Sinclair Broadcast Group (SBGI) Q4 2016 Results - Earnings Call Transcript

| About: Sinclair Broadcast (SBGI)

Sinclair Broadcast Group, Inc. (NASDAQ:SBGI)

Q4 2016 Earnings Call

February 22, 2017 9:30 am ET

Executives

David B. Amy - Sinclair Broadcast Group, Inc.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Jill Hecklinger - Sinclair Broadcast Group, Inc.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Steven M. Marks - Sinclair Broadcast Group, Inc.

Analysts

Alexia S. Quadrani - JPMorgan Securities LLC

Aaron L. Watts - Deutsche Bank Securities, Inc.

Marci L. Ryvicker - Wells Fargo Securities LLC

Kyle Evans - Stephens, Inc.

Dan L. Kurnos - The Benchmark Co. LLC

James G. Dix - Wedbush Securities, Inc.

Leo Kulp - RBC Capital Markets LLC

Avraham Avi Steiner - JPMorgan Securities LLC

Barry L. Lucas - Gabelli & Company

James Davis Hebert - Wells Fargo Securities LLC

Operator

Greetings and welcome to the Sinclair Broadcast Group Fourth Quarter 2016 Earnings Conference Call. As a reminder, this conference is being recorded. And I would now like to turn the conference over to David Amy, Vice Chairman of Sinclair. Thank you. Please go ahead.

David B. Amy - Sinclair Broadcast Group, Inc.

Thank you, operator, and good morning everyone. Before we begin today, it's with great pleasure that I can now turn over the quarterly earnings call that I've been hosting for the last 16 years to our new CFO, Lucy Rutishauser. I've enjoyed and have been honored to speak with you and even get to know some of you on a personal level over the years. I look forward to continuing to provide the support and business integrity you've come to expect from Sinclair along with our new CEO, Chris Ripley, who is leading us into this historic moment in time for our industry. Hopefully, you share our excitement as we look forward towards the future of broadcast television.

Lucy, the call is yours.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Thank you, Dave, and thank you for your years of hosting the call for us. So participating on the call with me today are David Smith, our Executive Chairman; David Amy, our Vice Chairman; Chris Ripley, President and CEO; Steve Marks, Executive Vice President and Chief Operating Officer of our Television Group; and Steve Pruett, Executive Vice President and Chief TV Development Officer.

Before we begin, Jill Hecklinger will make our forward-looking statements disclaimer.

Jill Hecklinger - Sinclair Broadcast Group, Inc.

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 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 later today and will remain available until our next quarterly earnings release.

Included on the call will be a discussion of non-GAAP financial measures, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements, but are provided as supplemental detail to assist the public in their analysis and valuation of our company. A reconciliation of the non-GAAP financial measures to the GAAP measures in our financial statements is provided on our website, under Investor Reports and Filings.

Chris Ripley will now take you through our operating highlights.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Thank you, Jill. Before we go through the results, let me review some of the more meaningful activities that have taken place since our last earnings call. We've been very active on the network front, announcing the launch of two new networks this month, CHARGE! and TBD. TBD brings together the best of the Internet to TV and is geared towards a millennial audience. CHARGE! is modeled after COMET, our successful science fiction network partnership with MGM, except CHARGE! is action and adventure-based. Early feedback has been very enthusiastic for the new networks.

COMET, profitable from the start and launched in October of 2015, is now in over 80% of the country with a loyal fan base and we'll be extending its distribution even further with its upcoming launch on Apple TV and Roku this quarter.

In February, we reached an agreement in principle with Frontier Cable for carriage of our Seattle and Portland stations as well as Tennis Channel. We also extended our programming agreement with MyNetworkTV through the 2017-2018 broadcast season. Our drone program is off to an exciting start with 14 stations providing spectacular aerial footage for our news.

On the regulatory front, the FCC has recently enacted some welcomed and overdue regulatory improvements, rescinding the JSA processing rules and launching the ATSC 3.0 NPRMs process. We are expecting the ownership rules to be tackled sometime this year. This is all good news for our industry, as the elimination of antiquated rules will allow us to compete on a level playing field with other forms of communications.

Turning to ATSC 3.0, our ONE Media 3.0 subsidiary continues its development of products and services, which will lead to next-gen business opportunities, including work on a Single Frequency Network deployment, automotive telematics, the 3.0 transition plan, and other business model opportunities. The FCC completed the reverse portion of the spectrum auction, which closed at the 84 megahertz clearing level. As a result, we expect to receive $313 million of gross proceeds later this year. We do not expect any loss of over-the-air coverage or MVPD carriage and no material impact on operating performance.

We're pleased to announce that once again we're offering up to $50,000 in scholarship funds to minority students studying broadcasting or journalism. And as we enter 2017, we're very excited about the deregulation potential, our auction proceeds, the upcoming Next-Gen Broadcast Platform, our development initiatives, our strong balance sheet, and our free cash flow performance.

