which includes $38 million related to the gain on the sale of spectrum in Harrisburg and Baltimore.

For free cash flow purposes, be sure to add back the $38 million of taxes on the spectrum sale since the proceeds are not included in the free cash flow.

The effective tax rate in 2018 is expected to be a benefit of low single-digit percent rate, and this reflects the lower statutory federal income tax rate as well as tax credits related to the sustainability initiatives and the tax-free gain on the Milwaukee spectrum sale.

At March 31, total debt was $4.030 billion, including $27 million of non-guaranteed and VIE debt. In April, $111 million tranche of term A loans matured and were repaid with cash on hand. Cash at March 31 was $810 million, plus $227 million of spectrum auction proceeds in qualifying intermediary accounts.

In addition, we had $484 million available on our revolver, bringing total liquidity to almost $1.5 billion. Total net leverage through the holding company at quarter end was 3.4 times on a trailing eight-quarter basis, excluding the VIE and non-guaranteed debt and net of cash. This is below the low end of our target net leverage.

The first lien indebtedness ratio on a trailing eight quarters was 1.3 times on a covenant of 4.25 times.

For year-end 2018, two-year holding company net leverage before Tribune is expected to be on a historically low 3.2 times and pro forma for the Tribune acquisition after the divestitures, we expect combined company total net leverage to be approximately 4.35 times at year end. Now, Steve Marks will now take you through our operating performance..

Thank you, Lucy, and good morning, everybody. As we discussed last quarter, Q1 was challenged by the Super Bowl and Winter Olympics, both being carried by NBC, which is our smallest affiliate group. Nevertheless, we met guidance for core advertising and a beat on media revenues.

Political revenues in the first quarter were $7 million versus $2 million in the first quarter of 2017. Our full year political revenue continues to be estimated at $140 million to $150 million for the year. Pro forma revenues from our digital business grew almost 70% in the first quarter as compared to the same period last year.

Turning to our outlook, which does not include Tribune, for second quarter, we are expecting media revenues to be approximately $684 million to $688 million, up 7.5% to 8% as compared to second quarter 2017.

This assumes $18 million to $19 million of political revenues versus $5 million last year and includes $318 million in distribution fees versus $279 million last year. On a pro forma basis, second quarter media revenues are expected to be approximately 4% higher than Q2 of 2017 on higher distribution, political and digital revenues.

Pro forma core advertising revenues in the second quarter, excluding political, are expected to be down low to mid-single-digit percents versus the same period last year. This reflects the commentary Chris gave regarding audience fragmentation and uncertainty around growth in the economy.

As a reminder, 45% to 50% of our media revenues are subscription based and not tied to advertising. Distribution revenue, net of reverse retrans fees for this year is still expected to grow by low single-digit percents.

On the expense side, we are forecasting media expenses in the second quarter to be approximately $460 million versus $396 million in the second quarter of 2017, with the majority of the increase coming from reverse retrans or acquisitions and growth initiatives. Media expenses in second quarter of 2017 on a pro forma basis were $407 million.

For the year, media expenses remain unchanged at approximately $1.815 billion to $1.818 billion versus 2017 pro forma media expenses of $1.622 billion.

The increase is due primarily to higher reverse retrans on the larger number of network's agreements that renewed annual compensation increases, growth initiatives and sales commissions on the added political revenues.

EBITDA in the second quarter adjusted for $4 million in one-time transaction costs is expected to be approximately $173 million to $176 million versus as reported second quarter 2017 EBITDA of $197 million and $207 million pro forma.

The decline is primarily related to timing of ONE Media expenses, their full year guidance remains unchanged and timing of net distribution fees and political revenues, which are weighted to the back half of the year.

Free cash flow in the second quarter adjusted for a one-time cost is expected to be approximately $86 million to $92 million, 25% to 30% higher than last year pro forma second quarter. As Lucy stated, our 2017-2018 pro forma combined free cash flow is estimated at $1 billion to $1.030 billion. And with that, I'd like to open it up to questions..

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question is from Marci Ryvicker with Wells Fargo Securities. Please proceed with your question..

Thanks. I have a couple.

I guess the first one is related to the release, the first release that was out this morning, which mentioned that the sellers' multiple on divestiture stations is 9.7 times blended 2017-2018 cash flow adjusted for "market rate network programming costs." Can you explain that what that means?.

Sure. It's pretty straightforward. Three of the stations involved in the total package had under-market reverse retrans and so, that was going to end as of June of this year.

So, the more representative way to think about it from an economic perspective was to put in market reverse retrans into those cash flows because that's how the buyers look at it..

