Sinclair, Inc. (SBGI) Earnings Call Transcript
October 3, 2023
Earnings Call Speaker Segments
Okay. We're going to get started. I'm Aaron Watts, the Media Cable Satellite Research Analyst at Deutsche Bank. Very pleased to have Sinclair back with us again this year. On the dais with me is Chief Executive Officer, Chris Ripley; and Chief Financial Officer, Lucy Rutishauser. To both of you, thank you for being here.
So it has been a topical year in the space. So I'm glad we have a chance to sit down to discuss not only Sinclair, but also industry themes as a whole. Sinclair has had a lot going on this past year, though, specifically, including a corporate reorganization. And this came against a challenging advertising backdrop, continued secular changes across media as a whole. Chris, to kick us off and level set, how have you repositioned Sinclair now to navigate the evolving landscape? Where is your focus and your priorities over the next year plus?
So on the broadcast side, we are very bullish about the year ahead and the future. We are going to have significant net retrans growth from here on forward. We have had -- as we guided previously, '22 to '25 net retrans going to be up low-single digits. There has been a decline in net retrans in '23 and so you can see that in order for the guidance to play out that '24 and '25 are going to be robust. We're also seeing the ad market firm up here, which is a good sign for the macroeconomic backdrop and the advertising market for political, we're expecting to be record-breaking in 2024. And on top of that, we're investing heavily in transformation for broadcast. We've got $65 million worth of spend here in '23, focused on cloud transformation, a new unified ad sales platform, all things that are going to make us much more efficient in the future and much more effective at running our business. We're at peak investment in '23 around that transformation and that investment spend will subside in '24 and not be there in '25. So you've got extra expenses burdening '23, which will have benefits in future years. You've got significant growth across the advertising business and the retrans business projected for '24 and '25. And then on top of that, you've got ATSC 3.0 starting to contribute in '24 as the market gets fully deployed here across the U.S., we're currently sitting at 65% to 70% coverage. We're finally starting to get traction on some of the use cases that we've been talking a lot about beyond broadcast and we'd expect that to start contributing in '24. So we're very bullish on the broadcast business in the years ahead. And we feel like we've -- we've taken our hits there over the last couple of years, but setting up for a good couple of years ahead in terms of visibility. And then on Tennis Channel, we're very, very bullish on Tennis Channel. It's got a number of growth vectors that are all coming together here in the next couple of years. Direct-to-consumer, which we think is a massive opportunity for Tennis research that we have conducted points to a subscriber potential in the millions to 4 million potential direct-to-consumer subscribers at over $100 per subscriber a year is a very significant outcome for Tennis and that's going to be launched next year. International has been going great. We're in 9 other territories now, just launched Spain. And we're starting to acquire other rights. We have the WTA rights in Germany, Austria, Switzerland. We're having active rights discussions in other territories. We have the opportunity to build a Tennis channel in every single one of those territories of significance in tennis. So an entirely new business. And our fast channel strategy is taking off on tennis. We launched T2 on Samsung only. It's now moving to other fast platforms, it's free ad supported. We have plenty of match content and other content to supply it for very low incremental cost. And it will be our front of the funnel, if you will, for Tennis. And then we've also doing a lot more in Pickleball. We'll be launching Pickleball TV here in the next quarter. And we're also looking at padel in Europe. So there's a lot going on in Tennis to be excited about, and I didn't mention e-commerce or sports betting. Compulse has had a really significant year, turned profitable this year. It's invested heavily in its platform. Its platform is a best-in-class local digital marketing services platform and now it's all about just adding scale. So we're looking at transactions that can add more scale. We're obviously growing organically there. But getting it to the point where it is best-in-class, and it's profitable, was a significant milestone that we passed this year. And then last but not least, you've got an investment portfolio that's worth about $1.3 billion, including cash on hand, and that increasingly is turning into cash. The investments in that portfolio have returned almost 20% IRR over the last 10 years. They've done incredibly well. But we are actively monetizing them and we'll look to redeploy them in majority control investments so that investors can see the results on our income statement.
