Sinclair - Earnings Call - Q1 2021

Transcript

Speaker 0

Greetings, and welcome to Sinclair Broadcast Group's First Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lucy Ruedeser, Executive VP and Chief Financial Officer.

Speaker 1

Thank you, operator. Participating on the call with me today are Chris Ripley, President and CEO Rob Weisbord, President of Broadcast and Chief Advertising Revenue and Steve Zenger, Vice President, Investor Relations. And before we begin, Billie Jo McIntyre will make our forward looking statement disclaimer.

Speaker 2

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 and will remain available until our next quarterly earnings release. Included on the call will be a discussion of non GAAP financial measures, specifically adjusted EBITDA, adjusted free cash flow and leverage. The company considers adjusted EBITDA to be an indicator of the operating performance of its assets.

The company also believes that adjusted EBITDA is frequently used by industry analysts, investors and lenders as a measure of valuation. These measures are not formulated in accordance with GAAP and are not meant to replace GAAP measurements and may differ from other companies' uses or formulations. The company does not provide reconciliations on a forward looking basis. Further discussions and reconciliations of the company's non GAAP financial measures to comparable GAAP financial measures can be found on its website, www.sbgi.net. Chris Ripley will now take you through our operating highlights.

Speaker 3

Good morning, everyone. Our results for the first quarter were better than we guided as our media revenues and EBITDA for the combined company exceeded our expectations due in large part to the change in the amount and timing of distributor and team rebates in the local sports segment, but also reflecting the continued improvement in the core advertising market, which beat expectations despite the ongoing pandemic environment. Advertising trends continue to improve in our Broadcast and Other segments first quarter core ad revenues, finishing flattish to pro form a 2020 and 2019, which exclude the sale of stations we made in the past twelve months. As you recall, April was the first full month negatively by COVID. Broadcast and Other was down 43% in that month alone and 36% for the 2020.

As expected, April well exceeded twenty twenty, up over 70% and was down low single digits from April 2019 when adjusting for station sales, which is the more representative comparison. One item that we're keeping a close eye on is the component chip and rubber supply constraints that are impacting the auto industry, which will likely be a factor in the category's ad spending in the upcoming quarters. While the auto category is comping against COVID weak quarters in 2020 for the industry, the visibility in the category is low right now. Overall, however, I would say that we continue to be very encouraged by the progress of the core ad market, which has seen particular strength in services and sports betting categories. On the sports side, the NBA and NHL seasons proceeded according to their revised schedules for the 2021, and MLB started their season on time and is expected to play a full regular season.

Core advertising for the sports segment for Q1 was slightly lower than our range, mainly due to fewer MLB spring training games than we expected. However, our revenue per game average in the first quarter was up over 2019. As a reminder, there were no professional games in the 2020 due to COVID, and we are expecting to receive more NBA games in the second quarter than we anticipated when we guided last quarter. Comparing to 2019, we're off to a good start in the second quarter of this year, aided by the additional NBA and NHL games in the quarter versus a normal season. In April, we launched our much anticipated Bali Sports app that gives authenticated viewers of the RSN a more robust and interactive experience than was previously available on the FOX Sports GO app.

Early feedback from users has been positive and initial usage stats show that users are taking advantage of the new functionality of the app. We expect to introduce additional features, including gamification elements later in the year. We're working diligently with Valleys Corp. Create a consumer experience that maximizes viewer entertainment and engagement by being able to move seamlessly back and forth between the Valley Sports app and Valley's new sports betting app, ValleyBet. Additionally, we are exploring non game programming that Valley's would provide to the RSNs with the goal of upgrading such dayparts content.

On the broadcast side, the National Desk, which premiered in January and airs across 68 of our markets, continues to perform better than we expected. The National Desk allows us to take the most timely and relevant content from our two thousand five hundred hours of local news produced each week, along with content created specifically for the program and share it with viewers across the country creating a unique alternative to cable news. Viewer feedback has been positive with many commenting that it is different and better than the other morning national news programs on broadcast nets and cable. We are encouraged by the reception the program has gotten and have plans to expand the program into the evening hours later this year. Part of the comprehensive news coverage that we pride ourselves on as an is our investigative journalism, uncovering local issues, corruption and other injustices.

For the third consecutive year, one of our stations received the prestigious IRE or Investigative Reporters and Editors award. This year, WGME, our CBS affiliate in Portland, Maine, received the award for bringing to light a serious shortcoming in the veterans crisis line in Maine. Through our investigative team's effort, we helped alleviate the issue and fought all year to get the problem fixed, culminating in Congress passing legislation to help resolve the issue. It is this type of relentless and insightful news coverage that is a hallmark of Sinclair's efforts to better the communities in which we operate and to rectify issues or inefficiencies that are present in our institutions. I'm very proud of the impact our stations have in making our communities a better place for all residents through uncovering and addressing issues that impact their lives as well as the support we bring from for them from fundraisers, public service announcements, and other charitable activities.

