Sinclair Broadcast Group, Inc. Q1 2009 Earnings Call Transcript

May. 6.09 | About: Sinclair Broadcast (SBGI)

Sinclair Broadcast Group, Inc. (NASDAQ:SBGI)

Q1 2009 Earnings Call

May 6, 2009 8:30 am ET

Executives

David Amy – Executive Vice President, Chief Financial Officer

Lucy Rutishauser – Vice President Corporate Finance, Treasurer

Steven Marks – Chief Operating Officer

Analysts

Bishop Cheen – Wachovia Securities

Aaron Watts – Deutsche Bank

Marci Ryvicker – Wachovia

Avi Steiner – JP Morgan

Michael Meltz – JP Morgan

[Andrew Finkelstein – Barclay's Capital]

Operator

Welcome to the first quarter 2009 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, David Amy, Executive Vice President and Chief Financial Officer.

David Amy

Good morning everyone. In the room with me today are David Smith, President and CEO, Steve Marks, Chief Operating Officer of our Television group and Lucy Rutishauser, Vice President Corporate Finance and Treasurer. Before we begin, Lucy will make our forward-looking statement disclaimer.

Lucy Rutishauser

Good morning everyone. 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 may differ materially and adversely from those described in forward-looking statements as a result of various important factors.

Such factors have been set forth in the company's most recent reports on Forms 10-Q and 10-K as filed with the SEC and included in our first quarter earnings release. Our earnings release was furnished to the SEC on an 8-K earlier this morning.

The company undertakes no obligation to update these forward-looking statements. The company regularly uses its website as a key source of company information which can be accessed at www.sbgi.net. In accordance with Rayguest this call will be available to the public. A webcast replay will be available on our website later today and will remain available until our next quarterly earnings release. Redistribution of this call is prohibited without the express written consent of the company.

Included on the call will be a discussion of non-GAAP measures, specifically Television Broadcast cash flow, EBITDA, free cash flow and leverage. These measures are not meant to replace GAAP measurements but are provided as supplemental details to assist the public in their analysis and evaluation of our company. A reconciliation of the non-GAAP measures to the GAAP measures in our financial statements is provided on our website under investor information reports and filings.

David Amy

Now turning to our results, net Broadcast revenues for the first quarter were $131.3 million down 18.4% or $29.6 million versus first quarter of '08. The decrease of $4.9 million less Super Bowl revenues. This is offset by $1.5 million in retransmission revenues. Our first quarter results which called for net broadcast revenues to be down low 20% came in slightly ahead of our guidance due to higher local ad sales.

Television operating expenses in the first quarter defined as space and production and space in SG&A expenses before barter were $65.9 million, down 10.4% from the first quarter last year. The $7.6 million decline was primarily due to the cost cutting initiatives we implemented in fourth quarter of '08 as well as lower sales commissions on the lower revenues.

Corporate overhead in the quarter was $6.4 million and that was $400,000 lower than first quarter last year primarily due to lower stock based compensation. In the first quarter we reported a $1 million non cash gain on asset exchanges. We also recorded a $130.1 million impairment charge or $100.8 million on an after tax basis.

This is associated with the assessment of goodwill and SEC licenses. This is a non cash charge which has no impact on our cash flows or our covenants.

When excluding this impairment loss, we had operating income in the quarter of $23.4 million, 49.3% lower than last year's first quarter results of $46.2 million.

Net interest expense for the quarter decreased 18.4% or $4.1 million from first quarter last year primarily due to a 200 basis point decline and three month LIBOR and due to repurchasing our bonds in the open market with lower cost revolving debt.

Our other operating divisions had a $700,000 operating loss as compared to an $800,000 operating loss in first quarter of '08. Television broadcast cash flow in the quarter was $43.6 million. That was down $24.6 million or 36.1% from last years first quarter BCF due to the lower revenues and higher film payments offset in part by lower TV operating expenses.