Okay. That's a great overview. We'll dive in on a lot of that further over our time here. I wanted to start though with current events. I think it's fair to say there's been a, a decent amount of handwringing that's gone on recently centered around the Disney Charter dispute, which ultimately got settled a couple of weeks ago. As we've now had time for that dust to settle would be great to hear your thoughts on the new template set by the 2 companies, which obviously includes both D2C and linear and seems to preserve the cable bundle for now. What does it mean for local TV broadcasters broadly and for Sinclair specifically? Was this a good outcome?
I think it was a great outcome. And it reminds me that 5 or 6 years ago, at a conference like this, I was asked about the advent of streaming and direct-to-consumer and one quote that I gave the industry that was played up in a lot of industry rags was I said streaming will be a sea of blood for the industry in terms of losses. And that so far has played out. And it's had a very detrimental impact on the Pay-TV ecosystem because direct-to-consumer streaming has been way underpriced. It was priced to grow subscribers, not to grow profits. And the industry is finally and the market has finally woken up to the fact that, that is not a great business model. And we're seeing the market change in reaction to that. And the Disney-Charter deal is just one more proof point that the market and the industry has become more rational as it relates to how to keep -- how to maximize revenue from your content. And I think it's truly a watershed deal. I take my hats off to Charter and Disney for figuring out a way to support the Pay-TV bundle, which is the large discounted offering to the consumer, while also growing direct-to-consumer a la carte SVOD for Disney. I think it's a path forward for the industry. And why it's so important from my perspective is, it is now incorporating those direct-to-consumer offerings directly into the Pay-TV bundle. So the fact that Disney+ and ESPN+ are now going to be included in-charters based offerings, I think, is very significant. What it does is it improves the relative value equation for the consumer. Now the consumer that's paying $80, $90, $100 a month to Charter or their Pay-TV can look at that and say, okay, I'm now getting more value. I may not be paying less, but I'm getting more value for what I pay and the alternative of them leaving Pay-TV and largely when people leave, it's because they are getting what they need from, say, a Disney+ or Paramount+ or Netflix, et cetera. These things are now included in what I get in Pay-TV. So the value equation changes quite significantly. The more value that can be put into the Pay-TV bundle, the better it is for the entire media ecosystem. It is the ideal business model from a content distributor or a producer perspective, it maximizes revenue and it also maximizes consumption and the optionality to consume for the consumer. So it is a model worth preserving. And I think most media companies have now realized that, in fact, have really come to the sort of unavoidable fact that keeping that ecosystem as sustainable is vital to everyone's future. And that's what I see in the Disney-Charter deal. And at the same time, on the other side of the equation, you're seeing a la carte of a SVOD get more expensive by the date, price increases, password sharing crack down, advertising being added. It's all -- so the value equation on a relative basis for a consumer, I can pay more and more for an a la carte SVOD on 1 side or I can stay with Pay TV on the other. And get much more value. And I'd expect the rest of the industry versus the MVPDs and media companies to follow suit. I think it's going to have a dramatic impact on churn going forward.
Okay. And then that can play through into your outlook for net retrans going forward if this kind of shifts...
And by the way, our guidance did not expect this deal to happen or what impact it may have. But I think it's very positive for churn, especially as it migrates to other MVPDs and other media companies. .
Do you feel the outcome of dispute in any way, tilted the negotiating leverage to distributors in discussions going forward, whether from a pricing standpoint or otherwise?
What we saw in the deal as reported is that the premium must-have content held its pricing power and the undifferentiated not highly viewed content like the 9 or so or 10 channels that Disney basically let go of. A lot of it is children programming, low-value programming did not. And -- but the premium content, which when you take a look at what we're offering is what we offer in spades, got it's price increases, held it's pay-on and packaging requirements. And so it really, I think, points to a barbelling of the industry in terms of -- if you've got premium must-have content. You still have your pricing power and you still have your negotiating leverage if you don't, then you've lost it.
Okay. One additional question along these lines was whether the new template now makes it possible or easier for distributors and their subscribers to access network content including nationally televised sports even if there is a dispute going on with the local affiliate. The obvious implication of this being a distributor may not feel as much pressure to meet an asking price from the local affiliate like Sinclair or settle a blackout dispute expeditiously, if they can access that nationally televised sports like Monday night football via the direct-to-consumer apps, that would be a part of the bundle now. Can you talk about all this and perhaps provide some color around your exclusivity protections?