For example, in 2020, as an organization, we helped raise over 35,000,000 for nonprofit organizations, schools, agencies and local disaster relief, while also collecting over 9,000,000 pounds of food and 242,000 toys in addition to providing over 2,000,000 meals and distributing 52,000 backpacks and school supplies and over 18,000 coats. I want to also mention that in April, we announced we would be expanding our board and named a new director, Lori Beyer. Lori is our first female Director and reflects our commitment as an organization to seek out diversity of experience, skills, viewpoints and backgrounds in addition to strengthening our governance. Finally, I want to talk for a minute about the dynamics behind some of the efforts Sinclair is making to drive future growth and what we believe the impact could be on the organization in the years ahead. One of the bigger opportunities for our sports business is going direct to consumer with our regional sports content.

It is no secret that consumer cord cutting and the dropped distributor carriage of the RSNs have left many people scrambling for a way to watch their favorite local team. It is imperative that Sinclair be able to fill that void and provide consumers the sports programming they desire most in a way they choose to access it, through MVPDs or digital means. At the 2020, we had 52,000,000 RSN subscribers, of which approximately 35,000,000 households are unique. The 35,000,000 households represents less than half of the total subscribers possible in the RSN team's geographic territories, meaning the total number of addressable subscribers under the D2C model is theoretically more than double. As I mentioned previously, we are currently developing a product to reach these consumers on a direct basis via an app similar to the way consumers access over the top platforms.

Because the launch is still many months away, I do not have particulars to give out give to you at this time, such as the content that will be part of the subscriptions, the price of the subscriptions, or other details that will be made available as we approach the launch of the product. But what I can say is the intent is to complement the accessibility of the programming currently available through traditional ways through distributors carrying the programming. As I said, consumers make the choice on how they watch the games, and we and the teams desire to make the programming as accessible as possible, something that today, unfortunately, is not ideal. We believe that ultimately, the incremental revenues from direct to consumer will likely more than offset the loss of revenue from churn of subscribers of traditional distributor platforms. And much like the authenticated viewers who currently subscribe to the RSNs, the direct to consumer viewer will benefit from the upgrades that we are making to the digital viewing experience, including increased functionality of playback and recording capabilities, enhanced news and statistics, new programming developed in conjunction with Valleys and elements of gamification including Watch and Bet via ValleyDet.

These activities are all part of making the viewing experience more personalized and engaging through the utilization of live interactive programming, games, contests, polls, socializing and sharing content with other fans, even interacting with advertisers. These are all ways in which the viewer becomes more invested in the activity of watching sports, fueling a virtuous cycle where the more they participate, the more they watch. This is a dynamic that simply does not exist today in live sports viewing. Once you have the attention of an engaged viewer, incremental monetization opportunities become significant. This is another aspect of the business' potential revenue generation, and so far, it's totally untapped.

Another opportunity for future revenue growth is ATSC three point zero or NextGen TV. We've talked about this initiative for a number of years, but with 14 markets now having been launched, TVs being produced and sold that are able to receive the new signal, a mobile phone prototype being tested, and our Cast. Aero partnership with SK Telecom completing testing of its five gs ATSC three point zero mobile platform technology, monetization for ATSC three point o is approaching. There are a number of ways that NextGen TV will enable us and the entire industry to generate incremental revenues while also better serving the public. With the new technologies, Sinclair and other broadcasters will be able to unlock the inherent value of the broadcast spectrum.

An example would be the ability to transmit four to five times the volume of video content and data capable of being transmitted as compared to the current broadcast transmission standard. Another example would be the ability to provide higher quality, higher value, ultra high definition content with Immerso Sound. But the benefits can extend far beyond superior quality and immersive video and audio experience. Sinclair and the entire industry will benefit in a number of ways, including potentially wholesaling excess spectrum data capacities to other firms inside and outside the broadcast industry establishing conditional access on enabled subscription based services for video, audio and other products targeting the device, household, and geographies. In addition, the increased spectrum efficiencies can be used to help communities by providing robust emergency alerting and to help support remote learning to underserved broadband areas.