Now, with that, I'll hand it over to Lucy to take you through the fourth quarter results.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Thank you, Chris. Before getting into the financial details, let me highlight some key metrics. On a reported basis, we grew our 2015/2016 combined free cash flow per share by 22% over 2014/2015, going from a combined $7.75 per share to $9.48 per share. At the same time, our two-year net leverage declined from 4.7 times to 4.4 times. So we increased our free cash flow per share and decreased our leverage.

Turning to the details. Media revenues for the fourth quarter were $727 million, an increase of 33% or $181 million higher than fourth quarter 2015. On a pro forma basis, fourth quarter 2016 media revenues were 26% higher than pro forma fourth quarter 2015, primarily due to increases in political advertising and retransmission fees.

For the full year, media revenues were $2.5 billion, an increase of 24% or $488 million higher than full year 2015. And on a pro forma basis, media revenues for 2016 were $2.523 billion, up 18% from 2015's pro forma media revenues of $2.147 billion. This was slightly lower than our guidance, primarily due to fewer political dollars than expected. Political revenues in the fourth quarter were $113 million and $199 million for the year, again, below our guidance, but nonetheless, the second best year in our company's history.

Media operating expenses in the fourth quarter, defined as media production and media SG&A expenses before barter were $382 million, up 22% from fourth quarter last year and up 16% on a pro forma basis. The increase on a pro forma basis was primarily due to higher reverse re-trans fees on network renewals, start-up costs related to our revenue generating initiatives, system upgrades as well as higher compensation.

Our media expenses were $2 million favorable for fourth quarter guidance on staffing and compensation. On a full year basis, media operating expenses were $1.455 billion, up 25% from 2015 and up 17% on a pro forma basis. Excluding reverse re-trans, investments and initiatives and acquisitions, pro forma media operating expenses were up mid-single digits primarily on compensation costs and commissions on the higher revenue and that was within our guidance.

Corporate overhead in the quarter was $19 million, up 4% compared to the same period last year, primarily due to higher group insurance. For the year, corporate overhead was $74 million, a 15% increase over the prior year due to increased salaries and benefits and legal and acquisition costs. Also included in this result is $10 million in stock-based compensation.

For 2017, corporate overhead is estimated to be $70 million. That's a decrease of $3 million over the prior year. Research and development costs, these are ONE Media costs, were only $1 million in the quarter and $4 million for the year. For 2017, we are estimating $16 million in ONE Media expenses related to the transition and implementation of ATSC 3.0.

EBITDA was $312 million in the quarter, an increase 52% or $107 million higher than the same period last year and lower than our guidance due to the lower political revenues. For the year, EBITDA was $913 million, up 27%, and on a pro forma basis, EBITDA for the year was $918 million. That's a 21% increase over 2015's pro forma EBITDA of $759 million, and that's primarily due to the higher political revenues and net re-trans growth. The EBITDA margin on total revenues was 39% in the quarter.

Net interest expense for the quarter was $54 million, up $5 million versus fourth quarter last year on acquisition financing, and for the year net interest expense was $210 million. Our weighted average cost of debt for the company is approximately 5%, and for 2017, we are estimating net interest expense to be $216 million.

Diluted earnings per share on 91 million weighted average common shares was $1.32 in the quarter and $2.60 for the year. We generated $208 million of free cash flow in the quarter and $530 million for the year. That is a 58% EBITDA conversion ratio.

Our free cash flow on a per share basis for the year was $5.61. We distributed $202 million to shareholders through share repurchases, and dividends and that represents a 38% payout ratio. Our 2016/2017 free cash flow yield is approximately 15% and our annual dividend yield on our current share price is approximately 2%.

Now turning to the balance sheet and cash flow highlights. Capital expenditures in the fourth quarter were $26 million and $94 million for the year. For 2017, we are estimating CapEx to be $90 million and that excludes any expenditures related to the re-pack or 3.0 deployment. Cash programming payments during the quarter, fourth quarter were $27 million and $112 million for the year. For 2017, we are estimating cash programming payments to be flat at about the $112 million level.

Net cash taxes paid in the fourth quarter were $28 million and $96 million for the full year. For 2017, excluding tax implications from the auction and the book gain, cash taxes are estimated to be approximately $133 million.

In January, we extended the maturity dates of our term B loans from 2020 and 2021 to a maturity of 2024. We also added additional operating flexibility, including a reduction in certain pricing terms and revisions to certain covenant ratio requirements.

At December 31, total debt was $4.204 billion, including $137 million of non-guaranteed and VIE debt. Cash on hand at December 31 was $260 million, and we had $483 million available on our revolver for total liquidity of $743 million. Total net leverage through the holding company at quarter end was 4.4 times on a trailing eight-quarter basis, that excludes the VIE and non-guarantor debt and net of cash.

The first lien indebtedness ratio, which is now based on a trailing eight-quarter covenant is 1.7 times on a covenant of 4.25 times. We estimate our two-year average holding company net leverage to be in the high 3 times by the end of 2017. That assumes our current portfolio and is before proceeds from the spectrum auction.

