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

My name is Marlane Pereiro. I'm the high-yield cable and media analyst at Bank of America Securities. Today, we have Jason Combs, CFO; and Rebecca Riegelsberger, Treasurer and VP of Tax from E.W. Scripps. Thank you, for joining us.

Good afternoon, everybody. We can go ahead and flip forward to the next slide. If you flip over to the next slide as well, so Becky and I are very happy to be here today to give you a quick update on the business. I am appreciative also that we were able to schedule this during intermission of the soccer match. We're up one nothing for anybody who hasn't checked recently. So all goodness there. So we'll start on this slide by talking a little bit about how the company has gone through a pretty, what I would say, a significant transformation over the last several years. And in doing that, the one thing that's remained consistent is just what you see on this slide that ultimately, we are focused on engaging and empowering the audiences that we serve and the communities that we serve. And when you think about this day and age, from a consumer perspective, who you engage with is more important than it's ever been. And so when you look at Scripps' own view of mission, of journalism, of stewardship, I think there's a really tight alignment there. So flipping to the next slide. Let's start by maybe giving a little bit of a recap for those not super familiar with our story on our 2 primary operating segments, and we'll start on this slide here. This is our Scripps Networks division. So our Scripps Networks division is comprised of 9 national news and entertainment networks that reach nearly every U.S. household over the air, but they're also widely distributed on pay TV and on connected TV. This division, as you see here, was a culmination of mostly a bunch of different acquisitions we've done the last several years, but was really solidified by the ION Media acquisition, which you can see ION displayed pretty prominently there. And in its first full year of operations last year, we did $950 million in revenue and at a profit margin of about 40%. Turning to our Local Media segment. On the next slide, so the map you see here, this is our Local Media segment. And we are one of the country's largest local independent broadcast groups. We cover 61 stations across 41 different markets. And last year, we reached 25% of U.S. TV households. And last year, we generated about $1.3 billion in revenue within this segment. And what I'll say is the map you see here is vastly different than it was about 5 years ago. We've more than doubled our footprint over the last 5 years in terms of local TV stations. Flipping to the next slide. So the accomplishments you see kind of listed on this slide, to me, they not only align with the acquisition thesis we had for the ION Media acquisition and all those Local Media acquisitions that I talked about, but I also would say they align very closely with our work against our long-term strategic objectives. The benefits of scale that we gain jump out on several of these, including the renewal of all of our major affiliation agreements on the Local Media side over the last 12 months at rates that, frankly, we were very pleased with. From a connected TV perspective, you see it mentioned there in the fourth bullet point, we believe there's a lot of value to be gained still in connected TV, and I'm going to go into a bit more detail on that in a few slides. But I will also say we are really pleased with the progress we've already made to date on gaining distribution for our brands in the connected TV space. And then our commitment to maintaining a strong balance sheet, again, jumps out on a couple of different spots here, primarily the debt pay-down we've had over -- since the close of the ION Media acquisition. And frankly, our free cash flow profile is just so different now than it was 3, 4 years ago. And I think that -- those were both driving factors ultimately behind the rating agency upgrades you see referenced here. So I would say, all in all, we're pretty pleased with the progress we've made, and we remain optimistic about our growth opportunities ahead. So this slide kind of sets up the next couple of slides. So a lot of words here, but largely talking about the areas of opportunity for growth in the media landscape, where we think we have an opportunity. And you see a couple of them mentioned there, specifically over-the-air and connected TV, those are areas we're going to delve into a bit more in the upcoming slides. And then further down the line -- we're not going to talk much about it today, but maybe we'd have some Q&A on it. We believe that our positioning as the largest holder of U.S. spectrum sets us up nicely to benefit as new business models using spectrum evolve for the broadcast industry. So on this slide here, what we're trying to focus on is the 3 primary distribution platforms to which we meet or reach, I should say, our consumers. And each of these platforms certainly has a different business model, and I would focus maybe less on the numbers here and more in the direction of each of these lines. So starting with pay TV on the left. Pay TV is still the predominant way that viewers access TV programming. We love pay TV. We monetize through retransmission revenue fees and through advertising. But clearly, it is also an ecosystem that is in decline. And so I think with any highly profitable ecosystem that is in decline, it's all about maximizing your yield and identifying ways to do that, and that is our top priority within the pay TV system. Moving over to the middle chart, over-the-air. So over-the-air is certainly smaller than the others right now, but it is growing, continues to grow at a very good clip. You see estimated 44 million households, so about 1/3 of all households have a digital antenna at this point. It's an easy value proposition for consumers because it's free for them to access. And we make money when they watch our viewing. And so from that standpoint, we're in a unique position versus some of our peer set. Because of our Scripps Networks brands that we have over the air and how heavily viewed they are an OTA, we tend to take a 25% to 30% share of all viewing. So as that grows, that's good for us. And then the last bucket on the right, connected TV. So connected TV has reached near ubiquity as a platform. There are a lot of -- there's a lot of complexity, a lot of moving pieces. There are different revenue models, ad-supported versus subscription, linear versus on-demand viewing. But as you can see here, it is growing, and it's a focal area for us. And so when you look across all these platforms, I think if I asked people in this room, many of you probably use multiple of these platforms. And I think that's why our view is no longer either-or where we focus our attention, it's an all-of-the-above strategy. How do we take all of the brands and the assets that we have and maximize our organization in each of these households. So let's take a little bit of a deeper dive on connected TV on the next slide. So from a connected TV standpoint, just to make sure we're on the same page, really just talking about any TV that is received over the Internet. And connected TV can be comprised of a lot of different things, right? Smart TV apps, your Netflixes, your Plutos, hardware like a Roku or more and more, you're seeing it built into the native applications of the TV manufacturer, so like a VIZIO WatchFree. And as I said before and as you saw on that chart, it's growing and it's growing rapidly. So what are we doing about it? Well, we've launched a pretty aggressive plan to roll out all of our brands in the connected TV space over the last year. So flipping to the next slide, I'm going to touch briefly on Local Media, so our local TV stations. We've already been doing this for a while now. Each of our markets has their own app that's available on Roku and lots of other platforms where consumers can access news, weather, on-demand content. And you see there on the chart that we had nearly 3 million hours of programming that were viewed in October through these apps, but this isn't new for us. We've had these apps built out for a while. It continues to be a place we put focus and we try to drive growth because it's another way within the local marketplace for us to reach our consumers. But where I think from a connected TV standpoint, the real growth opportunity for us is on the next slide, and that's within our Scripps Networks brand, so our national brands. So as you look at this chart, across the top, you see 7 of our 9 national networks that we own. And down the left, you see all the major connected TV platforms that we have. And we see there's a lot of checkmarks. 3 months ago, when I presented this slide, there were a lot of dates still out there. We've launched most of these on the page in the last, call it, 4 to 5 months, and we're seeing traction. We're seeing traction right away. Viewership is growing. We've actually gotten feedback from, for example, VIZIO of the demand they've seen for ION. When they put it on their WatchFree app, they moved it right to the top of the channel guide right behind their owned content because it was drawing eyeballs. And they win and we win when people watch it on their platform. And so this is a place where we've really just started focusing, these national brands there, this year, and we're seeing nice growth. We grew by nearly 60% in Q3 in connected TV revenue. and we're going to exit the year with these brands driving a run rate of $100 million in connected TV revenue. So as we look forward to 2023, 2024, we certainly see this as one of those growth engines for us. So that was kind of a deep dive on connected TV. I'm going to hand over to Becky now who's going to walk you through our efforts on growing the over-the-air marketplace.