EBITDA was $36.7 million in the quarter, $25.4 million or 41% lower than the same period last year due primarily to the decline in BCF. The broadcast cash flow margin on net broadcast revenues was 33.2% and the EBITDA margin on total revenues was 23.7% in the quarter. Excluding the impairment charge, we had diluted earnings per common share in the first quarter of $0.19 as compared to diluted earnings per common share of $0.17 in the first quarter of last year.

During the quarter we generated $22.3 million of free cash flow which was $13.8 million less than first quarter last year primarily due to the lower EBITDA offset by savings in interest expense, capital expenditures and current taxes. Our stock price at March 31 was $1.03 per share resulting in a free cash flow yield of 178%.

Before we go any further, we feel it is important in the current environment to address the issues of the May 2010 and January 2011 flip dates as they relate to our 3% and 4.78% senior convertible bonds respectively.

First, we expect to shortly begin the process of working with the convert holders to reach a mutually beneficial solution. Second, we will not be discussing specifics regarding the anticipated process or potential solutions that are available to the parties. And lastly, we will not going forward disclose or discuss any of our ongoing discussions or details of the process nor will we take questions or respond to any questions on this call or afterwards regarding the process, details or discussions until such time as a public disclosure is warranted.

With that, Lucy will take you through the balance sheet and cash flow highlights.

Lucy Rutishauser

Cash programming payments were $23.7 million in the first quarter and capital spending was $2.8 million in the first quarter. We had $11.2 million of cash on hand at March 31 and $1,332.8 million of debt which includes $57.4 million of non recourse and variable interest density debt that we are required to consolidate on our books.

At March 31, we had $120.5 million drawn under our revolving line of credit and approximately $48 million available of our $168.6 million commitment. Leverage at the operating company was 3.08 times at quarter end on an accompanying requirement of 6.5 times and if we add a leverage test to the holding company, it would be estimated at 5.69 times.

Our weighted average cost of debt at quarter end was 5.7%. During the first quarter we repurchased 1.5 million shares of our Class A common stock, at $50.7 million face amount at 3% convert and $1 million face amount of our 6% subordinated convertible bonds. On some of these repurchased, we previously reported to you on our February call and in our recently filed 10-K.

As discussed previously the accounting for our 3% senior convertible bonds has changed pursuant to adopting ATV-14-1 which addresses accounting for convertible debt instruments that may be settled in cash upon conversion. Per ATV-14-1 companies with convertible securities can be settled in cash at conversion, must account for this security in its liability and equity component, thereby recording a debt discount.

As a result, non cash interest expense was increased by approximately $.9 million in 2008 and $6.4 million in 2007. We expect to record an additional $12.1 million of non cash interest expense in 2009 and $4.5 million in 2010 as a result of the discounted amortization assuming the May 2010 flip date. This is already reflected in the guidance provided in our earnings release this morning.

In addition, the 3% face amount carried on the balance sheet at December 31, 2008 was reduced by a $13.8 million debt discount. We have included on our website the re-classes made to our 2008 income statement from adopting ATV-14-1 as well as the re-statements required pursuant to the adoption of FAS-160 which is accounting for non controlling interest.

Steve Marks will now take you through our operating performance.

Steven Marks

Good morning everyone. While we came in slightly ahead of our guidance, the advertising environment continues to be challenging. Visibility continues to be minimal. Including political local time sales in the first quarter were done 18.3%. The national was down 31.3%. Excluding political, local was down 17.3% while national was down 28.8%.

Local now makes up approximately 70.5% of our time sales. Approximately 2.6% of the decline in net broadcast revenues was due to the Super Bowl being aired on NBC as compared to Fox last year.

As expected, we had declines in just about every category during the first quarter due to the recession with the exception of grocery, breakfast foods and travel which were up an insignificant amount.

The automotive category was exceptionally weak, down 46.3% but in line with our expectation. Automotive has now dropped to be our second largest advertising category as 13.7% of time sales. It has been replaced by the service category which despite being down 19.2% in the quarter, now represents 16.7% of our time sales.

Other categories that were down significantly were movies, fast food and pharmacy. All affiliation on both and including and excluding political basis were down in first quarter.

