Sinclair - Earnings Call - Q2 2020

Transcript

Speaker 0

Greetings and welcome to the Sinclair Broadcast Group Second Quarter twenty twenty Earnings Conference Call. At this time, all participants are on a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.

Lucy Rutishauser, Executive Vice President and Chief Financial Officer. Thank you. You may begin.

Speaker 1

Thank you, operator. Participating on the call with me today are Chris Ripley, President and CEO Rob Weisbored, President of Broadcast and Chief Advertising Revenue Officer and Billy Chambers, COO and CFO of Local Sports. Before we begin, Billy 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 second 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, 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

Thank you. Like many of you, we eagerly await discussing the state of the company without the backdrop of COVID-nineteen. The past five months have certainly been challenging for the country, the economy, the industry and us as we face the pandemic's impact on businesses and consumers alike. First, I want to say how very proud I am of our employees who have done a tremendous job of adapting quickly to a new way of doing business. It is through their hard work and perseverance that we've been able to operate our business seamlessly without sacrificing the quality that defines our company.

We are already identifying learnings that we can take away from this period of time that can make us a stronger company going forward. With regard to the second quarter trends, as we move through the quarter, we did begin to see signs of improvement in the advertising market. Just as we anticipated and guided on our last call, after a very challenging April in which core advertising for our Broadcast and Other segment declined 43% year over year, June improved to a 26% decline resulting in second quarter core advertising performance for those segments to be down 36 and in the middle of our guidance range. Our decision to give you second quarter guidance on the May call was driven by our commitment to be as transparent as possible while also acknowledging the limitation that giving guidance for the entire year was impractical due to the wide range of variance that could result from uncertainties in timing, pace and magnitude of recovery. While we are still faced with many of those same challenges and changing dynamics around the effects of the pandemic making forecasting more difficult than usual, we have decided to once again provide guidance for the upcoming quarter.

As a reminder, we are starting to enter the peak political season, which is still expected to be a record political year and will help mitigate the weakness in core advertising space. We are pleased with the professional sports leagues that have resumed their schedules, although they are short. It is very clear that viewers are excited as well with ratings for the first day of the MLB season up 32% on our RSNs as compared to last year's opening day viewership. And as we've discussed previously, our contracts with the sports team already contemplate scenarios where there may be shortfalls in the number of live games delivered to us. And in such cases, we are entitled to remuneration from the teams for any games falling short of the guarantees that are defined in the contracts.

And conversely, we have distributors to whom we guarantee minimum gains of live games in contracts with us. I will leave it to Lucy to explain some of the ramifications of timing and impact of rebates due to and from Sinclair as a result of the shortened twenty season. I want to emphasize that contrary to reports out in the public at this time, we do not expect rebates from the teams to be greater than what we pay out to distributors. Given differences in the way rebates are calculated in the team versus distributor contracts and other variances in the contracts. Speaking of our sports business, there are a lot of exciting things going on behind the scenes at Sinclair.

As we announced several weeks ago, we hired Steve Rosenberg, a highly accomplished broadcast and programming executive as President of Local Sports. Steve along with Billy Chambers, who is the Local Sports COO and CFO will report into Rob Weisborn and help fill the void left by the upcoming departure of Jeff Krolick, who is retiring as the Head of our RSN business at the end of this month. I want to personally thank Jeff for all his assistance and hard work in helping integrate the RSNs into Sinclair. He has been a valuable resource to me and the rest of the company and we all wish him well in future endeavors. A few words about Steve.

For over twenty five years, Steve has been a dynamic force in broadcasting, excelling in a number of key sales, marketing, distribution and executive management roles. During his career, Steve has been a true pioneer of innovative and creative sales, marketing and programming efforts. Steve will play a key role in growing our sports business. His ability to challenge the status quo and bring about innovative ways to monetize opportunities will be fully utilized by Sinclair. One of its first priorities will be to use his programming expertise to help elevate our non game programming on the RSNs and our stadium network.

The majority of programming hours on these networks does not involve live games. So there is a significant opportunity to improve our viewership and revenue generating capabilities in these time periods. I also want to mention that Scott Shapiro has taken an additional role of Chief Strategy Officer of Sports and will focus on some of our larger growth opportunities such as those associated with legalized sports betting. We have other exciting developments in our sports business coming up as well with a number of significant growth opportunities on the horizon. As consumer viewing habits continue to evolve, we are committed to giving them an exceptional experience when and where they choose to watch us.

