Sinclair - Earnings Call - Q4 2020

Transcript

Speaker 0

Greetings and welcome to Sinclair Broadcast Group Fourth Quarter twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I will now turn this conference over to your host, Lucy Rutshauser, Executive Vice President and Chief Financial Officer. Please begin.

Speaker 1

Thank you, operator, and good morning, everyone. Participating on the call with me today are Chris Ripley, President and CEO Rob Weisbord, President of Broadcast and Chief Advertising Revenue Officer and Steve Zinker, Vice President, Investor Relations. 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 fourth quarter earnings release. The company undertakes no obligation to update those 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' use 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. Looking back on 2020, it certainly was a year that will stand out for a number of reasons. Of course, top of mind is the pandemic and its impact on people's lives, the economy and businesses. We saw just how resilient our company could be and how well our employees could respond and adapt to different way of doing business. The media industry in Sinclair faced and continue to face many disruptions in core advertising, distribution revenues and live sporting events.

However, built in hedges to shorten professional sports seasons as well as record political revenues helped to offset some of the declines brought about by the pandemic. The strong demand from political advertisers validates the importance of the TV medium in effectively reaching mass audiences. And we learned as an organization how to dial back costs while retaining productivity and efficiency despite less than ideal working conditions and 60% of our workforce working remotely. A special thank you to those employees who ensured we continued broadcasting to provide important news and COVID updates as well as other content, including sports to our consumers. 2020 was also notable for the advancement in important initiatives to fuel our growth in the years ahead.

Perhaps the most significant was our strategically important long term agreement with Valleys to partner in gamification initiatives, including the fast growing legalized sports betting industry. This enterprise wide partnership brings the mass audience reach of our assets, including our television stations, RSNs, Tennis Channel, Stadium and STIRR to drive awareness engagement for Valleys betting platform, which in turn should drive our viewership and revenue as well as the value of our equity stake in Valley's. In addition, the RSNs are being renamed Valley Sports and will receive a naming rights payment as well as a percentage of Valley's advertising budget. Sports betting is just one component of our gamification efforts. We are in the process of developing a new app which will encourage viewers actively participate in the sports viewing experience by offering interactive elements such as free to play contests, rewards, and the ability to engage and interact with other fans.

The idea is to make watching sports similar to playing a video game. During the year, we also made significant progress in our efforts around next gen broadcasting launching in 11 markets. The technology allows for our broadcast signal to be mobile, personalized and IP compatible, and early results indicate the signal strength and picture quality have met or exceeded our expectations. Over 20 television sets capable of receiving the enhanced signal were introduced into the marketplace during the year, And we're proud to say that the first OneMedia and Sankey OS prototype mobile phone aptly named the Mark one after our own Mark Aiken, who helped develop the ATSC three point zero standard, were developed to us for validation and testing of the functionality and performance of receiving the new signals through mobile devices. Our OTT and Connected TV assets, STIRR and NewsOn, which are free ad supported streaming television platforms or FAST in industry lingo, had breakout years and exceeded expectations with viewership up significantly.

Driving this growth was the importance of local TV during this pandemic. STIRR featuring over a 120 channels, including two commercial free ones dedicated to specific timely news areas, one covering local and national elections and one focused on COVID nineteen developments, including live press conferences across the country. Another channel featuring horse auctions demonstrates the unique ways these streaming platforms can monetize diverse opportunities. NewsOn, a leading purveyor of local news local broadcast news, features not only Sinclair news stations, but also many of the other local leading broadcasters. Finally, in 2020, we directly donated over $1,000,000 and helped raise an additional $30,000,000 for charitable causes across the country, including natural disasters and to aid those impacted by COVID-nineteen.

Before the pandemic, we were an early adopter of raising the minimum wage for our workers to $15 an hour. And during COVID, we offered our employees increased flexibility around sick leave to aid with dependent care, allowed flexibility around cashing out vacation hours to assist with financial hardship and revamped how we paid our commission employees due to the pandemic's impact on our advertising sales. And while we continue to make difficult decisions, some of which impact our employees, I believe Sinclair will emerge from the pandemic more flexible in how it operates positioned to capitalize on growth opportunities as we move into 2021 and beyond. As it relates to fourth quarter trends, the quarter ended up better than we expected with EBITDA coming in towards the upper end of our guidance range despite additional distributor rebate accruals due to shortened NBA and NHL seasons, stronger than expected core and political advertising revenues and lower than expected expenses also drove the results. Core Broadcast and other advertising revenues were above our expectations for the quarter as November improved to down low single digits percentages and December was relatively flat, likely due to the pent up demand after record setting political season.