Because ATSC three point zero is a mobile first standard, it brings portability to the spectrum opportunities and does not have some of the inherent weaknesses and reliability issues present in cellular or WiFi service. Of particular important interest to many sectors, including sports betting, is the ability to reduce latency and provide synchronicity when watching live broadcast on all classes of receiving devices, including mobile devices. Our JV with SK Telecom, Castlight Era, is making great progress on many fronts that will bring new network appliances and services to make beneficial use of our broadcast spectrum. Enhanced GPS is but one of those opportunities. We believe that for Sinclair, there is approximately $1,700,000,000 of hidden spectrum asset value based on applying $1 per megahertz POP valuation to our spectrum, which was the average price in the last major SEC spectrum auction.

So to sum it up, while the monetization of a viewer is at one level today, we believe the monetization of that same viewer is a multiple of that level in the future as we execute on the initiatives I just mentioned, plus others, which are expected to drive revenue growth in the future. With that, I will turn it over to Lucy to cover the financials of the quarter.

Speaker 1

Thank you, Chris. First, some housekeeping items to note. As discussed on previous earnings calls, distribution revenues and sports rights in the local sports segment can be impacted by minimum game guarantees, which can result in rebates to be paid to distributors or received from the teams. After we reported our year end results in February, the NBA finalized their schedule for the second half of the twenty twenty-twenty twenty one season, which resulted in more local broadcast gains than we were anticipating in our guidance. As a result, the prior estimate of $420,000,000 of rebates to our distributors and which we fully accrued in 2020 is now expected to be approximately $19,000,000 less with the credit booked in the first quarter of twenty twenty one.

From a cash payment standpoint, $133,000,000 of the revised €400,000,000 due was paid in Q1 of this year, another €84,000,000 expected to be paid in the remainder of 2021, and 183,000,000 is expected to be paid in the 2022. The lower rebate favorably impacted first quarter distribution revenues and adjusted EBITDA in the local sports segment. The increase in the number of games also resulted in a $46,000,000 decrease in the rebates we anticipate from the teams this year. If you recall from last quarter, the total amount of rebates from the teams as a result of the minimum game guarantees was estimated to be $697,000,000 of which $542,000,000 was received last year and $155,000,000 expected to be received this year, which after the $46,000,000 revision is now expected to be $109,000,000 and of that, dollars 67,000,000 was realized in the first quarter of this year and the remaining 42,000,000 expected to be realized in the 2021. Lastly, in an effort to keep my prepared remarks higher level, I will not be going through all the detailed numbers as I have in the past.

Instead, in addition to our earnings release this morning, we have prepared a schedule which you can access on our public website that provides the detailed numbers. We believe this format will allow you to focus on the more important aspects and analysis of our results. So now turning to the Broadcast and Other Corporate and Other segments. Media revenues for the quarter decreased 4% versus the same period a year ago due primarily to the absence of meaningful political revenue with 2021 being a nonpolitical year as well as reflecting the sale of three stations in the last twelve months. Media revenues exceeded our guidance range on better than expected core advertising and distribution revenue.

Our core advertising, excluding the three stations that we sold, increased almost 1% year over year and was better than our expectations of down mid single digit percents. And if you adjust for the impact of the Super Bowl moving to CBS this year from Fox last year, our core advertising results for the first quarter would have been up low single digits compared to a year ago. The growth came primarily from the service and entertainment categories, particularly the sports betting companies. And if we compare first quarter twenty twenty one to 2019, same station core advertising revenues were up slightly, which is a very good result considering the economy is not fully recovered and the country is still working through the COVID pandemic. Distribution revenues for broadcast and other increased 2% versus last year and was above our guidance range, reflecting a slight improvement in subscriber churn than what we anticipated.

Media expenses were 3% higher in this year's first quarter versus last year due primarily to higher network compensation costs, but were lower than our guidance range on better cost controls and lower digital expenses. Adjusted EBITDAX, excluding $13,000,000 for nonrecurring items, was $173,000,000 down 22% from first quarter a year ago due primarily to the drop in political advertising, but once again exceeded guidance. Now turning to the Local Sports segment. Media revenues for the Local Sports segment declined 5% compared to the first quarter a year ago on lower distribution revenue from dropped carriage and higher subscriber churn, partially offset by the distribution rebate credit and higher core advertising revenue, which benefited from more games in the quarter than a year ago. Media revenues also beat guidance with the distributor rebate accounting for the majority of the outperformance.

Local sports media expenses for the first quarter were up 35% from a year ago due primarily to the greater number of games played during the quarter, which increased sports rights amortization as well as total game production costs. Also impacting the quarter was approximately $19,000,000 of transition services and one time costs primarily related to the mover of our RSM production facilities, the new Valley Sports app, and the rebrand. Excluding the impact of the higher sports rights amortization in the first quarter, media expenses were favorable to guidance by $12,000,000 due to fewer Major League Baseball spring training games played than expected as well as overall cost savings. Our local sports adjusted EBITDA for the first quarter of $9,000,000 was down from the prior year due primarily to the lower distribution revenue but beat the high end of guidance by more than $60,000,000 on the net rebates and lower production expenses. For the consolidated company, Sinclair's total company media revenues for the first quarter decreased 5% from the 2020.