We're expecting the sports app that is in development will give viewers an experience unlike anything they've encountered in the past with enhanced graphics and sound as well as the ability to interact with the content in numerous ways including with advertisers and free to play games. We spent a lot of time meeting with many of the major players in sports betting and we expect to be able to more fully detail our plans in this area later this year. As the exclusive provider of local sports content for more than half of the MLB, NBA and NHL teams, we believe we are in a unique position to monetize the significant sports betting opportunity that exists. Other highlights in the quarter include next gen TV launches in multiple markets including Las Vegas, Nashville, Pittsburgh, Salt Lake City and Portland, Oregon with another 10 or so Sinclair markets targeted by the end of the year. It's exciting to see this groundbreaking technology in action.

There has been a great deal of effort within Sinclair for many years to create and bring this technology, the future of broadcast TV to the marketplace. Its impact, will be felt far beyond traditional broadcasting applications. Yes, next gen TV will deliver significant enhancement to television broadcast quality, but that just scratches the surface. The new platform gives broadcasters significant flexibility in using their broadcast spectrum. For starters, it dramatically increases spectrum capacity allowing for more channels and targeted content to be sent over the existing spectrum band.

Those signals will reach deep into buildings, moving vehicles and eventually people's phones opening up a wealth of opportunities for applications as diverse as targeted advertising, data delivery, premium content or sending advanced emergency information all in a mobile and portable manner. The signals also have interoperability with the Internet including five gs creating even more ways to satisfy consumer needs and to monetize the new technology. I applaud all of our employees who have been involved over the many years to make this game changing technology a reality. Innovation is the lifeblood of this company and it never ceases to amaze me the accomplishments of our talented employees at Sinclair are able to achieve. In July, we came to terms with Comcast to renew distribution rights for all of our businesses including our broadcast stations, Tennis Channel, the RSNs and YES!

As well as a full launch of Marquee in time for the Cubs first game of the season. The narrative that has been on the street regarding fears around completing the deal with Comcast or that terms will be unfavorable to Sinclair or that our broadcast stations will be dragged down by the RSNs was just incorrect. As we've said, we are we were confident that we would reach an agreement with Comcast that was positive for us and we are happy with the outcome in all regards. This agreement is another example of the benefits that come from negotiating for a large diverse set of very popular programming assets in this business and it is an undeniable affirmation of the importance of local news and sports, which consistently get high ratings and are highly valued by distributors, subscribers. It is also important to note that our deal not only includes the launch of Marquee, but expanded viewing coverage of the new RSN beyond where the Cubs RSN was previously carried.

This is something Comcast doesn't do for its own RSN in the Chicago area and didn't even in the past when the RSN included the Cubs. This was accomplished without giving up carriage of other assets in our portfolio and while still achieving what we believe are favorable rates throughout our portfolio. With the completion of the Comcast agreement, we have now locked up almost 85% of the RSN's total subscribers for at least two years and beyond. Also during the quarter, we agreed to a multi year renewal for eight stations with ViacomCBS. And on the sports side, we have an agreement principle with one team that expired at the end of last season.

In June, we announced we would be launching a new headline news service in early twenty twenty one focused on breaking news stories as they develop and sourcing them from our comprehensive local news resources. Think of it as breaking meaningful local news stories on a national level. In its initial phase, the new service is expected to be launched on approximately 50 of our CW and My TV network affiliates and will be broadcast from 6AM to 9AM each weekday as well as in our free ad supported app STIRR. On the community front, we awarded our annual broadcast diversity scholarship to 10 talented students who are pursuing a career in the broadcast industry. And in July, we launched a new campaign with the American Red Cross for urgently needed broad donations utilizing our news production resources to create messaging and awareness of the urgent need and to encourage viewers to donate blood.

The campaign's Day of Commitment was held on June 30 with the campaign continuing through mid August. Finally, want to discuss I want to address the initiatives around our capital structure that we continue to evaluate and act upon. We continue to believe our securities are significantly undervalued. This belief is reflected in our actions, including the continued repurchase of our equity during the quarter. Since February and through today, we have repurchased approximately 19,000,000 shares representing 21% of the total shares outstanding as of the beginning of the year.

While our proposed exchange of Diamond's unsecured notes resulted in lower participation than we expected, we believe the lenders decision not to exchange indicates their belief in the long term positive value of Diamond. As indicated previously, we continue to engage with financial institutions on ways to optimize our capital structure, delever and lower our cost of capital. Now I'll turn it over to Lucy to discuss our financial performance.