Political revenues were $300,000 in the first quarter versus $3.2 million in the same period last year. We outperformed the industry however in first quarter based on the TVD advertising survey of 750 stations time sales which were down approximately 28% versus our time sales performance of down 22.6%.

Our stations also grew their total market shares on average. With all but two markets our total share including political increased to 18.8% from 18.4%.

Turning to our second quarter outlook, as I mentioned, visibility continues to be limited and it is unclear what will happen with the automotive sector given Chrysler's bankruptcy and the possibility of a GM filing as well. With that said, our expectation is that the second quarter net broadcast revenues will be down by high teen percents from our second quarter 2008 net broadcast revenues of $163.7 million.

Included in our second quarter guidance is approximately $200,000 for political advertising as compared to $3.6 million in the second quarter last year. As expected, we are forecasting for all affiliation groups to be down in the second quarter. We are once again expecting the majority of our advertising categories to finish the quarter down versus the second quarter last year.

We expect automotive to finish the second quarter down by about 40% to 45% and services to finish the quarter by low teen percents.

On the expense side, we are forecasting our TV production and SG&A expenses to be approximately $69.2 million in the second quarter, a 7.1% decrease from the second quarter last year of $74.4 million. The $5.2 million decline is due primarily due to lower sales expense as a result of lower revenue and the effect of the cost cutting measures we implemented in the fourth quarter of 2008.

For the year TV operating expenses are estimated to be approximately $272.7 million, down $22.4 million or 7.6% from 2008's $295.1 million. For other line item guidance, please refer to our earnings release provided this morning.

With that, I'd like to open the field up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Bishop Cheen – Wachovia Securities.

Bishop Cheen – Wachovia Securities

Could you give us the balances of the three converts and also tell us in this current Q2 if you have bought back any other securities be the converts or bonds or stock.

Lucy Rutishauser

The 8% note, there's $224.7 million face amount outstanding. The 4.78% note, there's $143.5 million face amount. The 3% convert $294.3 million face and the 6%, $134.1 million face and we have not bought any securities back in the second quarter.

Operator

Your next question comes from Aaron Watts – Deutsche Bank.

Aaron Watts – Deutsche Bank

How much more flexibility do you have to use bank debt to buy back the converts?

Lucy Rutishauser

We would be limited based on the amount of the revolver liquidity so at the end of March we had about $48 million of revolver available to us. That would just be without going back to the markets.

Aaron Watts – Deutsche Bank

So between that availability and your free cash flow, you're allowed to choose to so to continue to buy back that holding company debt or converts. You have restricted payment capacity is another way to put it.

Lucy Rutishauser

We have the capacity, I'll say that. We have the capacity based on our March 31 to buy that back. I'm not saying that we would or we would not though.

Aaron Watts – Deutsche Bank

It looked like you did a little better in cutting costs than what you had guided us to at the end of the last quarter. Can you talk about what might have changed or if there was just some timing that you got some of the benefit upfront here?

Steven Marks

We just went back in and took a look at everything we had, every department we had and obviously the times called for doing so. We feel we made the cuts that obviously are hurting our performance. So we did what was necessary to do.

Aaron Watts – Deutsche Bank

Could you give us some idea with the changes that are taking place in some of your affiliations of the networks with My Network TV going more toward the syndicated model, CW yesterday talking about how they're dropping Sunday, what impact is that going to have for you and the 29 to 30 stations you have affiliated with those guys in terms of revenues and expenses as we go forward?

Steven Marks

I think that between the two of them we're about 24 between CW and My Network. The My Network thing, addressing that, from the beginning the 10:00 pm with My Network has not been what I could call a huge success and you would expect that there would be a building process with a new network debut.

So as the network continued to debut, the fact of the matter is, the numbers that we're going up against and the history of the network from its start are not numbers that are difficult to match. So at this particular point as they decide to go forward, the effect of 10:00 pm will not be that great based off of the last two years.