During the quarter, we repaid $18 million of scheduled debt amortization and distributed another $16 million in dividends. For the year, we distributed almost $140 million of free cash flow for scheduled debt repayments and quarterly dividends.

Since our November 2 earnings release, we repurchased 406,000 shares of common stock for $11 million and now have $119 million remaining on our buyback authorization. During 2016, the full year, we've repurchased $136 million or 7.5% of the float. Our share repurchases, dividends, and debt repayments represented an approximate 52% payout of our total 2016 free cash flow.

So with that, Steve Marks is going to take you through our operating performance.

Steven M. Marks - Sinclair Broadcast Group, Inc.

Thank you, Lucy, and good morning everybody. For the fourth quarter, political revenues were $113 million versus $12 million in fourth quarter of 2015. While this was below our guidance, again, let's not lose sight that 2016 with $199 million of political was our second highest political year on record. Looking ahead, pundits are already talking about 2018 being a hotly contested mid-term election year, with 21 congressional seats open and the potential for high-profile ballot issues.

Core advertising revenues, which exclude political, were down mid-single digits in fourth quarter, due to the crowding out effect by political advertisers and the absence of technical crews that closed their doors. This was in line with our guidance and in line with prior political year core trends. In addition, we continue to see our digital business as one of the best performing in the industry with our digital revenues growing 19% in the fourth quarter on a pro forma basis.

Turning to our outlook for 2017, which does not include the impact of the auction or the re-pack. For first quarter, we are expecting media revenues to be approximately $602 million to $607 million, up 13% to 14% as compared to first quarter 2016. This includes political revenues of $1.5 million to $2.0 million. Pro forma core advertising revenues in the first quarter, excluding political, are expected to be roughly flat versus the same period last year, in part due to softer retail, particularly department stores, the fruit category, media which shifted agencies and ad campaigns, and technical schools, which we spoke about last quarter.

For first quarter, we're expecting auto to be up low-single digit percent versus prior year. As well, we're seeing strength in services and telecom. With Small Business Optimism Index hitting its highest levels since 2004, we expect to see that translate into core local growth as the year progresses.

On the expense side, we are forecasting media expenses in the first quarter to be approximately $387 million versus $331 million in the first quarter of 2016, with about half of the increase coming from acquisitions initiatives and system upgrades. On a pro forma basis, first quarter expenses are expected to be up 11% on higher reverse re-trans, acquisitions, initiatives, and system upgrades. Normal operating expenses in the quarter are expected to be down slightly in a non-political year.

For the year, media expenses are forecasted to be $1.588 billion versus 2016 pro forma media expenses of $1.472 billion, an 8% increase. Of that, approximately half of the increase is from acquisitions, initiatives and system upgrades, and the remainder is from reverse re-trans, offset by a decrease in normal operating expenses. For this year, normal operating expenses are expected to be down low single-digits, primarily due to low sales commissions in a non-political year. EBITDA in the first quarter is expected to be approximately $180 million to $184 million, up 11% to 13% versus as-reported first quarter 2016 EBITDA of $163 million, and up 7% to 10% versus pro forma first quarter 2016 EBITDA of $168 million.

Free cash flow in the first quarter is expected to be approximately $106 million to $110 million. For 2016 and 2017, we expect our combined free cash flow to be towards the low end of our guidance due to the softer 2016 political revenues. For 2017 and 2018, we are estimating combined free cash flow of $950 million to $1.025 billion, or $5.46 per share, which excludes upside from the $313 million of gross auction proceeds.

With that, we'd like to open it up to questions.

Question-and-Answer Session

Operator

Our first question comes from the line of Alexia Quadrani with JPMorgan. Please go ahead with your questions.

Alexia S. Quadrani - JPMorgan Securities LLC

Hi. Thank you. Sort of a bigger picture question, with the possibility of more deregulation. I guess, love your view, any sense of sort of timing that we could see any changes for reimplementation of the UHF discount? And then, if we see sort of more sort of industry-wide, wide-scale deregulation, I guess, if you could – can you talk us a little bit about the benefits of consolidation compared to the last major wave M&A we saw a few years ago, I guess, how do you see it different or better? Any color on that front would be great. Thank you.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Sure. So, as I mentioned, we do expect this new FCC to tackle the ownership rules more broadly. The exact timing of how that's going to roll-out is not known to us, but we do expect it to be tackled this year and that will include looking at the UHF discount and looking more broadly at all the ownership rules that were just reaffirmed last year in the quadrennial review. So we expect good things to come from that. We're very optimistic about this new FCC and the leadership of Ajit Pai. And in terms of what that could lead to on the consolidation size we definitely anticipate that more consolidation will happen, in fact we think it's a necessary activity within the industry.

And just like the last wave, there will be synergies from re-trans, which Sinclair meets the way in in terms of rates and synergies on the cost side. And this next wave of consolidation will, I predict, allow broadcasters to compete more effectively with the big diversified media companies the world within the telecom and cable players. So that's more of a strategic – long-term strategic benefit for the next wave of consolidation, but they'll definitely be same thing as you saw before in terms of revenue and cost synergies.

