Sinclair Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to the Sinclair First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen only mode, It is now my pleasure to turn the floor over to your host, Lucy Rutishauser, Executive Vice President and Chief Financial Officer of Sinclair. Ma'am, the floor is yours.

Speaker 1

Thank you, operator. Participating on the call with me today are Chris Ripley, President and CEO And Rob Weisbord, President, Broadcast and Chief Operating Officer. I would like to also introduce our new Vice President of Investor Relations' Chris King, whom we're excited is joining us. Chris comes to us from Windstream Communications, where he was Vice President of Investor Relations and before that, Curo Health Services, where he served as Vice President of Investor Relations and Financial Planning and Analysis. Before transitioning to the corporate Chris was a senior equity research analyst at Stifel Nicolaus, where he won numerous awards for his stock Picking and Earnings Analysis in the TMT space.

Speaker 1

Welcome, Chris. Before we begin, I want to remind everyone The slides and supplemental information for today's earnings call are available on our website, spgi.net, on the Investor Information page and on the earnings webcast page. I also want to remind you that today's call is a Sinclair only call. Because we are currently soliciting proxies from our stockholders in connection with the previously announced holding company reorganization, Our statements regarding the reorganization will be limited to statements contained in Sinclair Inc. Prospectus And Sinclair Broadcast Group's definitive proxy statement, each followed with the SEC on April 26, 2023, as well as the reorganization Q and A followed by Sinclair Broadcast Group with the SEC on April 2.

Speaker 1

Our stockholders are urged to read these documents because they contain important information regarding the reorganization. Now, 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 filed with the SEC and included in our Q1 earnings release. The company undertakes no obligation to update these forward looking statements.

Speaker 2

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.

Speaker 2

The company also believes that adjusted EBITDA is frequently used by Analysts, investors and lenders as a measure of valuation. These measures are not formulated in accordance with GAAP and are not meant to replace GAAP measurements and may differ from other companies' uses or formulations. The company does not provide reconciliations on a forward looking basis. Further discussions and reconciliations of the company's non GAAP financial measures to comparable GAAP financial measures can be found on its website, And in order to have a meaningful discussion around comparative results and trends, all discussions of prior financial reporting periods during this call reflect Sinclair only pro form a numbers and thus exclude Diamond and any intercompany transactions with them and exclude businesses sold in the prior 12 months. For actual results, including the periods that Diamond was Consolidated, please refer to this morning's earnings release.

Speaker 2

Chris Ripley will now give an update on the strategic direction of the company.

Speaker 3

Thank you, Billy Joe. I want to begin our announcement to reorganize I want to begin with our announcement to reorganize under our holding company. Under the new structure, which we expect to close in June, Sinclair Inc. Will become the publicly traded parent of Sinclair Broadcast and its subsidiaries, which will hold the pure play broadcasting assets and a new subsidiary Sinclair Ventures that will hold this company's non broadcasting assets. We believe this will provide greater flexibility for creating value within the company.

Speaker 3

This simplifies the corporate structure and improves the transparency of financial results and disclosures on the value drivers of the business. Another way to think about the new structure is that our broadcast assets We'll remain in Sinclair Broadcast Group, while our non broadcasting assets, including Tennis Channel Compulse and our non media assets like Real Estate, Venture Capital, Private Equity and Direct Investments will be in Ventures. While we're optimistic about the future prospects of our core Certainty is causing us to think differently about the allocation of capital. With continued governmental restrictions on broadcasters' ability to transact, Transform and negotiate, we intend to allocate more capital to growing non broadcast holdings, such as future opportunities in India where NextGen Technologies are swiftly advancing. This reorganization will allow Ability for transactions, transparency around the sum of the parts, ultimately creating a non broadcast Division free to raise debt or equity financing to grow its assets and a broadcast division that is pure play and focused, unlocking overall value for our organization.

Speaker 3

Speaking of value creation, in recent weeks and in advance of NAB, We made several exciting announcements around the advancement of next gen broadcast technology. In particular, we announced That Sinclair along with our partners Cast. Era, SK Telecom and Sankeya Labs will build and operate a next gen broadcast data distribution core network. This will create an interconnected platform available to all broadcasters to provide commercial services and solutions for national data distribution. This platform will manage data casting across the U.