Adjusted EBITDA, which excludes $32,000,000 of onetime expenses, declined to $182,000,000 for the reasons just outlined. But compared to guidance, revenues and adjusted EBITDA both exceeded the high end of our guidance range. First quarter consolidated adjusted free cash flow, which excludes the adjustments, was $9,000,000 which is approximately $117,000,000 better than the low end of the guidance range, primarily on the adjusted EBITDA beat. For the quarter, we had a $0.16 loss per share on 74,000,000 weighted average common shares compared to $1.35 of diluted income per share a year ago. Adjusted for the nonrecurring items, diluted earnings per share was $0.18 for the quarter versus $1.53 a year ago.

Now turning to the balance sheet. Consolidated cash at the end of the quarter was $941,000,000 including $5.00 $7,000,000 at FTG and $415,000,000 at Diamond. Neither credit silos revolver was drawn during the quarter. And as of the end of the quarter, the balance borrowed under our accounts receivable facility was 173,000,000 Total debt at the end of the first quarter was $12,540,000,000 and net leverage for the consolidated company at quarter end was 6.4x. Sinclair Television Group's first lien indebtedness ratio on a trailing eight quarters was 2.7x on a covenant of 4.5 and 3.9x on a net leverage basis through the bonds, which is now in our net leverage target range.

Diamond's first lien indebtedness ratio on a trailing four quarters was 7.2 times on a covenant of 6.25, which only springs, if the revolver is strong, over 35%. Diamond's net leverage was 9.3x. During the quarter, we paid down $12,000,000 of debt and paid $15,000,000 in common stock dividends. And while many companies have recently been buying their shares, but only as the stock market recovered, we remind you of the 21% of our total equity we repurchased last year at almost half our current trading levels. Turning to the second quarter and full year guidance.

For our Broadcast and Other segments, our second quarter media revenue guidance is up approximately 16% to 18% to $774,000,000 to $793,000,000 The increase is driven primarily by higher core advertising revenue off of pandemic depressed 2020. The expected upside is partially offset by lower political revenue as 2021 is a nonpolitical year. Second quarter adjusted EBITDA is expected to be between $157,000,000 and $172,000,000 compared to $145,000,000 last year. For the local sports segment, second quarter media revenue is expected to be up 33% to 36% to $821,000,000 to $836,000,000 As a reminder, there were no major live sports games played in the second quarter of last year and there were accruals for distributor rebates which lowered distribution revenue. For the full year, Media revenues are expected to be up 14% to 21%.

Second quarter adjusted EBITDA is expected to be up 75% to 88% to 192,000,000 to $2.00 6,000,000 Full year adjusted EBITDA is expected to be down 24% to 46% to $458,000,000 to $637,000,000 For the consolidated company, second quarter media revenues expected to be up 24% to 27%. Second quarter adjusted EBITDA expected to be up 37% to 49% for an adjusted EBITDA of $349,000,000 to $378,000,000 and second quarter adjusted free cash flow up 343% to $4.00 5 percent for free cash flow of $2.00 6,000,000 to $235,000,000 And with that, I would like to open it up to questions. Operator?

Speaker 0

Thank you. At this time, we will be conducting a question and answer session. You. Our first question is from Dan Kuros of The Benchmark Company. Please proceed.

Speaker 4

Great. Thanks. Good morning. Maybe, Chris, just on the RSNs, a couple of things. Just your commentary around DTC, I think, a little more prominent this time.

I just wanna get a sense from you, you know, maybe how much, if at all, there is a change in tone there. Originally, we thought, you know, 2022, more of a super fan experience. You know, obviously, you've got the ongoing, you know, challenges with the distributors, but and and clearly a big TAM. So just to the extent you can kinda give us some color around, understanding you have to navigate your existing relationships, how you think that kind of there might be a key change there. And then you also talked about kind of improving dayparts.

I think the advertising guide in q two was surprisingly strong. You know, historically, I think it's been like ninety, ten distribution advertising. You know, to the extent that you are in talks with Valley and maybe even others to improve dayparts and kind of how you think the ad yield can be improved, and maybe kind of what the longer longer term

Speaker 3

split between ad and distribution could look like would be super helpful. Thanks. Great. Thanks, Dan. Look.