Alexia S. Quadrani - JPMorgan Securities LLC

And then, just a quick follow-up staying on that topic. I mean, is there any concern or I guess, thoughts that the networks, the larger networks may also be interested in adding stations to portfolio if the cap is lifted or eased. I think Fox may have indicated, but they are not interested. I think CBS has said the opposite, they might be interested. I guess, from where you're sitting, any thoughts on how that may play out or how that may impact your business?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

So I do expect them on the margin to be interested, as you mentioned, CBS, I believe, did affirmatively say they would be and they tend to, over the last couple of years have had interest in strategic markets, larger markets which fit their operating model, or areas where they have the AFC or the NFC deal on the football side. So I do expect them to be buyers. I don't expect them to be big consolidators per se, but being selective in terms of picking up stations that fit their operating model.

Alexia S. Quadrani - JPMorgan Securities LLC

Thank you very much.

Operator

Thank you. Our next question comes from the line of Aaron Watts with Deutsche Bank. Please proceed with your questions.

Aaron L. Watts - Deutsche Bank Securities, Inc.

Hey, everyone. Dave, we will miss you on these calls.

David B. Amy - Sinclair Broadcast Group, Inc.

Thank you, Aaron. Steve will still be around.

Aaron L. Watts - Deutsche Bank Securities, Inc.

Yeah. Steve, probably aimed at you with these couple, but just housekeeping real quick, I think you said auto looks like it's pacing up low single digits in the first quarter, what was that in the fourth quarter?

Steven M. Marks - Sinclair Broadcast Group, Inc.

It was down a few points in the fourth and obviously due to crowding out of political. That's not atypical. So we're back on track and we're doing well in first quarter, so actually in fourth, it was flat actually. Our category in fourth was flat, which is actually pretty impressive, given the crowding out factor.

Aaron L. Watts - Deutsche Bank Securities, Inc.

Yeah. Okay. And then, maybe taking a step back, just bigger picture. I'm curious your general thoughts on the ad market post the election. Are you seeing any more hesitation from advertisers than usual to start a year and maybe, in particular to start a year after an election? Maybe you could talk about what you're hearing from larger national accounts and also maybe on the more local side, your small media side businesses as well?

Steven M. Marks - Sinclair Broadcast Group, Inc.

I think the election was obviously very interesting and it did have an effect to people who were sitting on the sidelines watching what was going on. I do believe as we get further into the year, you'll see categories pick up. So I do believe the election had an effect. Business in first quarter was placed very, very late, more so than any other year before. So we were playing catch-up through our first quarter. We're having a really good first quarter in terms of core. As we mentioned, the automotive is up.

We do have some challenges that we're going up against, specifically the school category which we mentioned, which had a dramatic effect on our MyNets and CWs. It's a leading category for those stations. And we won't lap that until August of 2017. But, I'm very encouraged on what I see on the core. And what shouldn't be lost on anybody on this call, in fourth quarter, our numbers beat the marketplace in the audits on both political and political excluded, and you could expect the same in first quarter. So our performances there, we're beating our competition. We're beating them consistently and we're showing positive numbers. So the audits show we beat the field in first and fourth and we will beat the field in first.

Aaron L. Watts - Deutsche Bank Securities, Inc.

Okay. Great. That's helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Marci Ryvicker with Wells Fargo. Please go ahead with your questions.

Marci L. Ryvicker - Wells Fargo Securities LLC

Thanks. I have a couple, but the first one I'm going to start with, it's for your free cash flow guidance, Steve, are you assuming any changes in policies, whether that's taxes, interests, acceleration in GDP? Just trying to figure out what is embedded in that free cash flow guide?

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Yeah. So Marci, I'm going to take that one for Steve. So in our 2017, 2018 free cash flow we have not included any change in our corporate income tax policy. It does not include the auction proceeds in there and really so it's kind of more of a same operating environment as what we've seen. As Steve mentioned, we've been tracking as an industry on the core low-single digits. We've assumed the same type of growth rates. We have not built in for what we're seeing with the optimism index or unemployment rates coming down or even consumer confidence rising.

Marci L. Ryvicker - Wells Fargo Securities LLC

Okay. And then, you talked about a payout ratio of 38% in 2016 and I think that's a lot higher than its been historically. Is that something we should think about going forward in terms of share repurchases, dividends or was 2016 just like a special year?

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

So our share repurchases, as you know, we do not have a return of capital plan in place. Our share repurchases have been opportunistic on the dips and that's what you saw in 2016. There were a lot of dips in the industry and we took advantage of that. So, especially up at these levels, no, we are not looking to do share repurchases up here. So right now we would be looking at our dividend planned again, looking to delever the company through our scheduled debt amortization and to our EBITDA growth.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

I think I would just add to that, Marci, that we always balance how much we allocate to share repurchases with what's in the M&A pipeline as well and our leverage goals, as Lucy mentioned. So just depending on what that pipeline looks like, we'll do more or less of that activity.