So they vary depending on network relationship. And so this potential issue hasn't had any impact on any negotiations. In various relationships, there are contractual items that do deal with that potential, but it's not uniform across the industry. But what it really comes down to from our perspective is economics and alignments of incentives. Each affiliate body spends roughly $2 billion a year to the network -- to each network in the form of reverse retrans or programming fees. The network is not viable without that payment stream. It's a huge part of their economics and a huge part of how they pay for the NFL and all the other programming that they do. So I'd expect that if this becomes an issue that undercuts the ability of affiliates to negotiate with the distributors, the industry would act swiftly because it's not just an affiliate issue. It's an ecosystem, it's a network issue. And so because of that alignment of interest and the way the money flows, I'm not worried about it.
Okay. One last question around Disney, there have been recent headlines suggesting they may be willing to sell all our parts of the Linear TV business, a couple of broadcasters have reportedly put themselves in the mix as potential suitors what's your interest level here? How high a hurdle would that be from a regulatory standpoint? And maybe importantly, also your current leverage profile and how that would play into it.
Well, it's a good question. We certainly would be very interested if ABC was going to be transacted. I -- my -- I don't think anything's imminent by any stretch of the imagination. I also think that the likely -- if there were to be a transaction, and I think that's -- that's a big question mark from a regulatory perspective, whether that could be a transaction. It would be value destructive if you pulled apart the various pieces. ESPN from ABC, ABC the various linear networks. So the most -- and then by the way, probably value destructive to the other offerings like the DC offering. So they actually are complementary. And I find it -- although a transaction could be done, generally value-destructive transactions don't tend to get done. When it really comes down to it unless someone's just desperate to unload. And I don't think Disney is there. So we'll have to see how it plays out, but I'm not breaking it all up into various pieces, so I think it's a very unlikely outcome.
Okay. So I wanted to touch on retrans one more time just to make sure I had kind of the lay [ a line ] straight. I believe you have up to around 90% of your big 4 traditional Pay TV subs up for renewal currently and into next year. Is that correct? And as we now sit in October, can you give us a sense for how those discussions are progressing to the extent you already kind of have dived into it and your outlook for achieving your desired price increases to fit into that 2-, 3-year guidance that you spoke about earlier?
Well, we don't like to comment on active negotiations. But all I can say is, so far, we don't see anything in those discussions, which would change our guidance.
Okay. All right. And on the other side of the coin with network affiliation renewals, anything upcoming that you would highlight? Or more broadly, what are your expectations in terms of network comp growth rates over the next few years?
Again, there, the trend continues where the leverage has switched the network's ability to continue to push through significant increases has diminished. And I think that's more a factor than anything else that is just so much aggregate dollars that are being sent from the affiliates to the networks. And we feel confident in our ability to manage that down into increasingly sort of a flattish arrangement.
Okay, let's change gears to the advertising environment. It's been a sluggish year plus for advertising, most notably on the national side. On your earnings call, you noted 3Q trends appeared largely unchanged from 2Q trends with the notable exception of national advertising, which was showing signs of improvement. Has there been any material change to that outlook in the time since. Are you seeing any evidence that advertising is better or worse than you were expecting?
Yes. So I would characterize the current ad environment is stable. As you pointed out, we did see National start to improve late in second quarter. That has continued through the third quarter and looks like it will be slightly positive for the full third quarter. And then Local is, I would call it, a little bit more delicate and really based more on what's happening with fiscal monetary policy. So we're keeping an eye on that one. But if you think about the categories, though, Automotive, it's 20% of our ad spending, that category continues to grow this year. It's grown in the third quarter. We're beginning to lap insurance. We've talked about the insurance category being down for the past year. So now we are lapping that. And then we've seen in the third quarter and heading into the fourth quarter, growth in home products and then legal is always an all-time favorite to broadcasters, that one continues to lap to grow.
Lucy, on auto, have you seen any impact yet from the strikes? Has that caused any pullback in spend at any Tier 1, Tier 2, 3?
No. We have not seen anything at this point.
Okay. And on political, you mentioned, Chris, earlier that you were expecting next year to be a big year. What's your latest view on how that shakes out relative to what you collected specifically over the last couple of elections. And last cycle, we saw some shifting of spend from traditionally competitive markets to more solid blue and more solid red markets. Do you see that happening this time around with the presidential election?