Speaker 3

S. And will help stations capitalize on next gen Opportunities which independent studies estimate at a $10,000,000 revenue opportunity for the industry by 2,030. We believe data distribution is the next step in the evolution of broadcasting, allowing us to continue to provide exceptional and enhanced Video programming with interactive services, while at the same time repurposing the remaining capacity of our channels To meet the needs of data users nationwide. These business use cases provide a data agnostic IP pipeline to serve communities better on market disrupting terms that can increase the value of spectrum for all broadcasters. We expect our data distribution core network and platform to go live in Q1 of 2024.

Speaker 3

We're also continuing to deploy next gen broadcast technology in additional markets. In April, Des Moines and Rochester were the latest of our markets to rollout the service with Sinclair serving as a next gen host in both markets. Next gen broadcast was also deployed in San Francisco And although it is not our market, we are pleased the technology is now increasingly available in the top 10 markets. These deployments bring next gen broadcast technology to nearly 70 markets covering over 60% of the country with an industry goal of 75% U. S.

Speaker 3

Coverage by year end. One of NextGen Broadcast's key features is advanced emergency information, and we will be launching the nation's first pilot project to use that capability to disseminate this critical service with enhanced broadcast features. Through a partnership with the Metropolitan Washington Council of Governments, we will provide free over the air redundancy and enhancements Initially, the pilot launching this quarter will focus on Arlington and Fairfax Counties in Northern Virginia and the District of Columbia, but will expand to other jurisdictions in the coming months. We also announced an agreement for watermarking technology that will allow owners of next 10 capable TVs to access the broadcast app experience no matter how they get their broadcast programming over the air or via pay TV services. This increases the addressable market for TV homes that can access the broadcast app fourfold.

Speaker 3

As part of Sinclair's continued evolution, we also are reimagining much of our operational workflow and adding Enhanced capabilities to our technology, news gathering and media operation systems. We have entered into partnerships with Several providers and platforms that align with our vision for transformation. We have begun migrating our existing media and play out to the cloud, which will help further our goal to create compelling multi platform local news and sports content that could be distributed across fixed and mobile devices as well as interactive experiences for communities and fans. It will also enable enhanced tools to be integrated across our networks For advertisers and partners, to that end, we announced we will launch the 1st over the air local broadcast Station affiliate play out origination in the cloud, which is set to go live in Raleigh, North Carolina in June 2023. Sinclair will also be adopting an innovative cloud based workflow for news gathering, integrated news production and We're to increase the speed of news, content delivery to our audiences, reduce connectivity costs and enrich the flow of news metadata.

Speaker 3

As mentioned last quarter, the cloud migration costs are included in our full year expense guidance. We will be in investment mode for the next 18 to 24 months and anticipate to generate a positive ROI thereafter. As a company, we continually seek to In Q1 of this year, we announced several partnerships agreements most recently with YouTube TV to add carriage Tennis Channel and T2 to its lineup beginning June 1st to coincide with Roland Garros, the French Open. The agreement also adds Charge and TVD to YouTube TV's service offering and renews carriage of comment, Bringing all 3 of Sinclair's national multicast television networks to YouTube TV's lineup, offering subscribers access to top Fan favorite series and franchises. In addition, the agreement extends YouTube TV's existing carriage of Sinclair's CBS and My TV We also reached an agreement in principle with Hulu, which saw the turn of our ABC stations to Hulu Plus Live TV.

Speaker 3

Those stations began airing on Hulu's platform a couple of weeks ago. Additionally, our CBS affiliated stations have returned to Fubo after the CBS affiliated board, Paramount and Fubo reached agreement last month. We recently released our 1st annual ESG report, which highlighted the continued upgrades we are making to energy efficient equipment And our commitment to lowering our energy usage overall. We also expanded employee programs to further strengthen diversity and equal employment opportunities, furthering our community outreach and enhanced governance and risk management. Throughout our history, Sinclair has prioritized giving back With an unwavering commitment to the people and communities we proudly serve.

Speaker 3

Through our latest Sinclair Cares initiative, we partnered with National Alliance on Mental Illness to launch SinclairCare's mental health support and hope, a company wide on air campaign to encourage mental health awareness agreement with USC Shoah Foundation, the Institute For Visual History and Education to assist with the recording of interviews With genocide survivors as part of the institute's last chance testimony collection initiative, an effort to collect testimonies from the last Living survivors and witnesses to the Holocaust and other genocides. And on April 12, we launched our first Sinclair Day of Service, an employee led initiative encouraging all of our employees company wide to dedicate the day to giving back to our local communities. The day saw thousands of employees across the company volunteering their time and skills to local non profit organizations, including food banks, homeless shelters, veterans organizations, diaper banks, community cleanups and animal shelters in our local communities. The Sinclair Day of Service will return to our calendar each spring. By prioritizing sustainability, diversity and good governance And an emphasis on giving back to our local communities, we are not only doing what is right for our neighbors, our people and our planet, We are creating long term value.