Speaking of which, we had a record quarter for political advertising and political for the year was $373,000,000 which was approximately 40% better than our prior record year. For the first quarter, we're expecting Broadcast and Other core advertising to be down mid single digit percentages with COVID cases still high, new strains of the virus spreading throughout the country and vaccinations just rolling out. As we look out over 2021, there is still much uncertainty and limited visibility. COVID remains a challenge. Subscriber churn continues at elevated levels.

League schedules are still being defined and could change quickly. Timing for further distributor and team rebates is uncertain, and of course, '21 is a non election year. Nonetheless, we remain focused on our priorities for this year, which I'd like to share with you. This spring, around the time the MLB season commences, we expect to unveil our new Bali Sports app, which will allow viewers a more personalized and interactive viewing experience. The app will provide significant enhanced functionality and a new design that will be a key enabler for our initiatives around the gamification of sports viewing.

Just to give you an idea of the improvement of the new app and its increased capabilities, when we initially launched, the first phase of the app will allow authenticated users the ability to watch games with features like being able to rewind and view a replay, easily search for enhanced statistics and programming, including all the content that airs on our RSNs as well as enjoy increased news coverage about the teams and games. Importantly, the new app will allow us to better monetize hundreds of millions of digital impressions that are currently not being fully optimized on the existing FOX Sports GO app. We expect the new app will be an important component in helping drive increased revenue growth and profitability for our local sports business in the future. A little more color around the gamification initiatives we are undertaking. Our goal is to reach and engage as many consumers as possible through gamification across our entire enterprise of assets by implementing an array of gamification elements, each aligned with and authentic to the content and activity in which they are offered.

We will engage users while personalizing and customizing their experience for them based on their preferences and habits. We plan to roll out various gamification elements throughout 2021, starting with our sports assets. You should expect to see gaming elements being incorporated into our sports network and digital programming as soon as the third quarter of this year. In addition, we are working on a direct to consumer product that is expected to launch in 2022 and will allow unauthenticated users the ability to access and even subscribe to certain content from our RSNs as well as other unique content. Gaming activities are especially appealing to the 18 to 34 year old demographic.

In our market studies, approximately 60 of this cohort indicated that they would be interested in betting on a live sports event. This group has grown up with video games and seeks interactivity and community. We believe our initiative of making watching sports more dynamic and incorporating gamification into the viewing experience will resonate with them. This includes ways to interact with other fans, to share their passion in real time and be able to discuss what's going on in the game. A bad call, an awesome home run, our new platform will give them that opportunity.

It will also enable them to engage in contests and where legal facilitate sports betting, enhancing the game experience. Another exciting initiative for 2021, which premiered in January, is the National Desk, a new national news program that airs weekday mornings on 67 of our stations across The US and on STIRR. The program utilizes content from Sinclair's local news stations to provide viewers timely news coverage of noteworthy local stations of stories that are of interest to national audiences and free of commentary. Viewer feedback from the show has been encouraging, and we look forward to building on the successful launch as we move through the year. Of course, we will be continuing the rollout of next gen TV.

The industry expects that by the 2021, next gen TV will be available in 45 markets covering over 60% of U. S. TV households. The ability for it to provide superior audio and visual experience to target the household or device and be used for data casting are just a few ways we believe this important IP transmission technology can be monetized for the future. Also during 2021, we will be transitioning our current RSN operations, which currently are housed at in the Disney facilities in Woodlands, Texas to a brand new state of the art 25,000 square foot Sports Media Operations Center at Encompass Digital Media in Atlanta, Georgia.

This facility can run up to 50 RSN channels, including provisions for ultra high definition channels in the future. The new digital facility in Atlanta will allow us to take advantage of new business models, and we're eager to make the move later this year. Finally, I want to highlight another important initiative upcoming in 2021. We are targeting new solutions for advertisers to utilize our extensive combined reach into 70% of U. S.

TV households by pursuing a unified advertising platform that can give advertisers access to our vast advertising inventory across our entire portfolio of 186 stations, 21 RSM brands, Tennis Channel, STIRR, Stadium and NewsOn. This new platform is intended to give a look across all Sinclair business units, audience, and inventory that allow us to engage advertisers in multiyear deals that enable them to reach viewers on a local level through one simplified access point. As we move forward in 2021, there's no questions we still face many challenges and uncertainties. We continue to look ahead and make investments in initiatives that will enable significant new growth opportunities. I'll now turn it over to Lucy.

Speaker 1

Thank you, Chris. First, some housekeeping items to note. As a reminder, the RSNs were acquired in 2019. And so while twenty twenty fourth quarter results do reflect a full period comparison to the prior year, full year 2020 results do not. As such, for more meaningful comparative purposes, I will also include pro form a 2019 results, which assumes we own referencing certain pro form a numbers for our broadcast business, which reflects the sale of three stations, Harlingen and Lexington, which were sold in 2020 and Paducah, which was sold in February.