Yes. So as Chris pointed out, we do expect political to be another record-breaking year next year. It seems like every year, we're saying that. So just to put in perspective, 2020, excluding the Georgia Senate runoff, we did $350 million. And so we do expect to beat that number. When you look at what's happening here in '23 in a nonpolitical year and compare that up against '19, which is the relevant year. At the midpoint of our guidance, which is about $40 million to $45 million for this year. At the midpoint, that's about 30% more than what was happening in 2019. And one of the areas that's generally overlooked because everybody thinks about what's happening on the candidate side is the issue advertising. So this year, 75% of our political spend is coming from issues. And there's a lot of big issues of portion, immigration, gun control, ballot measures. The list goes on and on. And that's been a big driver. We expect that to continue throughout 2024. As we come into the fourth quarter, we should start to see some of the early presidential primary money coming in. Independent research that's out there is calling for also record levels of fundraising, that should -- broadcast is usually, where that money goes. And then to your other point, after 2022, there's a distress of political ads that are on social media. And so we have seen that start to minimize and that should also be money that comes back into broadcast to the extent that it went over to social.
So it sounds like you expect local broadcasters to maintain your share of the overall political spending pie. Is that a fair...
At a minimum, maintain the share.
Okay. All right. Let's talk about the financial profile of the company. You ended the second quarter with leverage of a little over 5x at SBG net of cash, while excess free cash flow will be more limited this year, that will obviously step up next year. Can you remind us what your target leverage is for the business, when you see getting there and how you're balancing your investments, M&A, share repurchases, debt paydown, et cetera?
Yes. So I'll let Chris talk about the investments in the M&A, but the target leverage remains high-3s, low-4s on a total net basis. That's trailing 8 quarters. So 23% is really an anomaly year for us. We have, as Chris mentioned, net retrans, which is down. There's $65 million of investments back into the broadcast business, whether it's on cloud, data distribution, our marketing services, ad tech, those are all things that will drive future growth as well as help us have CapEx and OpEx cost avoidance. So when you start to look at '24, and again, given the trailing 8-quarter calculation, '24 political, we expect to be more than 2022's political. Net retrans, we expect to grow. It declined this year. The investments, $65 million this year. We expect that to be less next year. So those are all things that will naturally delever us as we go through the year. The political, of course, is comes in the second half of the year. And then as you look forward, right, you kind of need this anomaly year to drop out of the equation, '23 to drop out and get replaced with '25, and that would further delever us. So we expect to work back down to our target leverage. It's very important to us. One of the other things that we've done is we had bought stock back through early May. And then we changed our focus to buying back the debt, not because we think that the stock is fully valued. We still believe it's at a big discount, but the debt is also trading at discounts. And so we started buying the debt back. We've continued to do that through the third quarter. To date, we've bought almost $65 million of principal value back for about $50 million. So call it almost 25% discount on that. And we'll continue to be opportunistic on that front. So -- so we are focused on delevering the company and getting back down to the target leverage.
Okay. Is the plan to kind of -- in terms of priorities, keep debt repurchases a little bit ahead of share repurchases for now? It sounds like you've continued to buy back debt. Is that kind of the mindset at the moment or...
Yes. I mean -- so right now, as I said, we've been -- debt has been the focus for us.
And as you consider your debt maturity profile, which really starts in 2026 as well as kind of where your debt is currently trading, where do you think net leverage needs to be in order to smooth the path to refinancing or extending out those maturities in this project?
So look, we still have just under 3 years. So we do have some time. But I want to be clear that there's '26 is our top of mind for us. It's one of the reasons why we have been buying back some of the '26s, even though -- and we fall back -- let me just say, we fall back across both the bonds and the term debt. So the term debt, the '26s are attractive because they are the near-term maturity, the long-dated bonds are attractive because they're trading at the biggest discounts. So we've been opportunistic across all of those. But we do believe for all the reasons that Chris has talked about for the drivers of the business, what I've talked about comparing '23 and '24 and into '25 and the EBITDA that there is a path to address the '26s.