Yes. So we've been pretty vocal about -- and Adam, our CEO, has been pretty vocal about the focus on OTA and in particular, because of the opportunity that we have with the Scripps Networks stations. So what you can see from the graph on here is Scripps Networks takes 26% of the market where they have stations. Where we also have a local station, we take more than 40% of the market. So the reason it's a focus for us is because right now, even though we do love cable, we love retransmission revenue. Jason has mentioned that. We don't want to take the focus away from that at all. When people do unplug from cable, only one out of 5 of them right now are plugging in a digital antenna. So we look like -- we look at that as a major opportunity for us to win in that space and want to make sure that when people go to unplug, that they have a resource to still capture them in that advertising revenue space. So on the next slide just touches on how we've addressed that. So at the end of 2021, we talked about marketing efforts that we would have in 2022, and that goes through thefreetvproject.org website where we drive awareness about the opportunity to consume television through a digital antenna, to purchase the right antenna, to position it correctly in the house because we found through our research that people were having negative experiences. They might purchase an antenna. They would have a bad experience. They would unplug it, throw it away and then never go back to it again. And so in looking at our advertising revenue opportunity, if someone isn't plugging that in, we will lose the opportunity to monetize that viewer in the whole ecosystem. So we've seen from the efforts of thefreetvproject.org that people are getting educated on the antennas. They're purchasing different types of antennas, and then they they're -- we're able to monetize them through advertising revenue. So on the next slide just talks about how we're looking at that from a robust standpoint, so that we can actually measure the efforts of our marketing spend. So one of the big factors there is that we're partnering with retailers, such as Best Buy and Walmart, to really measure what are the return rates on the antennas, where are people purchasing antennas, are we seeing increased antenna purchases where we're doing marketing. And we have seen over 30% increase in antenna sales where we're doing those marketing efforts. And what we've also found, even most recently through our partnership with Best Buy, is that those antennas are being sold in the home theater space. So it's people that are really spending a lot on their television viewing experience. So it's not that we're driving people away from cable, but they're really enhancing their viewership package and plugging in a digital antenna, which is a great opportunity for us. I'll hand it back to Jason for the third quarter results.

