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

Aaron L. Watts - Deutsche Bank Securities, Inc. Alexia S. Quadrani - JPMorgan Securities LLC Barton Crockett - B. Riley FBR, Inc. Marci L. Ryvicker - Wolfe Research LLC Clay Griffin - Deutsche Bank Securities, Inc. David Joyce - Evercore Group LLC.

Greetings and welcome to the Sinclair Broadcast Group's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my please to introduce your host, 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 Rob Weisbord, Senior Vice President and Chief Revenue Officer.

Before we begin, Billie-Jo McIntire (00:00:56) 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 third 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 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..

Good morning, everyone and thank you for joining our third quarter earnings call. We have some great news to report. But before I hand it over to Lucy to walk you through those, let me review some of the more meaningful activities that have taken place since our last earnings call.

We've repurchased 5% of our shares outstanding, equaling approximately 5 million shares, generating an additional $0.29 of annualized free cash flow per share. At a 5.5 times free cash flow multiple, that represents over $150 million of equity value created. Our news stations added 42 awards, bringing our total for this year to 300 news awards.

That includes two national Edward R. Murrows, 45 regional Murrows won by 21 of our newsrooms, and 75 Emmys at 20 of our stations. We operate the greatest number of award-winning news content centers and are extremely proud of their impactful journalism. We congratulate all of our winners.

This year is an unprecedented election year that requires unprecedented political coverage. That's why we're committed to providing a true point of difference with additional context on the key issues and the candidates. We produced and/or aired 93 debates during this election cycle, including hosting debates for the U.S.

Senate, House of Representatives, Gubernatorial, Mayor, County Executive, City Council, and Attorney General races. Our commitment is to make sure our viewers can learn more and make informed decisions. Our stations continued to support their communities in times of crisis.

The recent hurricanes in the Carolinas and the Gulf Coast impacted a number of our stations and employees. We saw once again the great care that our people put into service, serving their communities and supporting each other.

In New Bern, North Carolina, our stations faced severe flooding but was able to maintain its operations through the worst of Hurricane Florence with the help of our other stations, the local community college and other broadcasters.

There really is no substitute for the reliability of the broadcast network through disasters like these hurricanes to bring emergency alerting and lifesaving information.

Additionally, with the help of the entire Sinclair news footprint, the stations promoted fundraising efforts across the country twice and raised more than $325,000 to be used by the Salvation Army in the affected communities. On the ATSC 3.0 front, things are progressing, with Fox and NBC recently announcing their support to adopt the new standard.

Additionally, we and our partner, Saankhya Labs, will be showcasing the first 3.0 mobile chipset this January at CES. Also we're working towards deploying ATSC 3.0 in another 20 to 30 markets in 2019.

On the governmental front, yesterday we entered into a consent decree resolving the Department of Justice investigation on the potential sharing of pacing information. The DOJ plans to file this consent with the court tomorrow.

There is no admission of wrongdoing or financial settlement and the consent decree only requires us to adopt certain additional compliance measures.

We agreed to do this consent decree despite our belief that there was no actual impact on pricing of advertising or any violation of anti-trust laws because the cost of compliance with the consent decree are minimal and this allows us to avoid the potential significant costs of continuing to dispute this with the DOJ and a potential lawsuit.

As Lucy takes you through the third quarter results, let me just say that if anyone doubted the power of local TV's brand awareness capabilities, needs to look no further than this year's political spending.

With $250 million to $253 million of political ad spending on our stations, this year's mid-term elections will not only be the largest mid-term political year in our history, but will also surpass every presidential election year in our history other than 2012.

We believe this is a strong indicator of just how robust 2020's presidential year political spending will be. Based on this year's overachievement, we're increasing our 2017-2018 pro forma free cash flow expectation by $137 million to $158 million above our previously provided guidance of $1 billion to $1.30 billion.

2017-2018 combined pro forma free cash flow is expected to be $1.158 billion to $1.167 billion, which implies total free cash flow per share of $11.35 to $11.44 on 102 million shares. 2018-2019 combined free cash flow is being increased to a range of $1.120 billion to $1.220 billion, or $11.55 to $12.58 free cash flow per share on 97 million shares.

This reflects the 2018 political growth offset in part by timing of CapEx and ONE Media expenses that will roll into 2019, plus higher variable interest expense and higher cash taxes to be paid on the favorable 2018 political income.

Based on these expected higher free cash flow, our board has approved an 11% increase in our regular quarterly dividend per share from $0.18 to $0.20. Now, Lucy will take you through the third quarter results and full-year expectations..