Speaker 1

Thank you, Chris. First off, I want to echo Chris' appreciation of all of our employees who have done a terrific job of navigating the current environment and enabling us to perform at a high level as a company. Keep in mind that the inclusion of the Sports segment this year, which was not in last year's first eight month numbers, is responsible for many of the larger changes in our actual results versus the same period last year. Therefore, in many cases, I will be speaking about results versus prior year pro form a, which is a much more meaningful comparison and assumes we own the RSNs in those periods. Before getting into the results, let me walk you through the accounting for the distributor and team rebates and the sports rights amortization as a result of the fewer professional games played.

Pursuant to GAAP, we are required to accrue the total estimated rebate amount owed to the distributors across Q2 through Q4 of this year, which will reduce distribution revenue in each quarter. The cash outlay to the distributors, however, is not expected to occur until after 2020. On the team side, the rebate associated with the overpayment for the fewer games to be played in the season is expected to be realized in part in the third quarter with the majority in the fourth quarter of this year as lower sports rights payments. Therefore, adjusted EBITDA for the year is expected to reflect both the team rebates to us and our rebates to distributors. And as Chris mentioned, we do expect rebates from the teams to be greater than what we pay out to the distributors.

However, there will be a timing as it pertains to the cash flow with us realizing the benefit of the lower sports rights payments this year in advance of the distributor rebates being made in after 2020. Sports rights amortization, which is included in the media and programming production expense line and which is noncash and not factored into the calculation of adjusted EBITDA, gets recognized over the applicable sports season. So in the second quarter, there were no professional games played, and therefore, sports rights amortization was minimal. We expect sports rights amortization for the third quarter to increase, mirroring the high level of sports games currently scheduled in the period. For fourth quarter, the sports rights amortization is expected to be much lower with baseball's regular season likely completed and with NBA and NHL games for the 2021 season likely starting later in the quarter than normal.

All right. So turning to the consolidated company results. Consolidated media revenue for the second quarter increased $539,000,000 due to the inclusion of the Local Sports segment, which was not in last year's second quarter results. On a pro form a basis, total media revenues of $1,260,000,000 were down versus last year's second quarter media revenues of 1,710,000,000.00 due to a number of factors which we have previously discussed, most notably the weakness in the advertising market due to the pandemic, the absence of live sports, the associated accrual for the distributor rebates and the absence of discharge fees. As compared to guidance, Media revenues came in below the range we gave on our last earnings call by $119,000,000 However, this is important, this is due to the $124,000,000 of the distributor rebates that we accrued during the quarter, which was not included in our guidance last quarter because at that time, we didn't know how many games were the leagues were going to schedule.

So if you exclude the accrued rebate, our revenue would have been within our guidance range. Media revenues of $669,000,000 for our Broadcast and Other segments, which excludes DRSNs, were within our guidance range with both advertising and distribution revenues coming in as expected. As Chris mentioned, the advertising market improved as we moved through the quarter. June ended with our Broadcast and Other segments declining 26% over the same period last year, which was a significant improvement over the 43% drop in April. July has seen the improvement continuing, finishing down 20% for the month.

And even as political ramps up in the third quarter and is expected to displace other advertising categories, we still expect to finish the third quarter down 15% to 22% in core advertising, which is an improvement over the second quarter performance. Subscriber churn in the second quarter across all of our segments was 7% on a year over year basis. That's slightly higher than the trend over the past few quarters, but understandable given the impact of COVID on the economy and the number of people that are unemployed in the country. Consolidated media operating expenses of $569,000,000 were down 50% on a pro form a basis compared to last year's $1,139,000,000 dollars and that's due to the absence of the live games, the lower sports rights amortization and proactive cost controls. Our focus on managing our expenses during the quarter drove the $11,000,000 positive variance to guidance.

Adjusted EBITDA on a consolidated basis increased 31 to $254,000,000 due to the inclusion of the Local Sports segment. On a pro form a basis, adjusted EBITDA declined $391,000,000 driven by a $330,000,000 decline at the Local sports segment and a $61,000,000 decline at the broadcast and other segments. The sports segment adjusted EBITDA of $110,000,000 was down from last year's pro form a $440,000,000 and that's due to the distributor rebate accrual, the absence of DISH, which was in last year's numbers, and the impact of COVID on the number of games. It is important to keep in mind that unlike GAAP results for the Sports segment, which included minimal amortization due to no live sports being played, local sports adjusted EBITDA reflected the continuation of sports payments made during the quarter. So just to put this simply, the sports segment results during the quarter reflect the accrual for the rebates to the distributors, but no benefit from the expected rebates from the teams, which are expected in the second half of the year.