I think if you're noticing a difference in tone on direct to consumer for sports, I think that is an accurate pickup as we dig into the details of our business plan and really, really realize what what the other opportunities are when you get a a fan that's coming in day in, day out to watch your games on a digital interactive platform where you know who the viewer is and you can funnel them into other opportunities, which are massive adjacencies growing really, really fast, like sports betting, like like merchandise, like what's going on with n NFTs. And, and that becomes a platform for, for interaction and socialization for, the fan. We, you know, we're we're very excited about what that means because we have the largest collection of premium sports rights in the country. And so we have this tremendous foundational piece, And, and we're we're filling out our plan, and we we've got our our our TV Everywhere app was launched a couple weeks ago. It's it's it's gone well, and and we're gonna continue to build on that.

And so I would say that you're you're accurate in picking up that increased bullishness on, on where we're headed, with direct to consumer. And then as it relates to, other dayparts, we did announce that MOU with, with Dally's. There's a lot on the drawing board there to improve our non game programming, which if you followed us, you, you would know that that was there's really nothing of value outside of the pre, post, and the game on the RSNs, and it's just a latent opportunity. And and they the arrangement with Valleys is is a great arrangement for for us because it enhances the programming that we're gonna have in these areas while taking little to no risk on the financial side, to get that programming. So it's really a best of all world sort of situation.

But what you're seeing in the numbers does not reflect the upgrades that are on the drawing board for the non game programming. Those actually haven't hit yet. And so, that's just a strength in sports advertising, core advertising that's really just blown us away here so far and the recovery that we've seen post COVID. And strength of sports and advertising related sports has never really wavered at all even through COVID and has continued to increase on a per game basis as we mentioned earlier in our comments. So when when when that new programming starts to hit outside of the game, the pre and the post, that's gonna be an additional upside.

So Dan as well as we'll we'll

Speaker 5

attack this with our yield management system. It's an AI machine learning system that will will have a dedicated analyst to look at, extracting a higher yield per game. As well as with that new app launch, we'll be able to geo target. So as you know, the RSNs are in multiple DMAs. We'll be able to target ads.

And during political season, we'll be able to capture more of the political dollars by zeroing in on those POs and specific DMAs as well. And then through the gamification, in our interactive division, we'll be launching some free to play beginning this year, and we'll be able to cap capture dollars sponsoring these free to play. So as well as brand content opportunities. So there's numerous opportunities to unlock with the RSNs that that we're in in this stuff.

Speaker 4

Got it. That's that's super helpful. Just housekeeping. I'll let everyone ask all of the core questions. Just, Lucy, what was political in q one?

Speaker 1

Q1 of this year, we had about $4,000,000 for the total company.

Speaker 4

Got it. Perfect. Thanks very much, guys. Thanks, Dan.

Speaker 0

Thank you. Our next question is from John Janatus of Wolfe Research. Please proceed.

Speaker 6

Thanks. Good morning. Maybe a quick follow-up to Dan's question just on direct to consumer, Chris. Just wanted to clarify, do you need to get consent from distributors prior to doing it? And can you talk about the process in terms of the leagues, teams and I guess distributors?

Are those on parallel paths? And could any of those things impact timing? And then maybe on a related topic, with baseball season starting and no new news on the carriage front related to YouTube or Hulu, can you talk about your confidence level about getting something done as we get deeper into the season?

Speaker 3

Sure. Thanks, Sean. Well, we have already cleared the path with the distributors to launch direct to consumer. So that's the answer on that question. And we have rights direct to consumer rights really, for the vast majority of our teams.

We are in discussions with the leagues and the teams on enhancing some of those rights to make the product even better. So that's what's going on right now. I don't see that, being a threat to timing. The the plan is to launch in the 2022. And, and then on your question around carriage, look, we we don't comment on the specific status of any one distributor discussions.

So, you know, only I the only thing I can say is time will what time will tell if these distributors will return.

Speaker 6

Alright. Thank you very much.

Speaker 0

Thank you. Our next question is from Stephen Cahall of Wells Fargo. Please proceed.

Speaker 7

Thanks. So Chris, maybe just to dig a little more into the RSNs, maybe you can just tell us a little bit of of what happens next. I think that probably the Dish discussion is ongoing. So I'm just curious if you would accept an agreement with Dish that that didn't include them. And then if we kinda think about where you might be with the RSNs if you come in at the low end of your guidance this year, it could mean a renegotiation of debt or some more liquidity coming in.

And I know these are what if scenarios, but I think it would just be helpful if you could maybe just talk about a little bit of of how you're thinking about those scenarios. And then, Lucy, the buyback commentary was very helpful. You certainly were opportunistic last year to take advantage of the share price dislocation. As you think about uses of broadcast cash flow going forward, is it debt reduction? Is it being opportunistic on maybe potential end market station m and a, participating in a diamond recapitalization?

Maybe just help us think about uses of broadcast cash. Thanks.