Of course, as reported numbers can be found in this morning's earnings release. Also, as we discussed on our last two earnings calls, the shortened professional sports seasons in 2020 and 2021 impact the accounting for our local sports segment in a few significant ways. First, 2020 distribution revenue reflects an accrual for estimated rebates to be paid to our distributors based on the number of games delivered versus the minimum game guaranteed in our agreement. Due to the NBA and NHL shortened 2021 season, we increased our fourth quarter accrual for these rebates by approximately $49,000,000 bringing the full year 2020 distributor rebate accruals to approximately $420,000,000 Of that, approximately $220,000,000 is contracted to be paid over 2021, and the remaining $200,000,000 is contracted to be paid in the 2022. As you may recall, offsetting this amount are reduced sports rights payments that the teams owe to us due to shortfalls in minimum games, Including the reduction in the 2021 NBA and NHL seasons, minimum game delivery shortfalls totaled approximately $697,000,000, which is approximately 125,000,000 more than what we guided to last quarter.

Of this total, of the $697,000,000 due to us, $542,000,000 was realized in 2020 and $155,000,000 is expected to be realized in the 2021. Please note that with league schedules and game counts subject to change, these estimates from the teams and to the distributors may also change. Now on to the financial highlights. First, I'll go through the segments in detail and then do a sum of the parts for the consolidated company. Starting with the Broadcast and Other segments.

Media revenues of $986,000,000 for the fourth quarter exceeded the high end of our guidance range by 25,000,000 The quarter benefited from the strongest political ad revenue we have ever experienced in a quarter totaling two zero four million or 10,000,000 higher than our guidance as a result of the Georgia runoff election. Political was the primary driver for the 20% increase in media revenue versus the same period last year. At the same time, core advertising also exceeded guidance, declining only high single digit percents rather than the mid teen percents we were forecasting. As Chris mentioned, November and December were stronger than expected after October's political crowd out. Pro form a distribution revenues increased 8% compared to the fourth quarter last year despite mid single digit percent subscriber churn on a year over year basis.

Media expenses of $533,000,000 were also favorable compared to our guidance range due to lower production and programming expenses and lower G and A. Compared to the prior year, media expenses were $23,000,000 higher due to increased network programming costs offset in part by cost controls. Adjusted EBITDA of $4.00 $8,000,000 was $132,000,000 increase over the prior year and exceeded our expectations due primarily to the higher advertising revenues and lower costs than we were forecasting for the quarter. For the year, Broadcast and Other Media revenues were 3,259 million dollars and adjusted EBITDA was 1,046 million dollars Turning to the Local Sports segment, results for the quarter were better than anticipated, but timing around the start of the NHL and NBA seasons, timing of the team rebates, as well as the higher distributor rebate accrual resulted in lower revenues and EBITDA. Media revenues of $531,000,000 in the fourth quarter were $257,000,000 lower than the prior year, driven in large part by the total $168,000,000 of distributor rebates we accrued in the quarter, the dropped carriage by several distributors in the 2020, the elevated subscriber churn and a decline in advertising as a result of fewer live games in the 2020.

Compared to guidance, media revenues of $531,000,000 came in at $26,000,000 below the low end of our range as a result of the incremental distributor rebate accrual that we took, without which media revenue would have exceeded the high end of the range by $17,000,000 on higher than expected results in advertising and distribution revenues. Local sports media expenses of $163,000,000 were $434,000,000 or 73% lower than the fourth quarter a year ago, with the vast majority of the decrease due to the timing of the sports rights amortization expense with the NBA regular season being delayed until the December and the NHL season delayed until 02/2021, whereas in 02/2019, both seasons began in October. Compared to guidance, media expenses were about $10,000,000 higher due to the NBA's decision to resume play in December versus our forecast that they would wait until 2021 to return, and that led to both higher game related production expenses as well as higher sports rights amortization for those NBA games that were played in December. Excluding the timing of the sports rights amortization and production of of those unanticipated games, media expenses were approximately $20,000,000 less than guidance. Local sports adjusted EBITDA was $2.00 $9,000,000 for the quarter, 26,000,000 below guidance due to the additional distributor rebate accrual and timing of some team rebates that slipped into 02/2021.