Okay. So, it's apples to apples. Okay, that's perfect. It's apples to apples..

Yeah..

And then also just related to the Tribune deal, can you talk about where both the DOJ and the FCC are in their review process and maybe what you think about timing relative to the UHF discount decision?.

Sure. So, the DOJ is wrapping up the vetting of the buyers, and now that we have completed FOX, we are going to go back in front of the FCC and hopefully get this on public file very shortly, which will start a 30-day comment period for them to approve the divestitures.

And as far as it relates to this court case, which I know there's been a lot of speculation about, look, we firmly believe the likely outcome here is that the FCC wins.

If by some scenario they don't and we have not been approved by then, we can either wait and see if there's an appeal or some sort of FCC action, which I will note that there's an outstanding NPRM, which has already gone through its comment (23:03) period with the FCC as it relates to the national cap.

We also had O'Rielly go on record saying that he was open to changing the cap. And so, something could happen there or the other alternative is obviously that the deal would just expire and I would just remind everyone that Sinclair does not have any breakup fee in that scenario..

Great. And then, I have one for Steve. Auto has been pretty soft I think across the board from just about everyone who's reported so far.

Do you have any color on what's going on, specifically in the auto category?.

Well, for second quarter, we took some cancellations and I know you've heard this from others, Chrysler primarily. What we're seeing primarily is local as well as foreign domestic dealers, money is down.

But what is interesting and the color on this is that when you read reports, especially for first quarter, Marci, there's nothing wrong with car sales.

So, what we're seeing right now in the first and second quarter, we're not seeing as many promotions as we saw last year and you could argue with sales being quite frankly rather strong, that perhaps dealerships are taking a little bit of a rest and putting a little bit more money in their pockets, because sales remain strong and inventory remains low.

So, we think there's some profit taking going on both foreign and domestic in terms of dealerships. Now, in the back half of the year, we still think this category is going to be negative because of a crowd out situation with political. But we're confident that the category will rebound in 2019.

And quite frankly, if you take a look at the last four years, this category has had nothing but increases. So, it's taking a little bit of a rest for six months of this year, but we're confident that it will rebound eventually..

Great. Thank you so much..

Our next question is from Aaron Watts with Deutsche Bank. Please proceed with your question..

Hey, everyone. Thanks for having me on. One follow-up on the kind of FOX announcement this morning.

Does the new agreement impact the net retrans fee growth goal post that you had previously provided for the next few years?.

No. We had already factored in expectations around what that deal was going to be..

Okay, got it. And then secondly, just a question around core advertising.

Chris, any sense for how much of the kind of softness right now would be due to that audience fragmentation you talked about versus just a little bit softer consumer spending at the moment or ad backdrop? And I guess your expectations as you think ahead over the next year or two for where core advertising growth will trend?.

Well, listen, I think fragmentation has been a trend that we've been fighting for decades now as more and more choices are available to consumers to be entertained or informed. And so, it's really nothing new. It's just a continuation of existing trend.

I think the recent softness that we're seeing is very specifically driven by some weak sectors around auto. So, I expect that to rebound. And there's no hiding that the core ad side is our most challenging revenue stream, while we're seeing tremendous growth in retrans and digital and not much in the way of growth on the core ad side.

I think that despite that challenge, there are green shoots there when it comes to our network, strategy, where we're repositioning inventory out of the local marketplace putting into the network marketplace, programmatic, our TIP initiative, which we're making great progress.

We just added additional broadcasters to it recently and that is all around automation and making it programmatic and making it actually efficient and profitable for the agencies to buy local broadcast stations, which is not today. And then, finally addressable, which we think is a huge opportunity in terms of the CPM lift on our inventory.

So, even though it's challenged today, I see a great potential in the future for really leveling the playing field versus other ad forms right now, be it cable networks or broadcast networks or digital video, which just have inherent advantages over us that need to be equalized..

Okay. Appreciate it. Thank you..

Our next question is from David Farber with Credit Suisse. Please proceed with your question..

Good morning, guys. Thanks for taking my questions. Some of them are already asked, but I wanted to spend a minute on the guidance and pro forma leverage that you highlighted.

So, first, just perhaps I missed it, but it appears you might have changed the guidance on the non-media line from what was more of a net basis of revenue and expenses at 4Q to now at gross.

So, my question is how are you guys thinking about the non-media line apples to apples and if your expectations have changed since 4Q? And then, I had a follow-up. Thanks..