Speaker 1

Why why don't I do that question first, and then and Chris can talk to the other one. Right, uses of free cash flow really haven't changed from what we've been talking about for years. And it doesn't really matter if you're on the STG side of the stack or the diamond side, right? It's all about how do we delever, how do we increase value, long term value for the companies, whether it's through acquisitions, investments, reinvesting in the companies on the STG side, which has been the company that has funded the equity returns, right? It's also been about the equity returns.

So all of those things are still on the table, right? Equity returns, delevering, strengthening the balance sheet and making sure that we're reinvesting in the company with the free cash flow to continue to grow for the long term.

Speaker 3

Great. And so on on your question related to Dish, look, we really can't be negotiating in public with Dish for, I think, obvious reasons. But I will note that, excuse me, we have had tremendous success with the traditional MVPDs when we come with the entire suite of our programming on offer. In fact, we know and we have been successful with with all of them under that circumstance, save for Frontier who, you know, filed for bankruptcy. So, it will be a pivotal time.

And, you know, of course, we can't predict. We don't have a crystal ball what will happen, but but I I will note that, you know, that has been a successful strategy for us, with the other traditional MVPDs. And then as it relates to to Diamond and its capital structure, again, we're being very proactive on that front. We're open to discussions with our stakeholders. Indeed, we are in active discussions with a large segment of our capital constituency with respect to structures that will help us achieve our goals, which Lucy mentioned, including strengthening our balance sheet, optimizing our cost of capital, funding future growth opportunities, maximizing shareholder returns and delivering the entity.

Speaker 0

Thanks for the color. Thank you. Our next question is from David Hamburger of Morgan Stanley. Please proceed.

Speaker 8

Hi. Good morning. Thanks for if I could, two questions. Can you talk a little bit about I know you've recently renewed your programming contracts with a few teams. And talked about giving equity in the stations and how that helps to attenuate some of the escalating cash costs associated with those contracts.

Can you help us dimension like what has been the cost savings? And maybe can you give us a forward look? How many contracts will you be renegotiating here this year and your expectation for how those will be negotiated? And then a second question, have some, if I may.

Speaker 3

Sure. When when when we go into, renewals and we don't we don't specifically say which which teams are up for confidentiality reasons. But every year, we have a few teams, that have come up. So last year, we we obviously had the Marlins and the Brewers. Those were, you know, successfully renewed.

And this this coming months, we've got a handful of teams. With 45 teams in the total portfolio, they're, you know, over over sort of a fifteen year spread of of, contract expirations. You've got a handful of teams every year that you've got to deal with. So it's it's really sort of normal course as as you roll through the business. And our our one of our explicit goals, and it it already exists in the portfolio when we took it over, is to variabilize more of the cost structure.

So when we go into a renewal, specifically with anchor teams on on the MLB side, we, we have we always try to negotiate in, an ownership stake in the RSN, which then takes a portion of what they, want in terms of total rights fees and makes it variable depending on the performance of the RSN. And there is no rule of thumb I can give you besides that, you know, most of the stakes are minority stakes. And, just depending on how big the rights fee is, you know, and and how large the income projected out of the RSN will be for that minority stake, then, you know, determines how much of the total rights fee will be variable versus fixed. And so they're really I without getting into specifics on a specific contract, which I can't for confidentiality reasons, I can't really give you more, detail than that. But to say that we really do like that strategy, it it does variabilize more of the cost structure, and it aligns interest with the teams.

And and you can see just sort of in our overall on our overall numbers what's what's happening in terms of what you know, I think we're at mid single digits in terms of rights fees going up, and we do expect that to head downwards in terms of annual escalation on an overall perspective.

Speaker 8

Okay. Thanks. My second question is with regard to guidance at Diamond. The better expected EBITDA, know, was driven a little bit by rebates in the first quarter. But if I look at the midpoint of guidance for the year now, it's come down relative to the guidance you provided for the fourth quarter earnings call.

Can you talk about what's driving I would anticipate if there was kind of better expected outcome in 1Q, we wouldn't see a guide down for the year. So I'm wondering what's driving that guide down. Maybe you could also in context, Luci, you had mentioned last quarter $100,000,000 of incremental expenses associated with growth initiatives. And can you put this in the context of there was a $368,000,000 reduction in cash at Diamond in the first quarter. I know interest cost and the sports rights payments are higher in the quarter.

And you mentioned the $100 plus million of rebates to distributors. But can you talk a little bit about liquidity and the cadence of cash flow as you look at Diamond for the remainder of the year and you're going into 'twenty two?

Speaker 1

Okay. So three questions here. Let me do the cash walk first. So the cash usage from the December balance to first quarter, you've hit on all the main points, right? There was the EBITDA.