In terms of the CW, they've had a pretty good year ratings wise. Sunday has never been a temple for us in that we've gone to a lot of revenue on Sunday and we'll take back that time period with really no loss financially whatsoever.

The interesting thing about the two networks quite frankly, we've had a lot of success surrounding the network with very competitive programming, i.e. Two and a Half Men and most of these markets where we have My Network and CW affiliates, the real story is what we're doing with surrounding those particular networks.

As we mentioned in this briefing this morning, it was interesting to note that in a very difficult economy, we had quite a few of My Network and CW stations actually grow share in first quarter. So we're confident that we're on the right track with both of those networks.

Operator

Your next question comes from Marci Ryvicker – Wachovia.

Marci Ryvicker – Wachovia

You mentioned that on the local side in the first quarter it was a little bit better than expected. Which categories were stronger than you had originally thought?

David Amy

I don't know that we could point to anything and say it was stronger than we originally thought. It was from a local standpoint, a focus on new business and the continued effort by Steve and the stations to generate local revenues has been just a great result and relatively speaking to what we thought.

Steve Marks

On a local basis, we actually finished first quarter up 15% on new business which is just an out of the ball park number considering the economy. So the efforts came on a local level and most of it through new business initiatives.

Marci Ryvicker – Wachovia

When you say new business, what exactly are you talking about?

Steven Marks

People that have not been on our air for at least a 12 month period.

Marci Ryvicker – Wachovia

Do you know where those advertisers are coming from?

David Amy

Just knocking on doors on the streets. All different categories.

Marci Ryvicker – Wachovia

What prompted the impairment charge? Usually we see goodwill being appraised or evaluated towards the end of the year unless an event occurs like a sale. Is there anything going on that prompted you to evaluate your goodwill?

David Amy

The catalyst for that occurred during the first quarter as both the pricing of our equity dropped from about $3.00 down to $1.00 just through an optional value and then the bonds and the converts also diminished quite a bit in public trading value. So those two elements require under the impairment GAAP rules to reappraise our valuation. So those were the catalysts so as a result of the market coming down we had to go back, re-appraise and by following the rules we incurred the impairment.

Marci Ryvicker – Wachovia

What is your exposure to Chrysler?

Steven Marks

Counting both the manufacturing and dealers right now, receivables are about $1.5 million, just sort of a round number. We have in the numbers for our projections internally are estimating the total exposure counting Chrysler and GM could be as high as $1.5 million. So certainly a number that dealers are out there will be paying their bills. So that should be out total exposure when you add them both together and that's we think a very conservative way to look at it.

Lucy Rutishauser

That number is built into our second quarter expense guidance.

Operator

Your next question comes from Avi Steiner – JP Morgan.

Avi Steiner – JP Morgan

Can you give us a little bit more color on the expense side? It looks like Q1 you were down a little over 10%, station OpEx and SG&A yet your full year guidance is more in the 7% range. And can you just confirm that there is a $500 million incremental carve out under the credit agreement that perhaps could be used as well if you're in covenant compliance.

Lucy Rutishauser

Some of the things you'll see first quarter we didn't have a lot of promotion expense in there whereas for the May and November book we'll be promoting those. You'll also see costs from a year ago is for the removal of the analog equipment to take that down.

Avi Steiner – JP Morgan

I just want to make sure that there's if I'm reading it right, there's a $500 million incremental on the credit facility that actually could be used for the converts or something else as well as long as you're in covenant compliance.

Davy Amy

We've talked about that. It's still there.

Lucy Rutishauser

That would have to be syndicated. That's not an available commitment to us.

Operator

Your next question comes from Michael Meltz – JP Morgan.

Michael Meltz – JP Morgan

What's your time thinking on the investment spending for the year? I know you outlined what you did in the quarter. What are your mandatory payments?

David Amy

Mandatory payments, what we would call mandatory is a couple of trailing items. In the fourth quarter, we had estimated about $27 million of investments that we would be making and since that time we've been ramping up I guess you might think of it that way in terms of the economy were it is, some of the projects that were in process.