Speaker 3

Speaking of the long term, I want to congratulate Tennis Channel, which celebrates its 20th anniversary this year. In just two decades, Tennis Channel has created an enduring business with exciting growth opportunities to build on their many past successes and solid financial performance. Now I'll turn it

Speaker 4

over to Rob for an operational update. Thanks, Chris. Coming off a record midterm election In year end 2022, political spending has started off strong with over $3,000,000 booked in Q1, which is double the spending Of Q1 2019, we are excited to see the strength in political candidate and issue spending this early in the year.

Speaker 5

We are

Speaker 4

projecting political spend to continue and set us up nicely for our highly contested presidential race in 2024, which we expect to be record breaking once again. Our success in selling high profile time periods such as Super Bowl and March Madness Resulted in advertising in the Q1, achieving the high end of our guidance. Core advertising decreased Slightly in the Q1 compared to the same period a year ago. The automotive category has been steadily rebounding since the beginning of the year, And we are seeing low single digit percent increases in Q2 phase along with the strength in legal and retail categories. These positives are offset by softness in the insurance category.

Speaker 4

2nd quarter is expected to decline low single digits, but in line with Q1 core when you exclude the Super Bowl and March Madness. This quarter, we began rolling out 1st phase of our unified ad platform, which combines all of Sinclair's advertising, linear and digital assets And allows our sellers to increase velocity of cross platform ad campaigns by highlighting the combined reach and frequency. The technology makes us the 1st local broadcaster to consolidate all sellable inventory into a single system. Our goal is to make sure all our inventory is easy to package, price and maximize revenue while meeting the goals of our clients. We've also completed the national rollout of our yield management platform with dynamic pricing.

Speaker 4

The platform uses artificial intelligence and machine learning, so the algorithms get smarter based on history And pricing will be adjusted based on the current supply and demand. By ensuring pricing aligns with supply and demand of the marketplace Will allow us to reduce pre emptions, save time and make it easier for our sales folks to figure out How much they should charge for campaigns also allowing us to maximize revenue yield. Tennis channel is off to a sales start in Q1. We've seen increase in our audience in adults 25% to 54%, which was up 15%, adults 18% to 49%, up 8%, total view was up 8% and households were up 7%. The strength of tournaments in Indian Wells of Miami led to March having the highest average audience in key demos Since 2019, and it was the 2nd best march ever for both households and total views.

Speaker 4

Our second channel, TT, has also set records in 2023 with Indian Wealth and Miami leading to March Becoming the top month in its history in both users and hours watch. Our live and VSD subscription service, Tennis Channel Plus, That's more than 3,500,000 hours streamed in the quarter year over year. Total subscribers are up 33%. Outside of the U. S, Tennis Channel International has grown 73% in number of sessions year over year.

Speaker 4

International distribution has grown as well. We've added LG as a partner and now reach approximately 2 thirds of the smart television sets In Germany, Austria and Switzerland. At the end of May, tennis will become a French Open dedicated network For 2 weeks, and we anticipate airing over 2,000 hours in the tournament across Tennis Channel, T2, Tennis Channel Plus. Au Pair, we're launching a partnership with a leading digital retailer to launch a white label Tennis Channel shop, which will allow us to create a merchandising revenue stream. TC Shop will launch sometime in the second quarter.

Speaker 4

Our broadcast stations continue to be recognized for their dedication to community advocacy journalism. As of March, our stations won dozens of local awards for their reporting. In Baltimore, WBFF's investigative unit, Project Baltimore Which was found to be denying students with disabilities a proper education and violating their federal education rights. And our station in Cincinnati, WKRC was named the finalist this year for reporting on radioactive contamination in Ohio. This is the 5th consecutive year that Sinclair stations were honored with national IRE awards and the 4th IRE award for WBFF.

Speaker 4

We're also seeing our Sinclair C. A. R. E. Community outreach program receive recognition.