Marci L. Ryvicker - Wells Fargo Securities LLC

Okay. And then, there is so much focus on the M&A, and just your general thoughts on the industry. Are you expecting there to be transformative deals at some point? Or are we looking at just station swaps among companies?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Well, a lot of that will depend on what happens at the FCC and as I mentioned, we're quite optimistic about new leadership there and their plans to deregulate the industry and put us on an even playing field with other forms of communication. So we have to wait and see what will happen, but we think it will actually happen fairly quickly here and we'll start to see some movement this year. And if that happens, I do expect transformative deals to come on heels of that.

Marci L. Ryvicker - Wells Fargo Securities LLC

Got it. Thank you so much.

Operator

Thank you. Our next questions come from the line of Kyle Evans with Stephens. Please go ahead with your questions.

Kyle Evans - Stephens, Inc.

Hi. Thanks for taking my question. We haven't seen scale participation of the broadcast affiliates in the OTT offering so far. Under what circumstances and on what kind of timeline could we see a shift where the affiliates become willing participants in these things going forward? And then, I've got a follow-up question. Thanks.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Sure. So we are in active discussions with all of the OTT players that you read about and we do participate in CBS All Access and Sony Vue already. As I mentioned, we are in the discussions with everyone else. It's a lengthy process to work some of these things out, because we are very careful about what we're going to do in terms of ensuring that our compensation is in a similar spot to the standard MVPD marketplace and that we're not disadvantaging ourselves long term. But I do think this year, you'll probably start to see some movement on that as more of these players enter the marketplace and realize that they need the local affiliates to have a robust offering.

Kyle Evans - Stephens, Inc.

Are those discussions which are ongoing now, are those taking place at the affiliate board level or is that happening out of the station group by station group basis with the networks?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Well, it's both really. And I can't speak to other broadcasters and their level of engagement, but we are engaged with the affiliate boards and directly with the OTT players.

Kyle Evans - Stephens, Inc.

Great. And one last follow-up. Could you give us – I always have to ask the obligatory re-trans sub count update. Thank you.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Yeah. So Kyle, I'll take that one. So interestingly we did see some very slight decreases over the past year, but our price increases more than offset that. As you know, the industry is still trading at a very deep discount to fair value on what we should be getting. We believe the slight decline is more of a reflection of all the recent MVPD mergers as they integrate platforms and customers and we do not expect that trend to continue.

Kyle Evans - Stephens, Inc.

Okay. Thank you.

Operator

Thank you. Your next question is coming from the line of Dan Kurnos with Benchmark. Please go ahead with your question.

Dan L. Kurnos - The Benchmark Co. LLC

Great. Thanks. Good morning. Just first one for Steve, just a follow-up on your commentary on softness in retail in Q1. Since we cover the e-commerce space, we've seen some pretty ineffective advertising in digital by the retail guys, both offline and online. And I'm just curious if it's really just a reflection of softer foot traffic and that's more a relation to you guys? Because we've heard some of those dollars are coming back to TV and other more proven audience reached platforms.

Steven M. Marks - Sinclair Broadcast Group, Inc.

Well, our digital stuff is doing absolutely excellent. As we said in our presentation this morning, it was up substantially. It will be up substantially again in the first quarter. I believe as it pertains to retail and specifically the department stores, there's a few of them that are not doing well in first quarter. I believe that will rebound as we get further into the year. We are presenting digital solutions to literally every single advertiser that we speak to. It's a huge category for us or a huge platform for us. And we're adjusting to presenting this literally on every presentation that we make. So again, huge plus digitally in fourth quarter, followed by again substantial gains digitally in first quarter. And as it pertains to these categories, we're trying to help them out and focus where they're spending their dollars and presenting to them solutions so that we could further grow their business for them.

Dan L. Kurnos - The Benchmark Co. LLC

Okay. Thanks. And then – yeah. Go ahead.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

I would just add to that, as it relates to your questions around retail, we are seeing some weakness in the categories you would expect in department stores, but it's a small category for us.

Steven M. Marks - Sinclair Broadcast Group, Inc.

Yeah. If I could add something here, it's a pattern that we have seen over the years, where advertisers move towards digital and think – and fall in love with the digital solution, where everybody is, and they move away from TV thinking it's kind of a old media, it's not going to work. And they realize time and time again, we've seen it with beer, we've seen it with auto, and now we're seeing it with retail that the importance of branding through television still remains so essential to bringing foot traffic or pulling inventory off the shelves. So, no surprise on this end when you make the comment about the dollars coming back into television.