Yeah. So, David, so the guidance didn't change. The only thing that we did and this was in my opening comments is we took the research and development line, that expense line and that's now netted in with the non-media piece..

Right. And so, for 2018, even though we don't see the revenue line, the expectations for how that business is performing have not changed..

Correct..

Great. And then, you discussed the mid-4s leverage, I believe, pro forma.

So, my question is, do you guys have any thoughts about taking leverage to that high 4s number you talked about previously, given you're a little bit lower now? And then if you were, would you consider anything with respect to recent stock price performance or other uses for that lower leverage number? And that's it from me. Thanks..

So, the 4.35 times, that is end of 2018 for Sinclair and Tribune combined after the divestitures. So, that is already at lower than what we had prefaced sharing about a year ago, which was close to 5 times. And look, we've heard from both lenders and from shareholders that they want us to delever. And so, that will be a continued focus for us.

At the 4.4 times, it's higher than the upper end of our target range. So, we will want to bring that down. Now, longer-term, we'll continue to balance our deleveraging targets with shareholder returns as well as with reinvestment opportunities..

I would just add to that that we'll be closing this transaction in incredibly liquid position and if the stock price is going to be anywhere near where it is today, it's going to be hard not to be allocating toward share repurchases..

Okay. That's helpful. Thanks for taking the question. Appreciate it..

Our next question is from Barton Crockett with B. Riley Financial. Please proceed with your question..

Okay, great. Thanks for taking the question. I wanted to follow up on that kind of share repurchase theme and just get your thoughts on the other side of this. So, let's say that through some unfortunate occurrence, you're not able to close the Tribune deal, you'd have a ton of dry powder (31:39) very low leverage generating high free cash flow.

How would you feel about share repurchase in that scenario?.

Even better. I mean, look, both ways, we're going to have just an incredible amount of cash and dry powder.

We'll be at a little bit higher leverage if we close Tribune, a little lower if we don't, and I look at both scenarios as just maximum flexibility to do to maximize returns for our shareholders and that's what we're all about at the end of the day..

Okay. And one of the things to add kind of softness here in the second quarter, it sounds a little different than what you were saying on the first quarter, where I think you were talking about seeing some good bookings and hopefully a bounce back up, that doesn't seem to have materialized.

And I know you've spoken in generalities about audience fragmentations, but can you be more specific? I mean what changed from what you saw at the time of this call a few weeks ago?.

We saw cancelations when we were on the call first quarter, our automotive was pacing very aggressively positive. Two weeks after the call, we started to get cancelations and obviously, (32:56) that situation, the cancelations were countrywide and affected every broadcaster.

The rest of the categories, I could give you some highlights for second quarter. Drugs and cosmetics, which is a significant category for us, is pacing and finished up first quarter up 40% and it is more than duplicating that in the second quarter. Entertainment, specifically casinos, will be up in second quarter with significant billing.

Movies will be up in the second quarter as well and services are our second biggest billing category to automotive will be up for both first and second quarters with (33:37) our biggest subset in that billing category significantly up. We're seeing some positives. There's no question about that. There's no reason to panic.

The numbers are close enough to arguably be where we thought they would be. And we remain optimistic now obviously into the back half of the year, we're still holding true to our political numbers, which means there's going to be a crowding out factor that will affect these categories..

Okay. That's helpful.

And then, just one last thing, switching gears, there's been some, I think, high profile kind of reporting on some of the content in your news programming and I was just wondering, stepping aside from the views on that content, how are you seeing the audience trends on your news programming? And has any of this kind of publicity had any impact there?.

Sure. So, first I would say, if you go back to some of my comments with 160 awards won so far this year and more, we have more award winning newsrooms than anyone in the industry. It certainly and any of this controversy has had no impact in terms of the quality of the journalism that's being done and that's being recognized time and time again.

On the ratings front, we obviously watched ratings very closely through that recent controversy and there was no impact whatsoever on ratings. In fact, sometimes, they would go up. And then, on the advertising side, we would get some calls of support from people that realize this was very overblown.

And then, there was some cancelations, but an immaterial amount..

Okay. That's helpful. Thank you..

Our next question is from John Janedis with Jefferies. Please proceed with your question..

Hi, thanks. So, Chris, you mentioned addressable advertising and the CPM lift.

So, I was wondering how far along are you on that front and when do you think the lift from addressable will be more visible or at least maybe a bigger part of the conversation? And then separately, just on the political front, I guess good to be tracking in line, I was wondering what type of digital targeting capabilities do you have and do you see evidence of an incremental shift from TV to digital in this cycle?.