We've had a couple of them that took place, you'll be seeing in our report here. One was about $3 million for a project that has been started about two years ago and there may be another $2 million on that project later this year.

And there was an investment that we have on the Virginia Eastern Shore where we pick up another 25% of the equity of that particular piece for about $5 million. That's been appraised at somewhere in the $120 million range so that purchase certainly was opportunistic for us.

The terms on that are $10 million in the first quarter. We'll see another $3 million of payments that will come later this year. Other than that there's a little bit here or there.

Michael Meltz – JP Morgan

So you did $6 million in the first quarter you're saying and as of right now you're anticipating another $6 million for the full year?

David Amy

Somewhere in that neighborhood.

Michael Meltz – JP Morgan

On auto, can you talk a little bit about what you're hearing from dealers of late? I know you gave your guidance. Are you hearing that the dealers are feeling slightly better about their business or any kind of qualitative statement you can make there?

Your answer to the prior question on Chrysler exposure, I don't think I understood the answer when you said $1.5 million. That's your receivable I guess. What is the actual revenue exposure if you can outline that for us?

Steven Marks

The first part of the question on what we're hearing from the dealers, obviously they're still waiting to hear back information as there could be some consolidation. Certainly everybody's hurt. So we're still waiting like everybody else to figure out at the end of the day where all of this winds up.

Obviously there will be some consolidation and there will be some local dealers that perhaps are at risk and all of that will probably evolve over the next six or seven months.

In terms of Chrysler going forward, I believe you're correct in terms of receivables. Once that's taken care of we'll be able to book business under obviously restricted conditions but we expect that Chrysler will be back in the market and they'll be buying time and they'll be an advertiser.

I think we gave you an overall view of about 40% to 45% down for Chrysler and for now that's about as accurate as we can get.

Operator

Your next question comes from [Andrew Finkelstein – Barclay's Capital]

[Andrew Finkelstein – Barclay's Capital]

In past recessions we've heard advertisers cutting their budgets back in marketing and maybe buying the top three instead of the top five. The results this quarter look on par better than some of the other guys we've seen. Can you talk about if that trend has occurred out there in your markets? And also on cost cutting, have you looked to reduce your news programming in any of your markets as a cost cut?

Steven Marks

In terms of the three, obviously on a national level more so than local where the budgets are more robust. As a negotiation tool, it's not unusual for agencies to say they're going to buy three stations or go two to three deep. So we've experienced that. So has everybody else that we compete against.

As I mentioned in our briefing, what's interesting about our performance in first quarter is as tough as the economy has been everybody should keep in mind we aired 16 less Super Bowls than we had in 2008, plus we didn't have Ohio State and the Championship College Football game this year.

Even with all of that up against us, we still grew share by four tenths of a revenue share point. So under extreme conditions, we managed to grow our revenue share as it pertains to the My Network and CW stations, we actually in markets interestingly enough in markets like Birmingham and Las Vegas and Milwaukee, where we have both My Networks and CW's in the same market, both of those properties in all three markets, all six stations, grew share both political included and political excluded.

That was quite a performance. So the fact that they're going two or three deep, it's true. But the bottom line is you've got to sell the spots and obviously the performance shows that we did that.

David Amy

As far as news, we continue to look at all of our expense lines including the news and as Steven mentioned earlier, we've been as a company very focused on every dollar. From day to day we've always had a reputation of being very cost conscious and very focused on our expense controls. But certainly the events that we're seeing here, the recession that we're in the middle of has really sharpened our focus for any kind of inefficiencies that we might see.

And so in that regard, it's been a healthy exercise in regards to looking across out platform and seeing what some stations are doing very well versus some stations that are not doing so well and implementing improvements where we can and we're staring to see and enjoy some benefits in regards to improved expenses.

Operator

Your next call comes from Aaron Watts – Deutsche Bank.

Aaron Watts – Deutsche Bank

In the past, your thoughts with regards to online, the networks showing their programming online and with Who and other sites picking up a little bit of steam here in terms of partners, I would be curious about your updated thoughts on how that affects your business model and your viewership.