Dan L. Kurnos - The Benchmark Co. LLC

So, I guess, it's a good segue, I'll ask my 3.0 and audience measurement question the next. Just curious on the ONE Media investment, how much of that is going to either sort of forward planning and SFNs? How much of it is going to making sure that you guys are fully capable, when this eventually gets approved? And I know David Smith has talked about creating a new audience measurement tool for the broader industry. I'm just curious if there are any expenses baked in for that, or if that's – you know, how that's coming along?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

So we don't disclose the specifics of where we're putting the money for ONE Media for competitive reasons. We are focused – we've highlighted the areas that we are focused on, that you just mentioned. I would say you know early work – so it's early days on the measurement side. Our focus right now is making sure we can get 3.0 deployed. And that we have all the sort of basic capabilities which will enhance our core business, first and foremost. If we can add measurement on top of that, that's sort of a cherry on top, if you will, at this point. But there's plenty of near-term, more near-term business opportunities that we're spending resources on.

Dan L. Kurnos - The Benchmark Co. LLC

Okay. And then, just one more if I could. Just, Lucy, if you could just remind us the timing of re-trans and reverse? And then, where you guys are at with Tennis and if you've changed your focus just fundamental improvements like increased ad inventory? That'd be great. Thank you.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Yeah. So we are – you know, we've talked about before, we are pretty much done with all of our major contracts. We really don't have anything new coming up. From a forward-looking perspective on a net basis, we ended last year, 2016, on a pro forma basis. We grew our net re-trans 21%. We're still on track for 2017 to grow net by mid-teens. And for 2018 to grow by single-digit percents. And again, that's just a function of when the network versus the MVPD contracts come up. And then, we would expect to see that accelerate as we get into the next cycle via MVPD renewals in 2019. So still on track. No change there. And like we talked about, it's a growing category for us.

Dan L. Kurnos - The Benchmark Co. LLC

Yeah. On the Tennis side of the equation?

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

So Tennis is also on track. When we bought them, if you recall, they were at about 30 million homes. And we now have them contractually to get to, later in 2017, mid-2017 to well over 50 million homes.

Dan L. Kurnos - The Benchmark Co. LLC

All right. Great. Thank you very much.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

And that number, yeah, Dan, that number should also continue to grow as we get into 2018, the number of subs.

Dan L. Kurnos - The Benchmark Co. LLC

Yeah. I assume. And I was curious about the fundamental improvement of the ad inventory, but we can, I guess go into that more offline. I've taken a lot of time here. So I appreciate it, guys. Thank you.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Okay.

Operator

Thank you. Our next questions come from the line of James Dix with Wedbush Securities. Please proceed with your questions.

James G. Dix - Wedbush Securities, Inc.

Hey, good morning, and congratulations, Lucy. I guess, I would say I have a couple questions. In terms of what you said, Steve, in terms of core local ad growth, you expect that as the year progresses. I just want to make sure – are you talking about all of your ad growth? Or were you meaning to kind of exclude what might be national spot advertising and that outlook and just focusing on one class of advertisers? Because I know sometimes you don't really focus that much on the distinction between local and national. So I just want to be clear on what your comments were related to when you said, why you expect core local ad growth as the year progresses.

Steven M. Marks - Sinclair Broadcast Group, Inc.

Well, we do count everything. The level buys, the spot, whether it's local or national, we love them all.

James G. Dix - Wedbush Securities, Inc.

Okay.

Steven M. Marks - Sinclair Broadcast Group, Inc.

It really doesn't matter to us as long they buy the spot and at the rate we're suggesting, but to further the comment, I do believe specifically local will grow as we get further into the year.

James G. Dix - Wedbush Securities, Inc.

Okay. But, the point is there's no potential offset from national that would cause your overall ad expectations to be not some growth?

Steven M. Marks - Sinclair Broadcast Group, Inc.

Nationally, we're doing fine.

James G. Dix - Wedbush Securities, Inc.

Yeah. Okay.

Steven M. Marks - Sinclair Broadcast Group, Inc.

So again, when you take a look at our performance, it's beating our peer group.

James G. Dix - Wedbush Securities, Inc.

Okay. Okay. Great. And then, just one other on de-reg. So Chris, I guess is your expectation that we're not going to see any kind of piecemeal changes through petitions to reconsider anything in terms of FCC rules? And that it's more likely we're going to see it kind of in a more comprehensive, larger proceeding? I just want to make sure I'm clear on the scenario that you think is the most likely.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Well, I think that piecemeal you might see something on the UHF discount, otherwise, it'll be done more holistically.

James G. Dix - Wedbush Securities, Inc.

Okay. And any sense as to when we would know on the UHF discount if it was done through kind of a piecemeal approach?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

My sense is that it will be relatively soon.

James G. Dix - Wedbush Securities, Inc.

Okay. Great. And then, just on the auction, I mean, now that you look back at it and see your participation and how you monetized in it, I mean, how did it compare to your individual expectations? And what do you think drove the variance? And then, secondly, one question I've had from people is, does the forward demand that we've seen in the auction reflect in any way on the ultimate demand for services or use of the spectrum that you envision with the transition to ATSC 3.0? It might be helpful to hear a little bit of your perspective on that. Thanks.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Sure. So I think we did very well. All things considered. We sold three stations in this auction and yielded $313 million. They were very high per megahertz POP value, so we are very pleased with the unit values that we achieved. Obviously, if it had of been stage one, two or three, this would have been a vastly different number, orders of magnitude is bigger and that's just a function of how the auction was set up.