We had the semiannual bond interest that got paid in Q1 and the rebates, distributor rebates that we paid. And then the the rest of that is gonna be working capital changes. So you've for the most part. So you've hit all all the key points on the change in cash. Look, based on our current assumptions and and, again, acknowledging that there's still a lot of uncertainty, right, with the economy and COVID and and churn rates, etcetera.

But, you know, based based on the assumptions, when we look out twelve months, we believe that Diamond has sufficient cash and revolver availability to fund all its debt services. So you should be fine there. And then your question on the 100,000,000 of the incremental expenses, so that is made up of of multiple things. It's made up of of new initiatives such as gamification and and new app features, right, which the old app didn't have and sort of a regular OpEx inflation. In there, also all the replacement services that were standing up such such as the going into the Encompass facility to get out of Disney's facilities, the development of the new app, as well as all the rebranding that we did around the, the, new name.

But at the same time, we're also continuing to pay Disney and Fox for transition services as we build up our own services. So there's a duplication of costs that are running through the model for the year. So that's primarily what's in that $100,000,000 And so when I think about it, a good $60,000,000 $65,000,000 of that does not come back next year because it was either the duplication of services for the rebrand or for the development of the app cost for the most part. And then your first question on the midpoint for the EBITDA. So as you know, right now, we still don't have DISH, Hulu, or YouTube up and running, and so that that will affect the top end of the range.

As we as we said last quarter, there were a range of outcomes that could happen during the year, whether it was on carriage, whether it was on churn, whether it was on advertising. And so with those three still not all, we've taken the top end of the range down. But I think the important part here is that the lower end of the range has increased for the year. So we went from the $441,000,000 to $458,000,000 at the low end. And so that's the more important piece that I think everybody should take away from.

Speaker 8

Okay. Thank you.

Speaker 1

Mhmm.

Speaker 0

Thank you. Our next question is from Aaron Watts of Deutsche Bank. Please proceed.

Speaker 9

Hi, everyone. Thanks for having me on. One quick follow-up on the core advertising at the stations. Encouraging to hear it seems like things are turning a corner. Lucy, I believe you said kind of flattish in the first quarter versus last year and April looking much better.

How is core trending for 2Q overall?

Speaker 5

We're looking at it slightly down against 2000 19, which is our benchmark. But, again, the business is being placed month to month, and that's why it's encouraging to see April. May have started off strong, and then we'll gauge where where we're going. We're cautiously optimistic as you see traveling increasing, businesses opening up, and so we think we'll benefit from a a more robust economy.

Speaker 3

Yeah. And I would just add to that. Like, you know, we we can as I said, we've been very, very happy with what we've seen on the core advertising front, and the only thing that gives us a little bit of pause for q two is is the chip shortage on auto. But all the others all the other categories have have been very, very strong, and look very, very strong in q two. So, you know, we're just you know, it's been a great bounce back in the economy overall.

Speaker 5

And we're we're in great shape to with our portfolio as the the gaming industry starts to spend and unlock what y'all have been asking for the last eighteen months, it it's now happening. And with our portfolio, we're we're able to capture those dollars in a significant way.

Speaker 9

Okay. Great. That's helpful. You know, second question, any material change in the underlying subscriber trends and churn for both the stations and the RSNs here to start the year? And and relatedly, on the Cox renewal you mentioned in the release, just wanted to confirm that the RSNs had previously been carried across their platform and that the agreements were merely extended to be coterminous with the, new broadcast deal.

Speaker 3

Sure. So we did see a slight improvement in, subscriber trends in the last quarter. Nothing all that material. So our outlook remains the same in terms of, mid single digits decline on broadcast and high single digits for for RSNs. And, and then the Cox deal, we're very pleased with the outcome on the Cox deal, and we did sync up and and and yeah.

We did sync up all of our content under, the same arrangement and and expiration date.

Speaker 9

Okay. Great. And one last one for me. And this is really really just to hone my understanding on some of your comments around your rights on the sports side, Chris. And correct me if I'm wrong on any of this, but I believe that MLB turned streaming rights back to the teams, but the NBA and NHL still negotiate those rights at the league level.

If that's alright, when are those streaming agreements up for renewal with the NBA and NHL? And are there currently any discussions with those leagues on either extending that deal or what the direct to consumer offering, streaming offering could look like there? And I know you touched on that earlier, just wanted to clarify those points.

Speaker 3

Yeah. No. You you have it right, Aaron, in terms of what you remember. The NHL and NBA, deals naturally, expire at the end of this season. So, it actually was very fortuitous because we wanted to expand and enhance the rights we were getting to make the product even better, as I mentioned.