Thank you, Chris. Continuing with the positive news, I am pleased to report that we exceeded our third quarter guidance in all key financial metrics. Media revenues for the third quarter were $730 million, an increase of 16%, or $101 million higher than third quarter of 2017 and exceeding the midpoint of guidance by $14 million.

On a pro forma basis, third quarter 2018 media revenues were 13% higher than pro forma third quarter 2017 on higher political advertising, distribution and digital revenue, offset in part by lower core advertising as a result of the political displacement. For the year, we are expecting media revenues of $2.905 billion to $2.917 billion.

Included in our third quarter media revenues is $331 million of distribution revenue, a 16% increase over the prior-year period. For the year, distribution revenues are expected to be $1.303 billion and we are still on track for pro forma net retrans to grow by low single-digit percent this year.

Political revenues in the third quarter were $70 million, that's versus $7 million in third quarter of last year which was a non-election year and $20 million higher than the top end of our guidance range. And as Chris stated, our full year political revenues are expected to be approximately $250 million to $253 million.

Media operating expenses in the third quarter, defined as media production and media SG&A expenses, were $458 million, up 14% from third quarter last year and up 12% on a pro forma basis. In both cases, primarily the result of higher reverse retrans fees, commissions on the higher revenue, and cost related to our growth initiatives.

Our reported media expenses were $2 million favorable to our previous guidance and for the full year, media expenses are expected to be approximately $1.810 million, which is in line with our prior guidance. Corporate overhead in the quarter was $34 million and includes $13 million in Tribune-related costs.

Corporate overhead was above prior guidance, due to a write-off of $8 million for the Tribune bond consent fee that we paid in 2017 and had on the balance sheet, as well as higher legal cost. For the year, corporate overhead is expected to be $75 million, excluding $25 million in Tribune-related costs and $9 million in stock-based compensation.

Non-media EBITDA was approximately $3 million in the quarter, $9 million better than our prior guidance on timing of ONE Media and R&D expenses that will now occur in 2019.

EBITDA for the company in the third quarter, adjusted for the $13 million in Tribune-related cost, was $234 million, that's $26 million higher than the midpoint of our prior guidance range. And that's on the political revenue beat and lower ONE Media expenses.

For the year, EBITDA is expected to be $932 million to $942 million, that's a $107 million to $117 million higher than last year's pro forma EBITDA. Net interest expense for the quarter was $71 million, which included $18 million of ticking fees on the expired Tribune-committed acquisition financing.

Equity method investments for the quarter were a loss of $25 million and diluted earnings per share, on a 103 million weighted average common shares in the quarter, was $0.62, or $0.86 excluding the impact of the Tribune-related costs and ticking fees. As mentioned, we repurchased 1.6 million shares in the third quarter at an average price of $28.06.

Excluding the $13 million of Tribune-related expenses, we generated $215 million of free cash flow in the quarter, exceeding the midpoint of prior guidance by $57 million and that's on the EBITDA beat, the lower CapEx and lower cash taxes paid.

$46 million of the free cash flow went to share repurchases, $11 million to debt pay down, and $18 million in dividend distributions. Free cash flow in the fourth quarter is expected to be approximately $253 million to $262 million and for the year, free cash flow is expected to be $714 million to $724 million.

Now, let me just say that again in case anyone missed that. For the year, free cash flow is expected to be $714 million to $724 million. As mentioned, we expect our 2017-2018 free cash flow per share to be $11.35 to $11.44 and 2018-2019 free cash flow per share to be $11.55 to $12.58.

Turning to the balance sheet and cash flow highlights, capital expenditures in the third quarter were $25 million, including $10 million for the repack. For the year, we are reducing our non-repack CapEx guide from a $100 million to an expected $81 million on timing of projects.

In addition, we are reducing the 2018 full-year expected repack CapEx from $40 million to a revised $37 million, also on timing. Cash program payments during the third quarter were $27 million and for the year, we expect programming payments to be a $108 million and that is in line with our prior guidance.

Net cash taxes paid in the third quarter were $1 million. For 2018, we are estimating cash taxes to be approximately $20 million.

Now as mentioned on prior calls, for full-year free cash flow purposes, we should (00:14:49) add back the $50 million of taxes on the spectrum sales, since the $226 million of spectrum proceeds are not included in free cash flow. So of that $50 million add back, $40 million is expected to hit in Q3 and $10 million in Q4.

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

At September 30th, total debt was $3.902 billion, including $23 million of non-guaranteed and VIE debt. Cash at September 30th was approximately $1.023 billion. In addition, we had the full $485 million available on a revolver, bringing total liquidity to more than $1.5 billion.