David Amy

I think we've been pretty consistent in our thinking that any kind of distribution in any form of additional viewing of television programming is a positive. Certainly that's the overall macro way to think of it for us and certainly if you can watch a show without having to be there all the time, that's helps quite a bit when it comes to watching as scheduled. So primarily what we're seeing is a benefit in that regard on an overall basis.

Secondarily, when you start breaking it down into specific viewing, what we see is that there's probably 150 hours a month of overall television viewing. When I say probably, it kind of averages out throughout the demos and the average television viewers watching 150 hours of television per month, whereas online viewing is a couple or three hours per month.

I think that points towards the fact that there's value there certainly. But that it's used to supplement the overall television viewing experience. So it's certainly not a replacement to broadcast television. The Neilson reports even come back and say that what they find in regards to viewership is that viewers will move towards the best viewing experience.

So with our high definition broadcast and whether it's 42 inch screen or a 60 inch screen or what have you, that kind of viewing experience is unparallel in regards to what you would get off an internet or off the web viewing.

It's interesting just week one of the comments in one of the panels that I was listening to was that the efforts to provide a viewing experience in big events, and the example was last year's U.S. Open when Tiger and Rocco went into the playoffs on Monday, that ESPN had quite a bit of difficulty in delivering that picture to the web viewers. So it's just a point to point issue where the demand for that was greater than what they were able to handle.

And certainly for us as broadcasters that would be a very simple solution for us to be able to handle that kind of demand.

Operator

Your next question comes from Bishop Cheen – Wachovia Securities.

Bishop Cheen – Wachovia Securities

Any comments on mobile and also make sure I have this right about other investments. I thought you said, or I remember the guidance was 27ish and did you say that maybe for the rest of the year there might be $6 million more of outside investment?

David Amy

I said we have about $3 million more on the Bay Creek. There may be another few million.

Lucy Rutishauser

Don't forget that $27 million was the guidance for fourth quarter although we spent about $11 million of it in that quarter.

Bishop Cheen – Wachovia Securities

So of the $27 million, $11 million came in fourth quarter. $6.4 million in this quarter and then $6 million maybe for the rest of the year.

Lucy Rutishauser

Right.

Bishop Cheen – Wachovia Securities

On mobile, is there any significant update that you can give us or the tenor and the tone of what you're seeing on that?

David Amy

I think the update on that is that it's getting closer an closer to an absolute reality, so much so that you may have seen this in the trades recently that Dell computers is now offering or about to offer based on show, small laptop computers that will have television receivers in them to be able to watch mobile television on a live rolling basis.

So that's just kind of the tip of the iceberg of what's coming from the standpoint of different types of devices that will likely be all affordable devices whether they're GPS devices or laptop computers of what have you. It seems unstoppable now that probably the next year we'll see just a plethora of devices that are going to offering local television.

It's a great opportunity for us is recognizing that there's going to be more and more people watching television on a mobile basis or a portable basis, is to learn how to monetize that on a going forward basis.

That's the real big opportunity irrespective of anything else that goes on. It's the notion of being able drop ads for specific devices in specific locations for specific advertisers is what we think is the great game going forward.

Bishop Cheen – Wachovia Securities

Are there any particular hurdles out there either on a regulatory or technical standards basis that still has to be overcome before this thing can speak its own level?

David Amy

I don't see any regulatory issues that are in the way. There are always technical issues but my sense is that they'll be dealt with on a rolling basis. Technology is clearly getting better and better. Every generation is an incremental improvement that makes it more usable and more user friendly.

So I think it will never be perfect like nothing is, certainly I think when it comes time to enter the marketplace we'll be substantially better than the original cell phone structures when they were put in place. And I think over time as we go into what I would characterize as the gap filling mode, it's very conceivable that we'll just be like a telephone operation from the standpoint of receivability. That's kind of the ultimate objective.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

David Amy

Thank you everyone. We thank you for participating on our earnings call this morning and if anyone has any additional questions, feel free to give us a call.

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