And in terms of your questions around the forward auction, how much was deployed, I think, there's a couple of things I'll say on that. One is this auction was set up where it started off with 100 megahertz being available to the wireless industry which is a very large chunk of spectrum. And, in fact larger than most historical precedence in terms of availability. So with a well-supplied auction, I think that's what you saw and that's why it ticked down four stages to reach equilibrium.

And so, I don't think the forward price is necessarily reflective of the true economic value of the spectrum. That being said, most wireless players are focused more on densification, smaller cells and higher spectral bands for that reason. And at the end of the day, this lower band spectrum still is incredible spectrum, beachfront property, but it really is best used for broadcasting. And that's what we intend to do with it with 3.0, and our fundamental view of the value of this spectrum hasn't changed at all from the forward auction. In fact we didn't – we looked at other forward auction comparables when we set our reserve prices, but our internal valuations of what we thought we could do with this in a 3.0 world were higher than those. And so, that is what instructed our reserve prices in this auction and the forward auction hasn't changed that view.

James G. Dix - Wedbush Securities, Inc.

Okay. Great. That's very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Leo Kulp with RBC Capital. Please go ahead with your questions.

Leo Kulp - RBC Capital Markets LLC

Good morning. Thanks for taking the questions. I just had a few. First around M&A. Assuming that the ownership rules do change, what types of acquisitions would you be most interested in? Would you be looking at smaller markets, medium, larger markets? And then, how high would you be willing to take leverage? And then, on the free cash guide, can you just give us a high level thoughts around what types – what your political expectations are for 2017 that are baked into that guidance? Are you expecting a decline versus 2016, maybe flattish? Any color around there would be helpful.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Okay. So on M&A front, we don't have necessarily a specific profile that we're looking for. What's most important to us, more than anything else is doing accretive transactions, being disciplined on price, and creating value for our shareholders. We've done acquisitions up and down the DMA scale and we've become proficient at operating markets at different levels so that we can take advantage of those opportunities. So I wouldn't say that there's a specific characteristic that we're looking for here in terms of that question. And what was your second question as it relates to M&A?

Leo Kulp - RBC Capital Markets LLC

Leverage. How high would you...

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

How high would you leverage? Yeah. So our long-term target is high 3s, low 4s. We're well on our way to hit that on a status quo case by the end of the year, so we do have some room to go up for a bigger deal, but our intent would be to have a quick path back to that target if it did go up for a transaction.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Okay. And let me do the political one. So just to frame this for you, in 2014, which was the last mid-term election, on a pro forma basis, we did about $148 million of political. And as Steve pointed to, we're already hearing rhetoric that 2018 is heating up to be pretty contested and potentially a lot of issues is on the table, so we are assuming political to grow off of the 2014 number, but not prepared at this point to give you any more guidance around that.

Leo Kulp - RBC Capital Markets LLC

Got it. Thank you both.

Operator

Thank you. Our next question comes from the line of Avi Steiner with JPMorgan. Please proceed with your questions.

Avraham Avi Steiner - JPMorgan Securities LLC

Thanks for taking the questions. A couple of credit ones real quickly. Does the high 3 times leverage target drive for year-end 2017 on that eight quarter basis assume any debt repayment above normal course amortization and maybe thoughts on the 6.125%?

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Sure. So that is a net debt number, so it's net of cash, so at this point in the model, all we've done is assumed our scheduled debt amortization, but again, even if we repaid any debt, it's a net leverage number, so you'd still have the same result.

Avraham Avi Steiner - JPMorgan Securities LLC

Perfect. And if you'd mentioned this earlier, I apologize, but can you remind us what the credit agreement and indentures say with respect to proceeds from the spectrum auction?

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Yeah. So we do have a reinvestment provision in the bank and the bonds agreement. We have 12 months after the point that we receive the proceeds. So it's a net cash number. And then, we have 12 months to reinvest it in acquisitions, CapEx, other similar replacement assets. And then our bank deal does have a $3 million carve-out for auction proceeds.

Avraham Avi Steiner - JPMorgan Securities LLC

I'm sorry, how big was that carve-out?

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

$300 million.

Avraham Avi Steiner - JPMorgan Securities LLC

Great. And lastly, not to beat the FCC change into the ground, but anything from the now Republican-led FCC indicating a change in view on the current state of re-trans negotiations? And thank you for taking the time.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Nothing on that front. I think that horse was beat to death through the last administration and I see no appetite or even thought to pick it back up here with the new administration.

Avraham Avi Steiner - JPMorgan Securities LLC

Terrific. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Barry Lucas with Gabelli. Please go ahead with your questions.