Total net leverage through the holding company at quarter-end was 3.3 times on a trailing eight quarter basis, excluding the VIE and non-guaranteed debt and net of cash. This is our strongest balance sheet in our company history. And based on guidance, we expect it to improve to an historically low 3.15 times by year-end.

The first lien indebtedness ratio on a trailing eight quarters was 1.2 times on a covenant of 4.25. And as mentioned, we repurchased 1.6 million shares in third quarter, and another 3.4 million shares in the fourth quarter. We have $946 million remaining on our share authorization. Now Steve Marks will take you through our operating performance..

Thank you, Lucy and good morning everybody. Well what can I say? Political ad spending in third quarter was even beyond what we expected, with political revenues of $70 million versus $7 million in the third quarter of 2017, and our guidance of $45 million to $50 million.

And it didn't let-up in fourth quarter either with another $145 million to $148 million expected. We now expect full year political revenue to be $250 million to $253 million compared to our previously disclosed expectation of approximately $160 million.

As mentioned, this is our second best political year ever, which we would expect (00:17:30) for a mid-term election. We believe this is a strong indication of just how robust the 2020 presidential year politically ad spend could be.

Our digital business continues to perform very well with pro forma revenues growing 19% in the third quarter as compared to the same period last year. Turning to our outlook, for the fourth quarter, we're expecting media revenues to be approximately $835 million to $847 million, up 21% to 22% as compared to fourth quarter 2017.

This assumes $145 million to $148 million of political revenues versus $16 million last year, and includes $339 million in distribution fees versus $300 million last year. Pro forma core advertising revenues in the fourth quarter, excluding political, are expected to be down mid-single digit percents versus the same period last year.

This is expected especially with the large amount of political that's booked and then displaced our normal advertisers.

On the expense side, we are forecasting media expenses in the fourth quarter to be approximately $464 million versus $416 million in the fourth quarter of 2017, with the majority of the increase coming from reverse retrans and growth initiatives. For the year, media expense guidance has not changed from our previous expectations.

We are estimating between $1.810 billion versus 2017 pro forma media expenses of $1.623 billion.

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

EBITDA in the fourth quarter is expected to be approximately $326 million to $336 million versus fourth quarter 2017 EBITDA of $233 million. The increase is driven by political revenue and net retrans, partially offset by the timing of ONE Media expenses. And with that, I'd like to open it up to questions..

Thank you. We will now be conducting a question and answer session. . Thank you. Our first question comes from the line of Aaron Watts of Deutsche Bank. Please proceed with your question..

Everyone thanks for having me on. One clarifier to start off. Steve, I think, I heard you say that for the fourth quarter core ad revs down mid-single digits.

What was that in the third quarter?.

Third quarter was low-single digits. And to answer your question directly and getting into the core, I think, it's important to note that with the crowd out, our core in third quarter was the best quarter that we have to-date.

So, I think that's pretty encouraging, obviously political was through the roof in third quarter, so created more clear-out than we expected. And with that said, it was the best core advertising quarter we had so far this year..

Okay. That's good to hear and I know we are all of an entire half a morning beyond the election, can you talk to the tone you're kind of hearing from the market place on how core is feeling the rest of this year and maybe heading into early 2019..

Is the election over. We're drunk from the election. Now, as we said, we're encouraged about the core because of the performance in the third quarter. We could talk about the automotive category as well, we know that's been down.

But the fact of the matter, when you take a look at our automotive category, we have eight subsets that we count on the automotive category. Half of those subsets are actually up. So that's encouraging. I'm not sure exactly where the automotive category yet will be in 2019, but obviously in the last six months there has been a crowd out factor.

The minus is low mid-single digits. However, as I stated, we have some encouraging news with the category and that four of the subsets were actually pacing up. So that's encouraging. As we go into 2019, you have to be able to continue to follow where the line is going.

I think, this company more so than any other company, has demonstrated that we see where the dollars are going, we're going after those dollars. We're reinventing ourselves, as an industry we have to reinvent ourselves and we're really becoming a custom of following where the money is going. There's nothing wrong with the ad dollar.

You just have to be able to follow where the dollars are going..

And I would add that based on the crowd out for the November and December back half of 2018, we'll be able to get a lot of the displaced revenue back in, which bodes well for a strong finish for us..

Okay, great. And then, maybe just one more bigger picture. I think, somewhat unique from some of your peers, you've put a lot of money to work in non-local content initiatives via Tennis Channel, college football, wrestling.