Yes. So we're going to go ahead and just give a quick financial update. So we'll start with the third quarter. And so from a third quarter perspective, our Local Media division had about 14% year-over-year growth in revenue. That was driven, as you would imagine, by the political revenue we saw in the quarter as well as growth in retransmission revenue. From a political standpoint, the $63 million you see here captured on page was below our expectations. What we saw ultimately was that we came in below expectations on political for the full year but still had a record midterm. And that was really tied to the mix of states we had and some races that were anticipated to be competitive races that became uncompetitive and drove dollars to other marketplaces. But what we saw was despite that, when you look at the overall share that broadcast is taking, broadcast took more share in 2022 than it did in 2020 and about 54% and continue to be the predominant way that campaigns find success finding their voters and motivating their voters to go to the booth. And so despite the miss versus our expectations, we're still excited that it is a record and we're optimistic as we look to 2024. On the Networks side, revenue was higher than we expected for the quarter. But pre some of the macroeconomic headwinds, this segment was growing about 10%. But the national ad marketplace certainly has been impacted by what we've seen in the last 6 months, inflation, all those other sorts of things. And so we guided to about flat. We came in up 4%, which not only beat our guidance, but when you look at the peer set who the Networks division competes against, was also best-in-class. Most of the peer set was flat to down, so we were certainly excited about that outcome. So now I'm going to hand it back to Becky, and she's going to walk you through our expectations for Q4.