Okay. So Chris, I wanted to ask -- or Lucy, I wanted to ask about the corporate reorganization that occurred earlier this year, not necessarily to dive back into all the details, but as part of that, you did move some assets out of the television group and into your new venture, silo, and you ascribe significant value to those assets that were moved how should lenders think about the potential for similar actions in the future? And I would add to that, to the extent that the TV group at some point, was in need of additional cash or could use cash to help pay down leverage, could we ever see value flow back the other direction from silos to the TV group -- from the venture silo to the TV group?
Right. So Aaron, I think the important to revisit the reason why we did the Reorg One was to highlight and show to Wall Street that sum of the parts valuation. And the second reason was to give transactional flexibility to Tennis Channel and to Compulse to let them pursue their own value maximizing path and we're already in deep discussions around both and how to optimize their capital structures and how to optimize their growth path. So going forward, we don't have any plans to move assets around. And our first, second and third priority is deleveraging SBG, getting back down to our target leverage, so that's what we're focused on. And the notion of -- to your last question of it is all one company, right? So the notion of funding coming from ventures to SBG is certainly something that could happen, but it's not something that we think needs to happen in order for SBG to return to its target leverage.
Okay. And Chris, I know you're somewhat tired on what you can say here. But on Diamond Sports, I think one overhang with the Sinclair credit is the uncertainty around how that situation plays out and what the outcomes are of it. Is there anything you have to update us with today that in terms of a timeline or magnitude of outcomes that could help us with that overhang or with that uncertainty?
We -- I can't comment on ongoing litigation of any type, including Diamond. The only thing I can point you to is that we did file our motion to dismiss. It's currently in front of the courts. So our expectation is that we'll reduce the exposure.
Okay. All right. You mentioned ATSC 3.0 in your opening remarks. That's obviously been something that's been talked about throughout the industry as a potential future growth driver. But we've been hearing about it for a long time, right? So what gives you confidence that I think you said next year, you actually start to see some tangible P&L benefits from that? And maybe you could also comment on some of the reports that came out last week about LG may be pulling back on support in terms of putting that into their TVs next year and maybe some others following suit. And if that impedes the progress or the momentum that's been building.
So just very quickly, I'll deal with LG first because I think it's a one-off. It can be easily explained. But we had a patent troll that was in a very patent troll friendly court. Won a case against LG. So they obviously want to stop the bleeding in terms of having to pay this patent troll, so they've temporarily suspended putting 3.0 in. They haven't sued any other TV manufacturers. We think they'll win on appeal. And we think that's just a temporary one-off issue. So I wouldn't read anything into that. In terms of 3.0, we are getting to a critical mass on the distribution front, currently sitting at 65%, 70% of the country covered. With 3.0, we have an active process going on with the FCC to future television committee that is working with the FCC to pave the way for the final transition and hopefully, the eventual sunsetting of 1.0. So it's been painful and it's been like hurting cats to get the industry here, but we are finally getting to the point, where we can have real discussions with customers about use cases that we've been talking about beyond broadcast that we've all been excited about. And some of those include automotive connectivity. We're active with Hyundai Mobis, we just did several demonstrations for other manufacturers around updating their software in their cars, which is now happening on a regular occurrence among other applications that we can have within automotive. We think delivering high-quality, low-latency sports, something we already do in our core business is going to be a huge part of the 3.0 story, especially as people look to add interactivity around these viewing experiences, enhanced GPS or/and GPS backup, which is a big focus for the government right now on the backup side, we think is going to be an incredibly powerful application for 3.0, enhanced GPS, which brings the accuracy rate of GPS that is uncorrected, 1 to 10 meters corrected down to 3 to 6 centimeters. We think it's going to have a very, very robust demand in urban areas, especially as more and more devices become and start doing things autonomously. That's probably where some of the first revenue will come in next year. And then IoT device control as more and more devices get connected and require connectivity. This is a far cheaper and more effective way to communicate than, say, adding like a full cellular capability to a device. So these -- we're getting real traction with consumers or customers, I guess, would be a better word for them around these use cases now that there is more capacity, and we're getting close to nationwide coverage. And the promise of using our spectrum for its highest and best use, which is mobile connectivity is finally coming into the focus.
Great. We are unfortunately out of time. But Chris, Lucy, thank you so much for being here.
Thanks, Aaron.
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