Again, excluding the accrued rebate, we beat total company adjusted EBITDA on additional cost controls at the Broadcast and Other segments. Consolidated adjusted free cash flow, excluding the nonrecurring legal litigation COVID transaction and regulatory items of $9,000,000 was $46,000,000 That's $79,000,000 below the lower end of our guidance. But again, excluding the rebate accrual, we exceeded our guidance slightly. For the first six months of twenty twenty, adjusted free cash flow was $156,000,000 And using our estimated share count through yesterday of approximately 79,000,000 shares outstanding, that reflects additional shares that we bought back here in the third quarter, that results in free cash flow per share of $2.11 in the six month period. Diluted earnings per share on 81,000,000 weighted average common shares at June 30 was $3.12 in the quarter or $3.21 when adjusted for nonrecurring items.

Our liquidity position in both credit silos is strong with neither silos revolver drawn and both silos having ample cash on hand. During the quarter, we launched an exchange for all of the outstanding Diamond 6% senior notes. Dollars 66,000,000 of the aggregate principal amount or approximately 4% of the outstanding issue was exchanged for $31,000,000 of new 12.5% notes and cash payments of approximately $10,000,000 In total, the transaction reduced our debt by $35,000,000 Now while we would have liked to have exchanged more of the bonds, the feedback we received was that the noteholders agreed with us that the bonds are undervalued and so chose to hold on for the future upside. As Chris said, that is a strong message for all holders of our cap structure. We continued our stock buyback program during the quarter, repurchasing over 5,000,000 shares of our common stock at an average price of just over $16 per share.

So far for the third quarter to date, we have repurchased over 4,000,000 additional shares. Since the start of the year, 21% of the total shares outstanding and 29% of the float have been bought back. During the quarter, we continue to execute on our plan to reduce costs with savings both for the short term and the longer term. We continue to scrutinize all spending, delaying or eliminating nonessential expenses, including open positions, media and promotional spend, T and E and CapEx, in addition to the variable expenses to come with fewer games and lower revenues. And we continue to look for additional opportunities.

We are confident that we can handle a prolonged period of weakness by executing the opportunities identified as well as additional steps we could take if necessary. Turning to segment details. For the Broadcast and Other segments, Media revenues decreased 7% versus the same period a year ago as advertising revenue was significantly impacted by the pandemic. A 36% decline in core advertising revenue was partially offset by higher political revenue and an increase in distribution revenue. The Broadcast segment's revenue also benefited from $25,000,000 of management incentive fees paid by the local sports segment that was not in last year's Q2 results and gets eliminated in consolidation.

We came in at the middle of our revenue guidance range and $12,000,000 over the high end of our adjusted EBITDA guidance. For the Sports segment, Media revenues of $616,000,000 decreased 38% versus pro form a results of $992,000,000 in the second quarter of last year. Much of the decline was expected and was due primarily to the absence of DISH, the lack of advertising revenues related to the postponement of the games, subscriber churn and the accrual distributor rebate. Excluding the accrued rebate, we were very close to guidance. Media expenses in the second quarter were $106,000,000 an 84% decline to last year's pro form a six fifty nine As explained, this is primarily the result of minimal sports rights amortization being booked in the quarter due to no professional games being played.

As compared to guidance, media expenses were slightly higher as a result of slightly higher than expected production programming expenses. Local Sports adjusted EBITDA of $110,000,000 for the quarter was below pro form a results of $440,000,000 last year and below our guidance range of 190,000,000 to $2.00 $2,000,000 again, due to the distributor rebate accrual. And if you exclude the rebate accrual, we would have beat our local sports adjusted EBITDA guidance. So hopefully, you're seeing a trend here as it relates to the distributor rebate accrual. If you back that out, we were we either met or exceeded all of our guidance in the second quarter.

So now turning to the consolidated balance sheet. The consolidated cash at the end of the quarter was $622,000,000 That includes $171,000,000 at STG and $436,000,000 at Diamond. Total debt at the end of the second quarter was $12,399,000,000 and the net leverage ratio for consolidated Sinclair at quarter end was 6.4x. Sinclair Television Group's first lien indebtedness ratio on a trailing eight quarters was 2.6x on a covenant of 4.5 and 4.5x on a net leverage basis through the bonds. Diamond's first lien indebtedness ratio on a trailing four quarters was 6.5x on a covenant of 6.25%, which again only springs if the revolver is drawn over 35%.