Excluding these two things, the local sports segment would have beaten the high end of the adjusted EBITDA guidance by more than $40,000,000 driven by the higher carriage fees and lower expenses than we were forecasting. For the year, sports media revenues were $2,686,000,000 and adjusted EBITDA was $841,000,000 So selling the parts of the consolidated company, Sinclair achieved total company media revenue of a billion 490,000,000 in the fourth quarter, which was within our previously provided guidance range and 91,000,000 lower than the previous year's fourth quarter for the reasons that I just went through. Adjusted EBITDA was $617,000,000 which was higher than the high end of our guidance range and $167,000,000 better than fourth quarter twenty nineteen. Adjusted free cash flow for the quarter was $416,000,000 For the full year 2020, the total company media revenues were 5,843,000,000 Adjusted EBITDA for the year, excluding the third quarter impairment charge as well as other nonrecurring legal litigation and regulatory costs during the year, was $1,888,000,000 down 12% versus the prior year pro form a. And for the year, adjusted free cash flow was $1,123,000,000 or approximately $14 per share.

Now turning to the consolidated company balance sheet. Consolidated cash at the end of the quarter was $1,000,000,000.02 $5 which included $783,000,000 of cash at Diamond. Now as a reminder, of the $420,000,000 of accrued distributor rebates, approximately $220,000,000 is contracted to be repaid in 2021 and approximately $200,000,000 in the 2022. In addition, Diamond is expecting 155,000,000 of lower team payments in the 2021 as a result of the minimum gain guarantees. As mentioned earlier, there are still many moving parts to the league schedules and gain counts which could affect the expectation of the distributor and team rebates.

During the fourth quarter, neither credit silos revolve was drawn. Total debt at year end 2020 was $12,551,000,000 and the net leverage ratio for consolidated Sinclair at quarter end was six times. Sinclair Television Group's first lien indebtedness ratio on a trailing eight quarters was 2.7x on a covenant of 4.5x and 4x on a net leverage basis through the bonds, which is within STG's net leverage goal of high threes, low four times. Diamond's first lien indebtedness ratio on a trailing four quarters was 6.3 times on a covenant of six and a quarter times, which only springs if the revolver is drawn over 35%. And I remind you that none of the revolver was drawn.

Through the bonds, Diamond was leveraged 8.3 times on a total net basis. Turning to our first quarter and full year 2021 guidance. The uncertainty of COVID and the pace of the vaccine rollout, continued struggles in the economy, evolving and continued elevated subscriber churn, and unannounced league schedules continue to make visibility for the business difficult and challenging to forecast. Nonetheless, given investor and creditor interest around Diamond's performance and outlook, we are providing full year guidance for Diamond and certain of the expense side for STG with the disclaimer that the outlook is subject to change for all the reasons I just mentioned. For our broadcast and other statements, our first quarter media revenue guidance is $730,000,000 to $745,000,000 down approximately 4% to 6% from last year's pro form a $74,000,000 The pro form a numbers exclude the results of Lexington, Carbogen and Paducah.

The decrease is the result of a full quarter of the pandemic versus really just two weeks last year, as well as this year being a non presidential election year. For the quarter, we are forecasting same station subscriber churn of down mid single digit percent, which is little change to the current trends. First quarter adjusted EBITDA for Broadcast and Other segments is expected to be between $122,000,000 and $135,000,000 compared to last year's pro form a $219,000,000 The decrease is due to higher network payments and the lower advertising trends. Revenues. And as a reminder, and as discussed on our last quarter earnings call, due to timing of network versus distributor contracts, the continued elevated subscriber churn and only having one major distributor renewal in the back half of the year, we are estimating gross retrans to grow by low single digit percent.

We project net distribution revenue to decline by mid single digit percent for 2021 due to a third of our big four affiliate subscribers resetting at or near the 2020. For the Local Sports segment, first quarter media revenue is expected to be $746,000,000 to $754,000,000 down 7% to 8% from last year's $812,000,000 driven by continued elevated subscriber churn and dropped carriage by several distributors in the 2020, offset in part by increased ad revenues from higher game counts. First quarter adjusted EBITDA is expected to be a negative 55,000,000 to a negative $63,000,000 due primarily to the impact of the lost distribution and sub churn and offset in part by the benefit of having more NBA and NHL games this quarter. Also keep in mind, the first quarter is typically the lowest EBITDA quarter of the year due to the acceleration of the MLB team rights payment. For the consolidated company, first quarter media revenues are expected to be $1,448,000,000 to $1,471,000,000 First quarter adjusted EBITDA is expected to be 59,000,000 to 80,000,000 and first quarter adjusted free cash flow of negative 85,000,000 to negative $108,000,000 And then just very quickly turning to full year 2021 guidance.

Our Broadcast and Other segment full year expense and other financial highlights are in this morning's earnings release, so I'm not going to repeat them here. For the Local Sports segment, Media revenues for the full year are expected to be $3,054,000,000 to $3,326,000,000 and that's up from $2,685,000,000 in 2020. The wide range reflects the uncertainty around the possible outcomes for this year, particularly around the distributor side of the business. Also keep in mind that 2021 does not anticipate distributor rebate accruals, which were included in 2020, although this could change if game counts change. We also expect more games this year, which should drive for advertising revenue.