So, on the addressable side, we've just started on our Sorenson commercial agreement, which targets smart televisions. That is in the early stages. They have about 15 million TVs that they can access. So, that base needs to grow and it will grow over time.

We're also starting to get opportunities to do targeted through virtual MVPDs, who have streaming capability naturally lends itself to streaming already, and then – sorry, the addressable already. And then, ATSC 3.0 has addressability built into the standard.

So, we're pretty early in terms of scratching the addressable surface, so it's hard for me to say when you're going to see it in the financials, but the technology is there and it's working and it's starting to penetrate the marketplace.

In terms of political, can you restate that question one more time?.

Yeah, sure.

Just on the political front, just wondering in terms of digital targeting capabilities, to what extent do you have them? And did you see an incremental shift I guess from TV to digital in this cycle on the political front?.

So, in terms of targeting capability, we certainly have – we personally have lots of ability to target on digital. We are not seeing a shift in terms of money from TV to digital for political. We think this cycle will be very strong in line with a non-presidential cycle.

The great thing about political cycles is that politicians raise money and they spend it all. They don't return it to people. So, TV is still the place where a lot of money can be deployed quickly..

And I would add to that we can geo target to ZIP Codes, neighborhoods for the local politicians and while we're not seeing a lag on the television advertising, we have seen some of that targeting being requested from the local races. And so, whether it's desktop or a mobile geofence, we're able to drill down right into ZIP Codes and neighborhoods..

And so, that's being used by politicians, but it's really a complement, it's not a replacement..

Right..

Our next question is from Barry Lucas with Gabelli & Company. Please proceed with your question..

Thank you. Thank you and good morning.

Steve, I don't want to beat the auto categories to death, but what are you hearing from the dealers or from ad agencies with regard to those dollars going elsewhere as opposed to just staying in a dealer's pocket?.

Well, I think you have to realize that we follow those dollars elsewhere. In today's technology, you have to adapt digitally. There are dollars going into new technology and we aggressively follow those dollars.

So, a portion of our automotive billing does come from digital and going forward, you absolutely have to be on top of your game on any diversion towards technology. You could argue that this company more so than our peers is a technology-driven broadcast company. We aggressively follow those dollars with a lot of success.

So, we're not scared about a diversion in this category of going to digital. We're prepared. We're billing significant digital dollars presently in the automotive category.

So, wherever those dollars may flow, we do have a game plan and we are having a great deal of success digitally in the automotive category and we continue to follow any diversion, whether it's in the automotive category or any other category..

I would add in that tier 3 is conversations about multi-platform and our commitment to content and multi-platform solutions are ongoing conversations at the local level..

Great. Thanks.

If I can squeeze one more in on the technology front, Phoenix got lit up for ATSC 3.0, so something for some update in terms of what would be next either markets or when do we progress from a market test to something more comprehensive?.

Well, we're going to be lighting up Dallas this summer and we are putting the finishing touches on – as our people involved in Phoenix putting the finishing touches on a construct for cooperation with other broadcasters.

That's the main hurdle right now is how do people cooperate within each market, so that we can channel share and some stations can go to 3.0 and others can stay on 1.0. And good progress has been made on that front and that was the primary reason that Phoenix was done and we're tackling that same issue within Spectrum Co.

And I think in the back half of the year, you're going to start seeing people execute on those transitions..

Okay. Thanks, Chris..

Our next question is from Kyle Evans with Stephens. Please proceed with your question..

Hi. Thanks for taking my questions and thanks for giving us a distribution metric. We appreciate it. Can we get an update on your sub-counts? We've heard kind of disparate commentary there and in some places people are talking about market size being a driver.

Any specifics you can give us on your traditional MVPD trends versus your virtuals please?.

Well, as I have said in previous calls, we have predicted that this year would be the year where virtuals really start to move the needle and that's proving to be true. On a sequential quarter basis, we actually saw growth in total subs from Q1 to Q4 – from Q4.

And so, we're seeing good stability on the – but slight declines on the traditional side, and that's being currently at least on the near-term trends more than made up for on virtual..

Got you. And if I'm correct, you guys are blacked out with PlayStation Vue.

How should we think about OTT blackouts? Is there any difference there versus traditional other than the fact there's just a lot more switching options for the consumer?.

Yeah, it's very similar. And in this particular case, Sony Vue is a minuscule amount of subs for us and they refused to honor their obligation to launch Tennis. So, we pulled from them. And I suspect at some point in time, we may come to some sort of a settlement on that..

Got you. Good segue into my Tennis question.