On a total net leverage basis through the bonds, Diamond was levered 8.5x. In terms of guidance, there is still much uncertainty around the resilience of the economy and COVID's impact. Our guidance will therefore be limited to the third quarter. Keep in mind that any change to the expected plans in the sports leagues could cause our reported local sports results to deviate meaningfully from our guidance. For our Broadcast and Other segments, our third quarter media revenue guidance is $777,000,000 to $8.00 $5,000,000 That is up approximately 6% to 10% from last year's pro form a $733,000,000 This is driven by higher political and distribution revenue, which is partially offset by a projected 15% to 22 decline in core advertising.

Adjusted EBITDA for the Broadcast and Other segments is expected to be between 187,000,000 and $211,000,000 compared to $216,000,000 pro form a last year. For the Sports segment, third quarter media revenue is expected to be $718,000,000 to $727,000,000 That's down 15% to 16% to last year's pro form a eight fifty eight The projections include the impact from the distributor rebate accrual. Adjusted EBITDA is expected to be $4.00 $2,000,000 to $410,000,000 as compared to $425,000,000 pro form a last year, with the decline primarily due to the distributor rebate accrual, the absence of DISH carriage fees and subscriber churn, offset by lower rights payments to the teams. I do want to point out that there is a sizable increase in GAAP media expenses in Q3. That is as a result of MLB, NBA and NHL sports rights amortization being expensed in the quarter, again reflecting when the games will be played.

While this increases expenses on a GAAP basis, it is a noncash item that does not impact adjusted EBITDA, which is based on sports rights payments, not the rights amortization. As mentioned before, the sports rights payments reflect the offsetting benefit from the teams on the fewer games, with some of that partially reflected in Q3 and the majority in Q4. For the consolidated company, third quarter media revenues are expected to be $1.46 to $1,497,000,000 adjusted EBITDA of 5,890,000,000.00 to 6.21 and adjusted free cash flow of $3.74 to $4.11 Based on our current share count of approximately 74,000,000 shares, this equates to free cash flow per share of approximately $5.5 to $5.55 in the third quarter. So with that, I would like to open it up for questions. Operator?

Speaker 0

Thank you. The floor is now open for questions. Our first question is coming from Aaron Watts of Deutsche Bank. Please go ahead.

Speaker 4

Hi everyone. Thanks for having me on. I have a few questions I wanted to run through quickly. I guess first on the television station group, encouraged to see the improvement month to month in core advertising. Are you seeing any fits and starts on that in your market that are seeing some ebbs and flows of COVID cases?

And also are the bookings coming in a lot later relative to where you've kind of trended historically or at least in the prior year?

Speaker 5

Yes, I'll handle that. This is Rob. We are not seeing the fits and starts. It's been pretty consistent. You're correct.

It's being booked a little bit later. They're holding on to it to see how the COVID is affecting the different DMAs that we're in. However, we've been encouraged through our virtual trainings, virtual sales presentations that we've been able to communicate in this new norm and being able to handle it. And that's why you're seeing the positivity and the pace moving forward.

Speaker 4

Okay. And in terms of bookings coming in later?

Speaker 5

No, the bookings are coming in later. Going more month to month than they are quarterly, semi annually or annually.

Speaker 4

Okay. Got it. And then as best as you have clarity on today, can you give us the latest on the stability of the underlying sub base for your station group and the RSNs? And has your near term, medium term outlook for cord cutting changed at all based on what you're seeing right now?

Speaker 1

Yes. So I'll take that one. So Erin, as we as I mentioned, we saw across all the platforms subscriber churn year over year down about 7%. Again, that's really coming from one primary MVPD. But we have what you're going see in our guidance for Q3 is that we have pretty much mirrored that level of churn, and that's really based on some of the public commentary from the distributors themselves here recently as well as just really not having a lot of visibility as to what's going to happen with the churn.

You know, as we talked about, there's two schools of thought that are out there. One is that, you know, people currently make churn just because of, you know, the the status of their their their employment and and the economy. But on the other hand, right, you you do have government assistance for those people. You also have the fact that, again, the TV is really the only form of entertainment that's out there right now, and especially right now with the games, people not being able to go to the games in order to watch their favorite team, local team, would have to see those on the RSN. So two divergent views here.

I really don't know where it ends up. So to be conservative, we have forecasted our Q3 to mirror the Q2 levels.

Speaker 4

Okay. That's helpful. And then just a couple of questions for me on the Diamond Sports side. With the Comcast renewal now inked, I assume you have a pretty large percentage of your distribution locked up over the next few years. Is that a fair statement?