The range assumes continued same distributor elevated subscriber churn of high single digit percent. Global Sports adjusted EBITDA for the year is expected to be $441,000,000 to $7.00 $9,000,000 versus $841,000,000 in 2020. The decrease is a result of higher sports rights payments, primarily as 2020 reflected higher minimum game delivery rebates as well as higher production expenses on this year's expected higher game counts, offset in part by the increased media revenues. So with that, I would like to open it up to questions. Operator?

Speaker 0

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your lines in the question queue. You may press star two if you would like to remove your question from the queue.

Please proceed.

Speaker 3

Close. Good morning, everyone. Lucy and Chris, thanks for all of the clarifications and the additional numbers, super helpful. Two questions. Just one on the broadcast side.

Just on the distribution, I know, Lucy, you mentioned that we know that this year is going to be kind of a tough one from timing. Can you just remind us of the MVPD renewal schedule this year and then just kind of your thoughts on net retrans heading into 2022 after kind of the big reverse step up, this year? And then on the RSN side, as much as I'd love to ask a question about Valley's acquisition of Monkey Night Fight and any ramifications for you, I think I'll stick with the more generic. The distribution, again, is very wide. I think Q4 was a little bit lower than people are expecting and then kind of Q1 a lot higher.

I'm just trying to understand what you guys are assuming, in your distribution numbers and then subsequent lead impact on guide? Are there things like the potential for Hulu, YouTube coming back? I just want to understand sort of what's going into your forecast. Thanks. So I'll let Lucy answer the second one.

I'll take your first question, Dan. The only thing of significance that happens on the retrans side for broadcast is DISH, this summer. And, certainly, this is a unique set of circumstances, that we're we're dealing with, where, as Lucy mentioned, one third of our big four affiliates had significant step ups, at or near year end. And it's the first time that's really happened for us. And then on the distributor side, you've the outside of DISH, there really isn't other renewal opportunities there to offset.

Speaker 1

Yes. So Dan, on your other question regarding like Q4, so remember, we booked an additional $49,000,000 of rebates to the distributors that we weren't expecting, and that was because of the shortened NBA and NHL season. And then we'll get the team rights rebate in 2021 on that. So that's why Q4 looks a lot higher, lower on the distribution revenues. But if you exclude that rebate, we actually beat our guidance for distribution revenue in fourth quarter.

Speaker 3

And on your assumptions just around the go forward, like, are there things included in there like Hulu and YouTube coming back? Like, is there a wide range of outcomes to kind of get to that big range of adjusted EBITDA guide? Is it just around sports rights and reimbursements? You know, just just wanna make sure that we understand sort of

Speaker 4

your thought process on that.

Speaker 1

Yeah. I mean, look, it it it's a wide range for for a lot of reasons. Right? There's a lot of potential outcomes that could happen, but, you know, what's in that range is is some assumption for some amount of carriage renewals. They come back on.

We're not gonna get into who, how much, when, or anything like that. That's why we have a range there.

Speaker 3

Okay. Great. And then I actually, if I could just quickly you know, that I I don't know what you're going to do with it. I thought it was interesting you guys picking up the rest of Zip Media, sort of just more of a ancillary curiosity given everything going on in the ad tech space. Just curious how that kind of fits into the equation.

Speaker 5

Yep. It's we had a piece of it. We wanted to buy the buyout the whole entirety because we have a business plan to focus on building out platforms for the local, small and medium sized businesses, being able to compete in with the larger agencies out there in acquiring CTV inventory, OTT inventory. And we've had significant success utilizing the platform. And by taking internally, we think we can have a growth into a major SaaS business as well.

Speaker 3

Got it. Appreciate all the color. Thanks, guys. Thanks, Dan.

Speaker 0

Our next question comes from John Jandis with Wolfe Research. Please proceed.

Speaker 6

Hi, thanks. Lucy, you talked a little bit about this in your comments and maybe a slight follow-up to Dan, but I may

Speaker 7

have missed it. So how are

Speaker 6

you thinking about churn this year? And do you think the launch or increased content on streaming services will have an impact in either direction? And then you didn't say much about it. So on capital allocation, with the move the stock has had over the past few months, how are you thinking about the buyback into 2021? Thanks.

Speaker 1

Yes. So what we've built into into our assumptions on the diamond side for this year is is high single digit churn, right, which is kind of what we're seeing right now and what the MVPDs themselves have have, you know, have all put out there. So so that's what what we're building in for for again, we don't have full year broadcast out there. But, you know, for first quarter, we're looking at mid single digit churn, on the broadcast side. And I think that's consistent with what you're hearing from other broadcasters as well.