Speaker 4

This year, Sinclair received 2 Anthem Awards for humanitarian action For our 2022 fundraising campaign, Sinclair Cares' Summer Hunger Relief. As Chris mentioned, we have Partnership with the National Alliance on Mental Illness and recently aired a town hall special to encourage mental health awareness in teens. We'll expand be expanding that partnership with a town hall special to address opioid addiction and the epidemic facing the country. Our news division will also be tackling the topical subjects of artificial intelligence as well as cybersecurity and Identity theft prevention and upcoming town hall specials in response to our viewers' requests for the information. 2 of our local podcasts, Missing Erica Baker about a missing child produced by our station in Dayton and UnSouth Carolina, which focused on the Murdock Murders which led to millions of views and downloads across the country.

Speaker 4

In Utah, news coverage of the destructive floods We shared across multiple platforms and the video was viewed over 15,000,000 times on TikTok, which illustrates on our communities and the work we are doing within the communities. I like Chris would like to thank our employees for the day of service and giving back to the communities that we live in. And now I'll turn it over to Lucy.

Speaker 1

Thank you, Rob. As a reminder, our slide deck and our financial The $766,000,000 of media revenues came in at the high end of our guidance range, With core advertising achieving expectation and political and distribution revenue surpassing the high end of guidance. The beef on distribution revenue was on slightly better subscriber churn than expected. As compared to the Q1 of 2022, Media revenues were down 6%, driven by the absence of political ad revenues, subscriber churn, The Diamond Management fee deferral and core advertising. Adjusted EBITDA Of $120,000,000 for the quarter exceeded expectations due to media revenues coming in at the higher end of guidance and media expenses Adjusted EBITDA decreased 40% compared to the Q1 of last year.

Speaker 1

This was the result of the lower media revenues as discussed And higher corporate and media expenses. The driver of corporate overhead was group and general insurance costs, annual compensation increases and one time expenses for professional fees. The media expense lift compared to last year was also due to annual compensation step ups as well as timing of tennis tournaments and investments in technology. This was partially offset by a reduction in sales expenses. Media expenses were also impacted by higher programming fees to the networks.

Speaker 1

Speaking of which, And as a reminder, on net retrans, we previously reported that since we don't have material distributor contracts renewing until the latter part of this year And with continued subscriber churn of mid single digits expected, our expectation is for net retrends In 2023 to be lower than 2022, but then grow in 2024 2025 as distributor contracts renew over the next 12 months. As a result, our 3 year net retrans growth rate range with adjusted free cash flow per share of $1 for the quarter and diluted earnings per share of $2.64 We ended the quarter with a cash balance of $623,000,000 Combined with our undrawn revolver, our liquidity was almost 1,300,000,000 at quarter end. Total debt at the end of the first quarter was 4,300,000,000 And STG's 1st lien indebtedness ratio on a trailing 8 quarters was 3.5 times, while total net leverage The bonds was 4.4 times. As discussed on last quarter's call, we do expect total net leverage to increase this year to mid-five times and then improve by the end of 2024, primarily on a strong political year. During the quarter, we repurchased approximately 3,600,000 common shares under a 10b5-1 stock buyback program and an additional 5,200,000 shares since March 31, representing approximately 13% of the total shares outstanding at the beginning of the year.

Speaker 1

Our total share count at the end of the quarter was 68,000,000. Turning to Q2 guidance, we expect media revenues to decline compared to Q2 2022 Due to the absence of political spending and continued year over year mid single digit subscriber churn, 2nd quarter core advertising is expected to be down low single digit percent versus the Q2 of last year, with the decline in core primarily driven by macroeconomic weakness as Rob discussed. 2nd quarter adjusted EBITDA is expected to be between $84,000,000 $104,000,000 as compared to 180 $4,000,000 pro form a last year, primarily the result of the lower revenue, higher network programming fees, Timing of expenses from the Q1 and investment in technology enablers and next gen and sales platform costs that Chris and Rob discussed. Adjusted free cash flow for the quarter is expected to be negative $6,000,000 to positive $16,000,000 And while we haven't provided full year guidance for adjusted EBITDA or free cash flow, there are a few things First, as we have noted on prior calls, due to the timing of distribution renewals, we are expecting net retrans to be down year over year. 2nd, we are investing roughly $75,000,000 in our infrastructure this year, such as moving to the cloud, Next gen technologies and marketing services platforms that are expected to yield future returns.

Speaker 1

Finally, there is still uncertainty surrounding the macroeconomic conditions, which could impact the consumer generally but there continues to be softness in services, which is our biggest category and which we'll need to continue to monitor closely. Despite the uniqueness of this year, free cash flow is expected to be positive as we head into another And with that, operator, I'd like to open it up to questions.