Could you update us on the split between advertising and carriage for Tennis in revenue?.

It's still overwhelmingly carriage fees for Tennis. And one of the challenges that Tennis has been that it's event based and Nielsen has a very fairly small sample. So, if the sample size isn't interested in your special events, like a certain tennis match on a certain night, then it has trouble picking up those spikes in viewership.

And we know this because we also get comScore, which shows significantly larger audiences. But be that as it may, Nielsen is the currency and it is getting better and they're working with us, but it's been a slow process, but we're seeing growth on the advertising side there and long-term, we think it's a really big opportunity for them.

But right now, most of the – the vast majority of the revenue is carriage..

Right. Two quick ones for Steve.

First, can you confirm, did you say digital was up 70%?.

I did..

Can you dig down into some of the drivers on that number?.

I think Rob will do that for you..

Sure. For the last several years, we've had a big commitment to a multi-platform initiatives that have been rolled out companywide. Our content has gotten significantly stronger on our websites, both desktop and mobile.

And the results, we're reaping the rewards of the results of this multi-platform initiatives that became a focus about four years ago..

I guess if I was to restate that, your local advertisers are buying more digital on top of your local content on different screens other than TV?.

They're both buying TV and the other screens as well. So, our repertoire for now is to go out and not sell a single solution. There are multiple solutions covering all screens. So, our general presentation's out in the local marketplace are covering all screens..

Got you. And then one last question for Steve. I'm going to hit the horse again.

Can you give us a specific auto trends for 1Q and 2Q pacings?.

Well, Q1, talking about the effect of the Olympics and we're not having a lot of NBC stations in conjunction with having the Super Bowl on FOX in 2017, where we have our most the affiliations. That category was down I believe low teens in first quarter.

And in second quarter, we're looking at – I believe the number is mid-single digits in automotive down in second quarter. And as I mentioned, primarily what we're seeing is, it's both foreign and domestic dealership money primarily that is lagging behind.

But I also mentioned if you read the periodicals on automotive and again, especially first quarter, because that's where most of the information is available at this point, there's nothing wrong with car sales.

So, you have to scratch your head a little bit and try to figure out what the dealer groups are doing and what the local dealers are doing and we believe they're holding on to their advertising money and taking profits right now because they continue to sell cars and their inventories are low, and we don't have as many promotions for the first six months that we enjoyed this time last year.

So, as I mentioned, I do think that category will rebound. It will not be in 2019 because of the political crowd out and now will come upon us in the back half of the year. But again, I mentioned that we had four years in a row of success in this category. So, we're not panicky on the automotive category..

The other thing to add is and you've heard this on some other calls is that Fiat is actively shopping Chrysler right now. So, we have had some cancelations from Chrysler as Fiat is trying to figure out what to do with the brand..

Got you. Thank you..

Our next question is from Davis Hebert with Wells Fargo. Please proceed with your question..

Hi, thanks for taking the questions. I just wanted to focus on the leverage metric Lucy gave. I think it was 4.4 times by year end with Tribune. And I think in the press release, you've said that you would delever materially or meaningfully over the following 12 months.

And just curious, does that mean EBITDA growth, free cash flow generation going to the balance sheet, just wondering the assumptions there?.

Yeah. So, Davis, the way our model right now is built is that he deleveraging comes from the EBITDA generation and the free cash flow going onto the balance sheet. So, that'll be something over the next short period of time that we will be evaluating the uses of the free cash flow..

Okay. Understood. Thank you. And then second question, any thoughts around the Food Network stake? You mentioned that Discovery valued at a little north of $2 billion. Just curious if you're having conversations? I know the Tribune deal's closed yet.

I guess any development on thoughts there?.

Sorry.

Could you repeat that question?.

Yeah. Just any thoughts around monetizing the Food Network stake.

Has that changed from prior comments?.

Well, look, I think we would be open to monetizing it. Quite frankly, it's performed exceptionally well as we noted in our press release and it's only going up in value.

I think Discovery is going to be an excellent steward of that asset, continuing to grow it direct-to-consumer and internationally and it produces a very nice increasing cash flow stream on an annual basis. So, we're happy to continue to be partners with Discovery on that.

If the deal makes sense, we're happy to entertain that, but we're certainly not in a rush to do anything..

Okay, great. Thank you..

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Lucy Rutishauser for closing comments..

Thank you, operator. And thank you for participating on our earnings call this morning. And if anyone has additional questions, please feel free to contact us..

This concludes today's conference call. You may disconnect your lines at this time. And we do thank you for your participation..