Speaker 3

And, and, John, on the on the capital allocation front, we have 880,000,000 left on our authorization. Last year, we retired 21% of our shareholders' standing, which is more than by a significant margin than any of our peers. We have received some feedback from investors that, you know, we need to make a make sure we have a healthy float to attract new investors. So we we wanna keep that balanced. And, and, of course, we always consider what our future investment opportunities are, as as we look to deploy cash.

But, I think it goes without saying, we think our stock is an incredible value even as it stands today. Thank you.

Speaker 0

Our next question comes from Steven Cowhall with Wells Fargo. Please proceed.

Speaker 7

Thank you. Chris, maybe first, could you talk about how you're thinking about approaching some of the performance criteria that allows you to take the additional options and valleys? Maybe what's kind of execution strategy there since it seems like that's a really significant opportunity for for value creation? And then, Lucy, I'd love to dig into the RSNs just just a little bit more. If we took out the $155,000,000 cost benefit for this year and took your midpoint kind of guidance.

Do you think that's a good run rate for earnings power at the RSNs, or does that really underestimate them? And maybe lastly, on Diamond, do you think you'll need to draw on the revolver this year?

Speaker 3

Okay. So, on Valles and our performance warrants, first, I'll say that the bar is very low, at least in our opinion as to what needs to be delivered. We think we will we will deliver well in excess of of those, user thresholds. And and also, importantly, it's it's it's it is it's users to the ValleyBet platform from any source. As you know, it's oftentimes to to track attribution.

We are promoting, Valleys across all of our platforms. We're rebranding the network. We're we're going to have deep integrations, across our digital properties, across our newscasts, talk shows, pre and post game. It's going to be a wide ranging, integration strategy, which should drive significant audience users into the ValleyVet platform. And so the strategy is really to be as tightly integrated as if the companies were one.

And in fact, we're even going to we even think about users as as one. So a Valley, that user is the same as a Valley Sports user, and we want it to be a seamless integration there, and we think that will drive more and more users over time, to Vale's sports betting app, which should launch this spring. And we should easily, achieve the targets that were that were put on those performance warrants.

Speaker 1

Okay. So so, Steve, your other question, was around, I believe, the EBITDA run rate without the without the rebates. Yep. And so, look, you know, you know, we've we've given you a range for this year. Right?

We've got a lot of a lot of moving parts that are happening this year. As we've mentioned multiple times throughout our scripted remarks, there's a lot of lack of visibility that we have into the year. So right now, we're giving you the range for this year. We have a lot of the growth opportunities that we talked about since we bought the RSNs, right, that sort of got put on hold because of COVID and disruption and gameplay, etcetera. So, you know, look, it's, you know, we haven't really started to implement a lot of the things that, that Chris has talked about now for the for the past year and a half.

So, I, you know, I can't really tell you beyond 2021 because there's still a lot of moving parts there, but you do have a range for this year for our EBITDA expectations. And then I think you had one other question.

Speaker 3

Yes. It's a revolver draw this year is not expected.

Speaker 1

Yeah. Not not expected. And just let me let me just follow-up with that because, remember, q one is the lowest EBITDA quarter for the typically for the RSNs. And so we're not drawn under the revolver right now. So again, assuming our current assumptions, we would not expect we would need to draw the revolver.

Speaker 3

Great. Thank you. Our

Speaker 0

next question comes from David Hamburger with Morgan Stanley. Please proceed.

Speaker 8

Hi. Thank you. Good morning. If I could, I have one clarification and then two bigger picture questions. If I heard you right, Lucy, I think you said you had $420,000,000 of distributor accruals in total.

And then you mentioned $697,000,000 in reduced sports rights payments. So does that mean the net benefit to EBITDA in sum total was $277,000,000 I think last quarter, you had mentioned the net benefit would be about $200,000,000 So I'm wondering if that's the right math.

Speaker 1

That that is on a but that goes over two years. Right? So, you know, not all that six all the $4.20 is accrued in '20, but only 542 of the team rebates, did we benefit in '20. The other 155, you won't see in the numbers until 2021.

Speaker 8

Right. Okay. So it was a total of $2.77. Okay. Thanks.

Kind of bigger picture, I believe in January, ViacomCBS had, you know, renewed their affiliate agreement with Hulu Live. And at the time, you know, Sinclair did not opt into that renewal for the CBS affiliates that you own. But my understanding, if you could, you know, verify this, is that you did opt back in just before the Super Bowl for the CBS affiliates at Sinclair. Yet I believe, you know, you didn't get carriage of the RSNs once again with Hulu. I'm wondering if discussion with Hulu, you know, discussions with Hulu around, you know, that opt in before the Super Bowl for the CBS affiliates had or had not included a discussion of carriage of the RSNs once again.