Do you have a percentage that you could give us of kind of what is locked in

Speaker 3

Sure. So 85% of the RSN subscribers are locked in for two years or more.

Speaker 4

Perfect. And Lucy, I just want to make sure I was clear on your comments and I appreciate all the color around kind of the rebates and the refunds from the teams. If I'm just specifically thinking about cash in cash out, to be clear, when do you expect kind of cash in from the teams in terms of the rebates there? And I think you said the cash out to the MVPDs will happen next year. Am I hearing that right or thinking about that right?

Speaker 1

Yes. So contractually with the distributors, because of the measurement periods, the cash out would occur after 2020. Each contract is different, so I'm not going to get into the wins after that. But rebates and the overpayments for to the teams all occurs this year, some in Q3, but the majority really in Q4 once we get through the full season.

Speaker 4

And in the end, those cash ins, cash outs, obviously differences in timing, but you're saying that those should be relatively equal or even the rebates from the teams to you should be greater than what you have to pay out to the MVPDs?

Speaker 1

Yes. So what I'm saying is the amount that we get in will be greater than the amount that we pay out, and that's really because of the variability, the differences in how the minimum gains are all calculated, you know, from one contract to the next.

Speaker 4

Okay. Perfect. And last one for me.

Speaker 1

Just to be Erin, just to be clear, because, again, there are there's a lot of, you know, misinformation on the street as it relates to this with, you know, people all modeling that Diamond is going to pay more than what they get in. And as Chris said, those are just not correct. We expect to get in more than what we will pay out because of the differences in the calculations.

Speaker 4

Okay. Perfect. I'm glad. Thank you for that clarity. Last one for me.

And again, appreciate the time. You repaid your revolver outstanding balance. It sounds like you're comfortable with liquidity. How do you think about that liquidity now going forward as you look at where your bonds are currently trading? I don't think I heard anything about more bond buybacks this quarter.

I know you also still have preferred stock outstanding. How do you kind of weigh the order of importance of attacking those different opportunities? And that's it. Yes. Thank

Speaker 1

Sure, Erin. So look, so we have our first and foremost, right, is the priority to continue to grow Diamond, right, whether it's through acquisitions, investments for the growth opportunities. But we are also committed to strengthening the capital table, lowering our cost of capital and deleveraging, right? So as we previously have discussed on other calls, we will continue to look for ways, right, to deploy the cash and to capital optimize the capital structure. So, know, look, everything is on the table right now.

We're evaluating a lot of things. So it could be anything, you know, from redeeming the preferred, additional debt exchanges, receivable financings, designating subs as unrestricted as well as looking at new acquisition opportunities and again investing for all the growth opportunities, which is the reason why we bought Diamond. So all of those things are being evaluated and on the table.

Speaker 4

All right, great. Thanks so much. Stay well, everyone.

Speaker 0

Thanks. Thank you. Our next question is coming from Dan Kurnos of Benchmark Company. Please go ahead.

Speaker 6

Thanks. Good morning and appreciate all the color everyone. Just so we're I guess maybe all clear in terms of some more granularity just around Comcast and Marquee. Just Lucy thanks for the color around subs. I hope it helps solve part of the equation.

Just trying to understand sort of the timing of when Marquis was it all just when the Comcast deal was done? I'm just trying to sort of understand the distribution delta from 2Q to 3Q on the RSN side or if there is some other rebate increased rebate nuance that we might be missing? And then on the core side, maybe Rob you just give us some more color just on sort of category improvement and sort of where you're seeing the particular pockets of strength and what gives you the confidence that we kind of continue to sequentially improve throughout the year?

Speaker 3

Thanks. Okay, Dan. I'll speak to Comcast and Rob will speak to the core question. In terms of changes, not much changed with Comcast at all. They continue to carry all the RSNs.

They previously carried all Tennis Channel, our broadcast stations. The only real change was Marquee. And they picked up Marquee the moment they signed the agreement. And as I noted in the prepared remarks, Marquee ended up getting into new geographies that the Cubs were not previously distributed on. So we're very happy with that outcome.

Speaker 1

Yes. And Dan, let me just answer your question on the dollars. So with the so there we do have the distributor rebate accrued in Q3. As we said, that will hit Q2, Q3 and Q4. So you are seeing that delta.

As well as remember, the RSN contract doesn't actually come up until the end of the quarter. That's when it expires. So you would not see the Comcast impact in the Q3 numbers.

Speaker 3

And just a side note there, so you understand, even though the RSN contract was renewed early and it doesn't actually expire until the September, that's because we did this all as one deal and everything will be coterminous on the other side.