As you said today, can you maybe give us your vantage point on how you would say those investments are working out versus maybe your initial expectations? And, do those experiences affect your mindset about acquiring more content platforms of a similar vein going forward, you're obviously sitting on a lot of cash in an enviable position on that front.

So, just curious about that that experience..

Sure. So, look I think saying that we've invested a lot of money is maybe a slight mischaracterization. Beyond Tennis, we really haven't spent significant dollars on content and Ring of Honor, I think, we bought for a couple hundred thousand dollars.

And it's, we think that's an unpolished gem that ultimately should be something in the same light as WWE. We actually sold out Madison Square Gardens for an event next year which is pretty (00:24:46) in 11 minutes. So, we know that that that brand has potential.

It just – it hasn't, we haven't quite found the right dials to turn yet, but we keep increasing the grass roots support on it and it has just a very, very loyal and avid fan base which is what you really need to explode a brand.

And on the syndicated side, we have we've been smart about investments there, using our leverage to not only reduce our costs there but also get equity positions in various – or equity like positions in various programs with little-to-no capital. So that's been a very profitable endeavor for us.

And then on Tennis, which we did spend a decent chunk of change buying, it was a net price of $285 million and further investments in Tennis.com and Tennis magazine and you probably just saw that we signed up the WTA for a five-year deal and we've also expanded other rights in other categories, like the French Open where we put more premium matches on our air and then also revamped our OTT app.

So, it's been an investment period for Tennis and Tennis is setting up exceptionally well for future growth with 2020 will be the breakout year for Tennis in a big way.

And that'll be the year where we sit back and look and say, wow, we really – all this work and investment that we put in has paid off in spades as 2020 looks to be a huge year for Tennis.

So, I guess, the overall question to your answer is when I look across what we've done in content, we're in varying stages of development, but we've always had a good return on everything we've done, but I wouldn't say that we've spent all that much risk capital when you consider the scale of the company overall..

Okay. Thanks, Chris..

Our next question comes from the line of Alexia Quadrani with JPMorgan. Please proceed with your question..

Hi. Thank you very much. Any more color you can provide on sort of the retrans outlook, following the deals with Altice and DISH in August. And I guess staying on that topic, if you can talk maybe about the Fox affiliate agreement you executed in May of 2018.

How much you think was tied to the Tribune station, sort of how we should think about that negotiation coming ahead?.

Yeah. So Alexia, I'll take the first part. So as you heard today, we've reconfirmed our guidance for our net retrans growth this year of low single digits and that's really just based on timing of how the MVPD versus network affiliation agreements come in. For next year, for 2019 and 2020, we're looking at low teen growth percent.

So there's still a very strong environment for us on the retran side..

And on Fox affiliation deal that will come up for renewal here at the end of January. The deal we cut in the summer, as I previously stated, was pretty much of fair market value for the stations and a market deal on reverse retrans. So, we don't expect a material difference in what gets renewed in 2019..

And just a quick follow-up, any comments or outlook on any changes or the timing of changes, really the timeline for the FCC rules coming up, do you – any sense when that may happen, you may see something there?.

Well, the local ownership rules, those were in effect, the UHF discount is in effect. Really the only thing outstanding right now is what to do on the national cap and the quadrennial review is coming up as well. So, we still don't know exactly what will come out of that quadrennial review.

But, we're not expecting much action on the cap in the meantime. There has been sort of a lack of unanimity in the industry on that, which I think is preventing the FCC from moving forward on something that I think they do want to deregulate.

But we'll see if the industry can get on the same page there, then perhaps there can be some movement on that front..

Thank you..

Our next question comes from the line of Barton Crockett with B. Riley FBR. Please proceed with your question..

Okay, great. Thanks for taking the question. I was wondering a little bit on a couple of things.

One is the share repurchase, which was meaningful, but frankly I was thinking you guys might do a bit more and I'm just wondering what it would take to get you guys to push the accelerator even more on repurchase, given the political environment and with the action in the stock, I would have thought this could have been a setup to do it even more than you did.

And then, as part of that are you kind of holding some in reserve, holding back in the repurchase, partly because of interest in some other M&A pursuits, potentially..

When we announced the $1 billion authorization, the plan was to spend that over two to three years. We've spent over $140 million in a span of about two months and so we're happy with the pace, we're happy with the price that we were able to achieve through that period. We've always been valuation sensitive when it comes to our repurchase program.

We also, as you probably know that we increased the dividend too, as another form of shareholder return. And so, going forward, we are looking at a number of opportunities, which could change our mix of free cash flow deployment, but that's always going to be a balance between where we're trading and what other opportunities we have in the pipeline..