And if not, I'm wondering why not? And would this kind of negotiation differ from, say, how you'd approach DISH this summer with the renewal at the Sinclair level versus again carrying the RSNs?

Speaker 3

Yeah. So look, we we we always come, and talk to distributors about all of our content assets. You know, we can't we don't get into, specific negotiations on specific distributors because those are confidential. But we are satisfied with the deal we did, with Hulu. RSN carriage is only just one form of consideration in the mix.

And I think as you know, it's a little bit different with the virtual MVPDs as it relates to how that works. There is a decision to be made with opt ins, and we maximize the value of that decision. And, and and in terms of, your question going forward on DISH, we've had tremendous success with all the traditional MVPDs, coming with incentives to take broader packages of content. And I would expect us to continue to have that success in the future.

Speaker 8

So if I might just follow. So could you kind of characterize what's different about the relationship with the vMVPDs? I mean, I noticed as well that YouTube last year, they only renewed for the baseball season, which, you know, is certainly not traditional what you've seen historically with MVPDs. I mean, should we anticipate, again, this greater level of kind of, you know, volatility in the distribution contract with the vMVPDs?

Speaker 3

Yeah. Look, the vMVPDs are, have a different business model. They're skinnier bundles, lower priced, targeting, you know, the lower economic socioeconomic strata for consumer. And and and there is a difference in the way we interact with them. The networks do a master agreement, with the the virtuals, and then we opt in.

And so, there there is a difference in the way that mechanics works, and if there's difference in their business model as well in terms of what they're what they can afford and what they value. So so, you know, that's that that does tend to lead to different outcomes.

Speaker 8

Okay. And if I could just one more question. We noticed you put out a press release that you renewed your programming contract with the Milwaukee Brewers. And I was curious, last year with the Kansas City Royals, you had given the Royals equity in the station. I'm wondering as well if that renewal included giving the Brewers' equity in the station.

And do you have any other renewals upcoming where if you did, where you would approach the negotiations in a similar manner?

Speaker 3

Sure. So we have binding term sheets for all the teams that we had near term explorations on, which included the Brewers and the Marlins. Both included equity participation, which, as we've been saying for a while now, we prefer because it variabilizes more of the compensation, aligns interest. And so both of those deals have that component. We have generally, And every year, there's a few teams that come up.

So we have we have some more that will expire for next season, and and those discussions, you know, are just getting started. But equity, because of the reasons that I've stated in terms of variabilization and alignment of interest, will be increasingly a component of the mix of consideration.

Speaker 8

Are you able to discuss the dimension of the variabilization of the cash compensation? I mean, maybe even just directionally how we might expect sports rights payments over the next, you know, in the near term or near intermediate term might trend as a result of, you know, these types of transactions?

Speaker 3

Yeah. So contrary to the national market, which you're hearing about, you know, NFL wants to double and, you know, big increases happening across the board. The local market where we play in is much less competitive. We're not seeing, those types of cost pressures. And and so, you know, we're not expecting rights to escalate by very by very much at all.

And, and when you give a team equity consideration as part of the mix, it's in lieu of cash, fixed rights payments. So it's really just a rights payment but in a different form and a different sort of risk return dynamic for them.

Speaker 8

Okay. Thank you very much. Thanks for the questions.

Speaker 3

Thanks, David.

Speaker 0

Our next question comes from Alexia Quadrani with JPMorgan. Please proceed.

Speaker 9

Thank you. Just on the sports side, I'm curious what has been the feedback or the response from the sports leagues, NBA, and NHL MLB, for example, excuse me, on Valley's partnership and plans for gamification of the presentation. And I'm just sort of staying on that sort of topic, the return of the NBA NHL in the upcoming MLB season. Has that accelerated conversations, talks with Dish, Hulu, or YouTube?

Speaker 3

So the response has been overwhelmingly positive from the leagues and our team partners. They're very excited about, the new branding, about our efforts, around gamification. There is a keen keen interest amongst, those parties to increase engagement a young among younger audiences. And, as I noted in my remarks, all of our data and research points to a high propensity for sports betting in the younger cohorts, for gamification. They're the video game culture, and sports betting is a great tonic, you know, to increase that engagement among, the younger viewers, which, you know, still have great affinity for these sports, just don't consume the games in nearly the the same capacity as their as their parents.

And and having interactive engagement, having rewards are you know, we believe in all the data points to that being a key to unlocking their fandom. And so the leagues and teams are perfectly aligned with that and very excited about it. Very excited about the Bally's partnership. Bally's just announced they've become an authorized partner of the NHL. So essentially, we were bringing the leagues a new customer, which they definitely appreciate.