Speaker 6

Rob, before you answer, just Chris, just on that, does that the TV side then is pushed back to the RSN start date now? Because I think that's a bit of nuance that might be missed there.

Speaker 3

No. Actually the TV side is going forward to the RSN expiration.

Speaker 6

Okay. And then Rob your comments on core?

Speaker 5

Sure. Yes. On the strength we continue to see services perform well. We have pharmaceutical that has joined the strength and we're seeing the education category pick up as well. We expect in the back half towards the end of third quarter going into the fourth quarter to see auto getting healthier than what we've seen it.

They've had a supply chain issue. We expect that to be fixed as the plants have been reopened and the 20 one's will be hitting the dealerships. So again, we've become less reliant on the auto business to drive our revenue. As in the past, I'll reiterate that we've gone from ourselves being generalists to specialists and that continues to lead to better performances.

Speaker 6

Got it. That's helpful. And Chris, I apologize if I missed this, but did you give us an update on where you're at with the DTC?

Speaker 3

No, we haven't that was not in my remarks. There's a lot of work going on in DTC right now. It's definitely going to be an important part of the future for VRSNs, for Tennis and also for Broadcast. And it's too early right now to give specific guidance, but we are busy adding that feature to our new digital reboot, which will come out next year. And it will be complementary to the MVPD product that we have today.

Speaker 6

Great. Thanks for all the color guys. Appreciate it.

Speaker 0

Thank you. Thank you. Our next question is coming from Davis Herbert of Wells Fargo. Please go ahead.

Speaker 7

Hi, everyone. Thanks for taking the questions and good morning. I wanted to ask on the current accruals and the rebates. I understand, I think, the cash flow piece. How firm are those rebate levels?

Mean, to the extent MLB stops and starts or maybe further under delivers on those live games?

Speaker 3

Yes. So the numbers could obviously change if the number of games change And it's just it's really just a mathematical calculation and the sort of hedged nature of our contracts would continue to apply as the gains continue to shrink.

Speaker 7

Okay. But would it be fair to say that if there are a few delivered under delivered, it's not going to be material to what you've already accrued for?

Speaker 3

It shouldn't be material to our actual EBITDA at the end of the day, but it could certainly increase the amount of rebates from the teams and the amount of rebates to the MVPDs.

Speaker 7

Okay, understood. And then on the team payment side, is all that getting taken care of this year? Or have you had negotiations with the teams to perhaps smooth that out over a longer period of time? Or is there other negotiations going on?

Speaker 3

It should all happen this year. To the extent some teams have issues from a cash flow perspective, we'll have to see. We have no indication of that so far. And what we've been doing is essentially withholding current payments right now to chip away the balance.

Speaker 7

Okay. Thank you. And then Lucy, you mentioned a lot of different liability management possibilities. I wondered, would a tender offer perhaps be in the conversations and to capture a discount in Diamond Sports bonds? Just thinking you'll be sitting on a decent amount of cash after political, maybe that's a win win versus an exchange, but just curious your thoughts on something like that.

Speaker 1

Well, so the political revenues are really belong to STG. And again, we've said in the past that each silo would be self funded. So STG's political has really gone to shareholder returns, whether it's the dividend or the share repurchases. And Diamond's cash flow is there to fund Diamond. So we would not look to pull STG's cash over to Diamond for that.

But again, when you're talking as much debt as Diamond has outstanding, anything we do, I think you should expect would be a bigger type transaction.

Speaker 7

Okay. And then my last question is, believe you had a year to rebrand the RSNs. I'm just curious the timing on that or if you got a reprieve with the COVID-nineteen Yes, it's

Speaker 3

more than a year on that and the new name will be announced and released early next year.

Speaker 8

Great. Thank you.

Speaker 1

Yes. Thank you.

Speaker 0

Thank you. Our next question is coming from Steven Cahall of Wells Fargo. Please go ahead.

Speaker 9

Yes, thanks. So maybe if we've learned one thing about the RSN business, it's just that the earnings power may be a little lower and so the debt level that you originally decided was appropriate might be a little too high. And Davis asked and we've talked a little bit about ways to renegotiate that debt level down. It's just a really big overhang on what's otherwise a really good TV broadcast business. So if you kind of step back, how do you really think about just steps that you can take to remove that overhang from the debt on the RSN business so that you can capture more of the fair value in the TV business?