And those renewal discussions are ongoing as we speak.

Speaker 9

Okay. Thank you for the time.

Speaker 0

Thank you. Our next question is from Lance Vitanza of Cowen. Please proceed.

Speaker 10

Hi guys. Thanks for taking the questions and congrats on the quarter. I have two questions, if I could. The first is, Lucy, I agree on the guidance for Diamond. I mean, seems pretty obvious, given where the bonds are trading, that the focus should be on the upside to the low end of the guidance.

I think, objectively, you'd have to look at this guidance as an improvement versus the prior guidance. I know I did. My question is, you mentioned range of potential outcomes. To what extent does the low end of your new guidance contemplate or to what extent is the low end of your guidance contingent upon, I should say, the return of DISH, Hulu and YouTube?

Speaker 1

Yes. So as we talked about this on our last call, Lance, well, so low end would incorporate no carriage returns as well as a range on subscriber churn and advertising ranges, which I'm not going to get into what those are. But that would be the low end, and the upside would also have the a range for subscriber churn, advertising, and some amount of carriage return.

Speaker 10

Okay. But so so just so I'm clear, though, you what you're saying is that even without the return of Dish, Hulu, and YouTube, you you're still covering your interest expense?

Speaker 1

Correct.

Speaker 10

Okay. My other question is with respect to the new app. You know, launched last month. I know it's early, but and I know that, Chris, you you did get into this a little bit during the call, but could you could you give us a little bit more color on what the feedback has been like? I haven't had a chance to play around with the app.

But to what extent is it branded Sinclair versus Bali Sports? Could you remind us who runs the app? I mean, is it your app or is it Bali's app? And how does the app help Sinclair versus helping drive revenue to Bally's eventually?

Speaker 3

Sure. So, yeah, the the app was launched literally, I think it was just two weeks ago last month, and it is branded Valley Sports. And I'll Rob, you

Speaker 7

know,

Speaker 3

who oversees our digital operations, talk more about the feedback and what we're seeing on the app. But it is it is a a Sinclair asset. It's not a Valley's asset. You can think of you know, just to sort of clear up some potential confusion, Valley Sports is the brand for our sense. And, it is, you know, it is a brand that that, you know, that we have rights to exploit on any platform to even to license out to other people.

And and and the rebrand has gone amazingly well. I think we've just the team really killed it on the rebrand. The product looks that much better. We've gotten compliments from all the stakeholders. That's been an improvement in the new product that we put out.

And and quite frankly, you know, it's amazing to do that when you're dealing with a brand that's so well known as Fox to switch it over. And within a short period of time, people just think of our networks now as Valley Sports. They don't think they're they're not connecting that necessarily to, you know, the casino company. And and that was the objective. So objective achieved.

And the app is an extension of that. So it it's been launched. It it was a big technical feat to convert over from Fox Sports GO. It's very a complex undercarriage to to manage all the rights, and we've we've pulled that off successfully. Now it's about improving and enhancing the features, in the app.

And so I'll turn it over to Rob. Well, and you also asked about just economic opportunity. It it represents a large economic opportunity for the RSNs as it relates to a bunch of impressions, which were way under monetized, in the FOX Sports GO app. They they weren't even targeted. So it really does build the business, for Sinclair, in in a big way.

And then it and then it and it does what what Valleys bargain for, which is promote the brand Valleys and connect over to their sports betting app, which we'll launch shortly. So it really is a very symbiotic relationship there. And I'll turn it over to to Rob to talk about some of the feedback.

Speaker 5

Yes, Lance. So our product team did a great job. We spent fifteen months building this app, trying to focus on full improvements, Fox Sports app, as feedback from our teams, and the viewers was a little bit long in the tooth. So it's a modern day app that only needed an update. It was not you had to go find the Valley Sports.

If you already have Fox Sports, it was just an update for that app, and it seamlessly went from Fox Sports to Valley Sports. And we are truly excited in just a short few days. We've had over 2,500,000 video views. And like Chris indicated is that we're gonna be able to unlock each impression from those video views. In the past, it was sold more of a share of voice, not geo targeted.

And through our Sinclair Sports Group, we have a dedicated digital team selling every single impression, which will unlock that value. Our interactive team, which is led by JR McCabe, will unlock the gamification. So there's numerous ways that we'll be able to monetize the app along with solidify the brand of Valley Sports itself.

Speaker 0

Thank you. Ladies and gentlemen, this ends our question and answer session. And I would like to turn the call back to Chris Ripley for closing comments.

Speaker 3

Thank you all for joining us today. If you should need more information or have additional questions, please don't hesitate to give us a call.

Speaker 0

And this concludes today's conference. You may disconnect your lines at this