And so, nothing but but good news, in terms of, the new partnership and and the implications it has for the teams in the leagues. And then in terms of your second question, look, undoubtedly, the return of sports is very, very important to us, in terms of our our value proposition to distributors. These are some of the highest rated programs on television. They have tremendous value, and, and that definitely plays a role in, in our discussions with distributors.

Speaker 9

Thank you very much.

Speaker 0

Our next question comes from Aaron Watts with Deutsche Bank. Please proceed.

Speaker 4

Hi, everyone. Thanks for having me on. Couple of questions. First, on the station side, core advertising seems to be moving in the right direction. Could you just highlight some of the things that are driving the the improvement and what's still lagging?

And perhaps you can mention auto specifically in there. And then what's your current view on when or if core advertising can ultimately recover to pre pandemic levels?

Speaker 5

Yeah. I'll take that, Aaron. Fourth quarter automotive quarter over quarter was up 38.5%. So we're very encouraged as the supply chain gets fixed that the spend will continue to see upward increases. And services was up 27% quarter over quarter.

And we're bullish on this ad revenue business. We established the Sinclair Sports Group, and that will unlock value across the RSNs, broadcast, and the tennis channel as well. We're working on several deals that will be unique to to what we've done in the past. So once, COVID seems to stabilize, we we see, advertising returning to the pre pandemic levels. And, coming out of first quarter with the vaccinations, even though there's uncertainty, we're very confident, on that.

We will exceed, the budgeted first quarter revenue numbers from an ad perspective. So all that leads, to very good optimism. Also, the sports fantasy gaming category will see a breakout year from expenditures as well. So it'll be a new category that will help drive our ad growth.

Speaker 3

Yeah. I wanna just add to that, Aaron, that we were very pleasantly surprised by the strength of core advertising in q four, given all the political we were we were we were absorbing. As I mentioned, December was basically flat. And so, you know, lots of markets are still in shutdown. Businesses are not fully operational.

But, as I'm sure you've read, as I've read, economic indicators are are very strong for a for a strong recovery next year in the general economy, and advertising is a derivative of that economic activity. So to be where we are, I I I you know, where we were back in March and April compared to now, I wouldn't you know, I'm I'm I'm very pleased with what's going on with the core. And and then when you when you when you start to lift some of the the reduction in activity levels from COVID, which we're having, you know, a a very strong rollout of vaccine in

Speaker 5

terms

Speaker 3

of numbers of people getting it. And and, you know, I'm I'm very optimistic about how that how that release of of economic activity will will impact our core.

Speaker 5

And two other factors that lead us to be optimistic is that across most of our day parts, we've seen audience share grow, which leads to more revenue for us, as well as as Chris mentioned, the launch of T and D and that expansion. So it gives many of our stations that weren't in the news game, a news outlet, and it's gotten some critical claim from our viewers, which leads us to believe that the ratings will follow as well. And so it opens up a new daypart for revenue for us.

Speaker 4

Alright. Great. That is really helpful. If I could shift gears over to the Diamond Sports side, just two quick ones. Thinking about the cost base in '21 versus 2020 and trying to set aside kind of the shifting team payments, but can you highlight how many how much incremental cost comes into play in 2021 that wasn't part of 2020, perhaps related to the app launch or other things along those lines?

Speaker 1

Yes. So so, Aaron, we we probably have you know, remember, there there's there's initiatives related to launching the app and rebranding, but there's also cost in there as we as we move off of the Disney and Fox TSAs and we get out of Woodlands and into the Encompass facilities that Chris talked about in his remarks. So you're looking at, I would say, for these transitional and initiative growth opportunity costs, probably about 100,000,000 that are embedded in 2021. But again, these are all either things that we are required to do, and then we'll save TSA cost if we're paying to Disney or Fox as a result of those, or these are things that are going to, propel the growth opportunities that we've been talking about.

Speaker 4

Okay. Got it. And then last one for me, and I appreciate the time. You completed a debt exchange last summer in part, I think, to capture discounted trading levels on the Diamond Sports debt. As you consider ways to bring down leverage and or the interest burden now at that entity, is another exchange offer or liability management exercise still being considered?

And if so, any any sense of timing you can give us on that.

Speaker 3

Yes. No. We are, we're very interested in that. We have active discussions. You know, we're we're not, you know, timing, I can't predict.

We're more interested in doing the right deal as opposed to just any deal. And and, you know, another exchange, I think, could be very likely.

Speaker 4

Okay. Thank you again.

Speaker 1

Thank you.

Speaker 0

Thank you. We have reached the end of the question and answer session, and I would like to now turn the call over to Chris Ripley, President and Chief Executive Officer for closing remarks.

Speaker 3

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

Speaker 0

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.