Speaker 3

Well, as we mentioned, we're busy looking at several alternatives for to delever Diamond that we think there are many options there. And as I've stated many times that we see these entities as independent and self funding. So we don't see any reason for value or cash to be going from one silo to the other. And really when you're looking at our valuation, it should be done on sum of the parts basis.

Speaker 1

Yes. And Steve, look, what I would add is I think what people are missing is the investment thesis of why we bought the RSNs in the first place, right? So as we look ahead, right, you've got it including all the growth opportunities and the synergies, which again is the reason we bought the RSNs. We love the business. It is a good business.

Are we is leverage here in the near term more elevated? Yes. I think that's probably though a for just about any company that's out there in The U. S. Today as a result of COVID.

So we have some elevated leverage. It will take us a little bit longer to get down to our target leverage, but we are focused on getting down to the target leverage. But part of how we're going to do that is through all the growth opportunities, again, whether it's the production programming synergies, cross promotion, cross programming, digital opportunities, legalized sports betting, rebranding and selling all of our digital impression. There's so much there that we haven't even started to mine with Diamond.

Speaker 9

Great. And then maybe just on the retrans side, you've done some recent station renewals with Viacom, CBS and with Comcast, as you pointed out. Do you feel like you have the ability to maybe give us either a qualitative or quantitative outlook on net retrans growth for 2020? Thanks.

Speaker 1

So as you know, we do not have full year guidance on the table. So at this point, we're not ready to put that out there. As I said, there's a lot of variability in what's happening in the pay TV universe, is a factor that would go into that. So at this point, no full year guidance.

Speaker 4

Great. Thank you.

Speaker 0

Thank you. Our next question is coming from John Giannitas of Wolfe Research. Please go ahead.

Speaker 8

Hi, thanks. I'll be brief. One is a follow-up on the ad side. There's varying waves of COVID across the portfolio. What impact are you seeing or do you expect to see on back to school spending?

And is that typically a swing factor coming in and out of later today? Then secondly given where we are on the political side, increasingly we end up seeing or do see a democratic sweep in the fall. How does that change the regulatory landscape in any parts of your businesses? Thank you.

Speaker 5

John, the you're back to school go

Speaker 6

ahead, Rob.

Speaker 4

Okay, go ahead.

Speaker 5

Sorry.

Speaker 3

No, no. I was just going to say, hopefully you heard that. John was a little muffled. But Rob, why don't you handle the back to school question and I will handle the regulatory.

Speaker 5

Back to school typically is not a large revenue driver for the company. But with COVID going on and hybrid learnings of some markets going back, some hybrid, some school from home. We're in the midst of launching several creative non traditional programs to generate revenue that we typically wouldn't be thinking of. So in that space, we expect to be able to scale several concepts across our platform. So we do think we'll be able to capture revenue that we probably haven't had in the past in regards to back to school.

Speaker 3

Okay. So in terms of your question around the election and the regulatory environment, I think it's worthy to note that broadcasting has significant support on both sides of the aisle. You saw that with letters from both a very large amount of both Democrats and Republicans supporting local media and promoting its survival is vital to the communities we serve. So we feel as an industry in good shape with bipartisan support. So we're not concerned about a change in administration and the notion of re regulating broadcasting would be akin to picking on the little guy.

I do think some of the bigger companies like Big Tech will have more regulations in the future. But our industry is so small and fragmented. It just wouldn't make sense.

Speaker 8

Got it, Chris. If I could sneak in one more, just a follow-up on Comcast and maybe a bit more broadly, as you said the market's been negative on right sense, can you give us an update on how you're doing the landscape? Obviously, talked about 85% of the subs being locked in, but have distributors in those negotiations have taken a harder look at that business? Any change in cheering or anything else to highlight?

Speaker 3

Sure. So we have seen in all of our negotiations essentially status quo environment in terms of terms, tiering, pricing, all the various elements that go into a distribution agreement. So really and we've now cycled through all the major and small MVPDs and say for one dish, we found what we expected which is that this is very valuable content to the distributors, it drives subscriptions And we have achieved what we set out to achieve with them which was status quo renewals.

Speaker 8

Thanks a lot.

Speaker 0

Thank you. At this time, I'd like to turn the floor back over to Mr. Ripley, President and CEO for closing comments.

Speaker 3

Thank you. I would like to conclude by thanking all of our employees, customers and stakeholders for their patience during this unprecedented time. We are comfortable that the actions we are taking are not only helping us manage the challenges in the short term, but are also positioning the company for continued success in the future. Thank you for participating on our earnings call this morning. If anyone has any additional questions, please feel free to contact us.

Speaker 0

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.