Okay, right. I guess, a second kind of different topic on the distribution growth that you see in the fourth quarter.

I was wondering if you could give us a little bit of a sense of the breakdown year-over-year, how much of that is retrans versus Tennis Channel and other kind of distribution fee sources and how you see those two kind of contributing as we go into 2019..

Yeah. So, the majority of it, Barton, is the retrans and again, the de-growth (31:58) you're seeing there in the fourth quarter is really timing. You know, we did the Altice deal I think in second quarter, we have the agreement in principle with DISH that we did in the third quarter.

But the majority of those numbers, we're not going to get to that level starting to break out what makes up the distribution, but know that it is pretty much all retrans..

Okay. That's great. Thank you..

Our next question comes from the line of Marci Ryvicker with Wolfe Research. Please proceed with your question..

Thank you. One of your peers this morning talked about pay TV subs trending up about 2%.

Just curious what you're seeing and how that's contributing to your net retrans growth?.

Yes. Marci, if you include the virtual MVPDs, which again are really just we're still in the very early stages of those subs ramping up and reporting, year-over-year, we were – the subs declined less than 1%, so call that sort of flattish..

Okay. And then is there any update on the ALJ process. I don't think the judge has been going to work.

But is that having any impact on conversations you may be having in the marketplace?.

No, it hasn't. We haven't heard anything from ALJ, the timing order was supposed to be out months ago, it hasn't come, but it has not affected our conversations in the marketplace, and we continue to move forward on other acquisition opportunities..

Okay. And then, I noticed in the press release, you're back on Sony PlayStation Vue.

So, any color on that conversation or agreement?.

Just like any other distribution conversation, 99% of those go swimmingly and we come to a new deal and a few of them don't. And Vue, we had a dispute with for a while, we were eventually able to work it out to the benefit of both parties..

And Marci, I want to come back to your question on the subs. So, with our flat performance on subs and the peer that you mentioned who is seeing some growth there, the takeaway is, that's a good story regardless of whether it's flat or we're growing.

And so that's important for people to understand that for the entire ecosystem, which we're playing on both platform distributions, it's a good story for broadcasters..

Great. Thank you..

Our next question comes from the line of Clay Griffin with Deutsche Bank. Please proceed with your question..

Hi. Good morning. Most of my questions have been asked.

But just following on the virtual MVPD side, just can you help us level set where you are with the other major platforms, are there any major holes, I guess, in terms of your station portfolio that you feel like you need to address with those platforms? And then, just secondly, just hoping you guys might be able to talk to some of the non-programming cost initiatives that you've undertaken and kind of the outlook there? Thanks..

So, really the only hole which we're working on right now is on the major MVPD side is Hulu. We have some of our stations on there, but not all of them, all the other majors are covered on the virtual MVPD side.

And on the non-programming side, we have a pretty significant innovation push across every vertical of activity within our stations, where we're examining how we do things all the way down to a very granular level of every step that's taken in the newsroom, how our sales forces are organized, what's going on the administration side, what can be hubbed and we're studying all that in great detail, and just about every activity in a TV station, so that we can become more efficient over time without actually losing quality or total volume of output..

Great, thanks, Chris..

Our next question comes from the line of David Joyce with Evercore. Please proceed with your question..

Thank you. If you could just provide an update on how ATSC 3.0 is moving along, given you've got some more volumes, some other station groups and you've been kind of encountering that with your fee (00:37:07) CapEx, and your guidance coming in lighter. What's the path there to – into that going live? Thanks..

Well it's live in a couple of cities already including Phoenix, Dallas and Chicago on a test basis. As I mentioned in our prepared remarks, we're working on a plan to rollout in 20 to 30 more markets in 2019 which is roughly a third of our portfolio. Other broadcasters are working on similar plans, you saw at NAB New York.

Two major networks, FOX and NBC supported the rollout of 3.0 which we think is a major milestone that basically tells you that the vast majority of the industry is behind this and working on it.

So, it's bit of a goal (00:38:09) for the industry is, for a full nationwide distribution coverage by 2020 and so, we're working diligently to get to that goal and as we mentioned in order to help accelerate the usage of 3.0, we've invested ahead of time in a partner, Saankhya Labs, to make sure that a more of a chipset was available, so that we're not chasing the receiver side as the transmission side ramps up..

Great. Thank you very much..

Thank you. We have reached the end of the question-and-answer session. Mr. Rutishauser, I would now like to turn the floor back over to you for closing comments..

Thank you, operator. This was a very good quarter for our company and we have very good outlook going into 2019. If you have any questions, please feel free to give us a call..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..