Yes. So just looking ahead to Q4, local revenues are -- I'm sorry. Local revenue will be in the mid-20% range, which is driven by political, which Jason just mentioned, $200 million was a record midterm for the company. Scripps Networks revenue is expected to be down in the mid to high single-digit range against, again, a Q4 '21 comp that was -- had exceptionally strong results. Q4 is when we cycle past the expense ramp for our 3 over-the-air networks. So you'll see that start to level out in this fourth quarter, meaning that expenses will be flat prior to the prior year with double-digit increases seen over the last several quarters. And then again, we expect our free cash flow to be in the $320 million range for the full year. And then finally, just kind of want to touch on the capital structure. So we finished Q3 at 4.7 leverage. Our secured leverage was 3.3. We have our first year [ of ] maturity is in Q4 of 2024, that's our lowest cost of debt. So when we think about how we're addressing debt, debt is our #1 priority, using excess cash flow to apply towards debt. Jason mentioned earlier in the slides that we've paid down nearly $800 million or close to $800 million since we closed on the ION acquisition in Q1 of 2021. Part of our financial policy is to stay as close to 50-50 fixed-variable. So we don't have any hedges in place. We have a natural hedge. Given the unsecured bonds that we had bought back earlier in the year, we are at 45% fixed, 55% variable. So even though that's a little off from our 50-50, we do feel comfortable with that. But you will not see us going higher than that on the floating rate debt, just given the rising cost of debt there. So we do get asked a lot how we target our debt pay-down. We will try to take advantage of purchasing unsecured bonds, if we can get a good discount on that. In the first quarter, we did take advantage of -- buying back $123 million of bonds. Most of our cash flow for the year comes in, in the fourth quarter. So you will see us active in that space as well as paying down term loans, again, with that excess cash that came in, in the fourth quarter.

So we went through that pretty quickly because we wanted to make sure we left some time for questions. So I think at this point, we're open to questions. Any questions from the audience? Or do you have any questions?

I do have questions. So I can start off with a few. Obviously, there was a lot of discussion in broadcasting around political and some of the misses around that. So -- and not just you but for others in the space. So given what happened in terms of how some of the races played out, does that affect how you're thinking about '24 and potentially forecasting that, just given where some of the more competitive races could be or anything to that effect?

Yes. I think -- so certainly, some of the things that came out of the most recent election cycle and some of the shifts we saw in population during COVID impacted that and impacted how red or blue a state was. That will factor into our modeling as we go into 2024. Also, the mix of races. So we have a pretty significant percentage of the senate races that are going to be out there that should be competitive. We have 6-ish governor races. I think the big question mark to be answered is around the presidential spend and what the Republican primary looks like, how that spend goes and whether Biden ends up running or not and what that primary could look like. But ultimately, if you look over the last 10 to 12 years, what you've seen is midterm-to-midterm presidential-presidential has grown every year. And so we remain optimistic looking ahead in '24.

And then just thinking about the trajectory of retrans fees over the medium term as we kind of see the trajectory of traditional pay TV subscribers, how do you think about that? The puts and takes?

Yes. So gross retrans will ebb and flow depending on your renewal schedule. And we have a favorable renewal schedule looking ahead to next year. We have 75% of our pay TV households are up for renewal in the first half of next year. And so as a result, we expect some pretty material gross retrans growth because we think we'll have some pretty significant rate step-ups there. And on the flip side, we've already negotiated virtually all of our affiliation agreements over the last 12 months. We know what that expense base is going in. And as I said earlier in my prepared section, we were really pleased with the outcome of those negotiations. And so I think when you look to kind of net retrans for next year, I would expect to see both nice growth in net retrans dollars and net retrans margin.

And you also had mentioned your spectrum holdings. So can you talk about any opportunities to monetize spectrum holdings? And then what potentially could be use of proceeds?

Yes. So I'll start with the spectrum -- the use of spectrum. So spectrum has been talked about for 15 years or something like that in NEXTGEN TV, and it was heavily tied to monetization within the television, right? Whether it was the ability to send certain programming through television, the ability to have data received back, so a 2-way connection. But the reality is that, that monetization only happens if somebody both buys a TV that has a NEXTGEN chip in it and they plug in a digital antenna. So it takes a while to build that kind of user adoption. So what I think you've seen, not just us but others in the industry, shift in [ area ] to is more focused on alternate uses of excess spectrum. And so the popular one that gets talked by a lot right now is data casting and the ability to use the unique characteristics of broadcast spectrum, which is a one-to-many, to be able to push large amounts of data to Ford's new car fleet or to FedEx's fleet. And so we can do that being a one-to-many technology versus what they use often today, which is 5G, which is a one-to-one. We can do that at significantly lower cost. And so we're actively doing pilots right now in certain markets to test out this technology, so are our peers. And I think you're going to start seeing -- in fact, you've seen at least one of our peers have announced a commercial agreement in this space recently.