Barry L. Lucas - Gabelli & Company

Thank you and good morning. I was hoping we would get into a little bit more detail on some of the new initiatives and starting with 3.0, if this is a topic of the open meeting this week or next week. What are the milestones that we have to hit, assuming favorable results, but sort of when does it become a business, if you will?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

So key milestones for 3.0 will be FCC approval, which the NPRM was just released and we're hoping it gets through that process by sometime this summer. And you're going to start seeing beta tests hit the market this year and sort of paralleling that process. And I would expect it to start deploying 2008 (sic) [2018] on a commercial basis in conjunction with repack activity. Just to give you an idea, we are going to be repacking here at Sinclair 93 of our 170 stations. And the benefit to that is that there'll be a lot of new equipment bought on these stations, equipment that will be ATSC 3.0 ready. And so, this is sort of a nice synergy of rolling out 3.0 in conjunction with the repack.

And so, I think that will start in earnest in 2018 sort of loosely following footsteps of the repack and at that point, you'll start to see receivers hit the markets, these hit the market. You need a certain level of receiver penetration for there to actually be a business within 3.0, and that's the part that's a little bit harder to predict. So certainly as it relates to Wall Street and putting anything in your models over the next couple years, I wouldn't. But it will have a big impact on us on the longer term.

Barry L. Lucas - Gabelli & Company

Great. Thanks for that, Chris. But if we can maybe go deeper into the model issue if you would. When you think about the other new initiatives and products, CHARGE!, Circa, et cetera, when might those start to be a little bit more material that we could really find those in the numbers and what are the critical factors to make them more material, if you would?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Well, on the new networks, we're very happy with COMET, it out of the gates was profitable and it's been growing. And so, that's why we've launched two more. I would say CHARGE! to be very similar to COMET. TBD is a little bit more experimental, so it's a little bit more unpredictable how that will turn out. I would expect those to really start showing up the numbers in 2018.

Barry L. Lucas - Gabelli & Company

Great. Thanks very much. Appreciate that.

Operator

Our next questions come from the line of Davis Hebert from Wells Fargo Securities. Please go ahead with your questions.

James Davis Hebert - Wells Fargo Securities LLC

Yeah. Good morning. Thanks for taking the questions. Most of mine have been answered, but I just wondered, Chris, if you could comment on the industry's position in programmatic. I know Sinclair has been trying to lead some things there. And then secondly, with a lot of the interest in news in general, especially on the national front, just curious, are you seeing ratings improvement on your local news, whether it's morning or evening?

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

So, on the news front, I'll answer that first. There has been this phenomenon with Trump where people are watching more news, they are watching more cable news and they are also watching more of our news, too. So it has been a positive to your question in terms of news viewership overall benefiting cable news outlets and our news outlets. And sorry, what was your first question, again?

James Davis Hebert - Wells Fargo Securities LLC

On the programmatic. I think you have the consortium, box mix. I mean, just kind of, yeah.

Christopher S. Ripley - Sinclair Broadcast Group, Inc.

Yeah. So programmatic has been probably slower than we'd like in terms of organizing both the technology and the people together. We're still very focused on it. We have had a great success selling in a non-automated fashion our footprint, our 40% footprint into the network marketplace. We're excited about what we see there and it points to the opportunity that we have within programmatic or automated selling, however, you want to position it. And so, we by the end of Q1, we should have the technology ready to start doing that and we're still in active discussions with several other broadcasters to group ourselves together making a more robust buy. So it's a focus. It's a big long-term opportunity for us. Our inventory is massively undervalued relative to other marketplaces. And it's something that we are very focused on and we'll get there eventually and I think it'll be big for us.

James Davis Hebert - Wells Fargo Securities LLC

Okay.

Steven M. Marks - Sinclair Broadcast Group, Inc.

Just to add to that, with our audience network, which Chris was mentioning that covers 40% of the country, we're selling local inventory as a network with a great deal of success and it's money that is new to the marketplace whereas we're targeting cable network dollars. So we're positioning our 40% footprint against cable network viewership. And when you compare our 40% to their 100% distribution, our 40% typically beats their 100% distribution by a wide margin. So we're really onto something. So we're placing these dollars locally as a network and it's beginning to put pressure on the inventory. When you put pressure on the inventory, the rates will rise. And we're already beginning to see that. What's encouraging is that we just completed our second year of doing this and we're seeing the impact to actually in the audited shares. So when I tell you that we're beating our competition and we are, we beat our competition both ways, politically excluded and included in fourth quarter. And we'll do the same again in first quarter. And you could take that a little bit of these initiatives are adding to that performance.

James Davis Hebert - Wells Fargo Securities LLC

Great. That's very interesting color. Thank you so much.

Operator

Thank you. This concludes today's question-and-answer session. I would like to turn the floor back over to management for closing comments.

Lucy A. Rutishauser - Sinclair Broadcast Group, Inc.

Okay. Thank you, operator. Before everyone disconnects, let me just say that we are very excited about the upcoming changes for our industry, from potential deregulation to the much anticipated approval of 3.0 and the rollout of our content and digital initiatives. We expect you will see great things from Sinclair in 2017, as we embark on our vision of connecting people to content everywhere. So thank you for participating on our earnings call this morning and if you have any questions, please feel free to contact us.

Operator

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines.

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