Operator

Certainly, at this time, we will be conducting a question and answer session. We do ask that while posing your questions, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Your first question is coming from Stephen Cahall from Wells Fargo. Your line is live.

Speaker 6

There we go. Thank you. So I've got a few, maybe just to start off on the leverage going to the mid-5s. You bought back a lot of stock in the quarter. So as we just think about the moving parts to leverage, is a lot of that cash coming off the balance sheet For investments and stock repurchases, combined with some of the investments dragging EBITDA, but we'd just love to get the components Of the change to leverage from the 4.4 this quarter to the mid-5s?

Speaker 1

Yes. So what's in there, Even is the 2nd quarter stock repurchases is a piece of that. And then as I talked about Adjust the direction of adjusted EBITDA this year, which again is a non political year, net retrans being down And then the absence of political and the investments in the infrastructure, so Those are the things that are sort of driving the EBITDA and then you do have the 2nd quarter repurchase in there. And then that 5.5% also assumes a successful closing for HoldCo And TEN is shifting out of the STG attributable EBITDA for leverage. And as we said in our Q and A around holdco, That was worth 0.3 turns of leverage.

Speaker 6

Got it. That's very helpful. And then, Chris, you've talked a lot about the value of the investments in ventures and that marketing that you've got at 1,300,000,000 Could we expect any incremental financial disclosure to understand the components of that? I'm thinking specifically about real estate and PE And the venture capital investments and just how we might think about those and relatedly, how do we think about the accounts receivable facility given Diamond's

Speaker 3

We're holding company because we do have an outstanding share exchange offering. So we really can't say anything more than what is in that document without triggering an amendment requirement. So I would point you to that document for your questions there. We do we will Once that closes, which is expected to be voted on May 24 and then the closing in June, First, we will come out with a more detailed vision around ventures and enhanced disclosure It's definitely part of the plan. So, What's driving this move, as I mentioned in my comments, Is this big dislocation between our sum of the parts and what's in the public marketplace?

Speaker 3

And you can see we put our money where our mouth was, Repurchasing the stock recently because of that and so we're very focused on how do we get the right Assets and the right information in your hands so that we can get properly And so we're looking at all options in that regard. And then in terms of your question around the AR facility, I would expect That AR facility to get refinanced at some point in the future. And We're happy to continue to hold it, provides a reasonably good return and it has high quality Security in the form of AR. So but our expectation is at some point that would be refinanced.

Speaker 6

And then just the last one for me. I think the recent reorganization filing did have a new risk factor that wasn't in the 10 ks, Suggesting that the Diamond bankruptcy could mean either legal action or adverse tax consequences. Can you just help us frame any material risk that you see at this point or Financial liability related to the Diamond bankruptcy?

Speaker 3

We really can't speculate at this point as it relates to Diamond. It would be just pure speculation, and we'll be back when we know more in terms of

Operator

Your next question is coming from Ben Soff from Deutsche Bank. Your line is live.

Speaker 7

Hey, guys. Thanks for the question. Just a couple of quick ones. So first, I was wondering if you could help us quantify The impact of the expenses shifting from 1Q into 2Q. And I also noticed The value of the investment portfolio went up.

Speaker 7

So I was just kind of curious, which assets saw their value increase and maybe if you could talk a little bit more about that dynamic? Thanks.

Speaker 1

Sure. So Ben, I'll take the first one. So sequentially on the expenses Increasing from media expenses increasing from Q1 to Q2. So, there is Some timing from Q1, probably about $10,000,000 of timing from Q1's favorable variance that goes into Q2. And then also, you need to recognize that Tennis Channel has a different seasonality Profiles and the broadcast assets.

Speaker 1

So whereas for broadcast, our biggest quarter is typically in the 4th quarter, Both revenue and expense wise, for tennis, their biggest expense quarter is the 2nd quarter because that's when Roland Garros happens, that's their big tournament, a lot of production costs around that. And so just so that We haven't talked tennis in a few years, but just to kind of put their seasonality back in front of everybody. From an EBITDA standpoint, historically, Q1 would be their best quarter, Followed by Q4, then Q3, those are kind of typically close to each other though. And then Q2 is their lowest EBITDA quarter and that's because their expenses are highest around some of the Slams and tournaments and production costs. So that's going to be a big driver of that sequential Q1 to Q2

Speaker 3

move. And in terms of the investment portfolio, there was it's hard for me to point to any one There were several assets that went up in value in Q1 due to just improved performance On the underlying fundamentals and then we also had realizations in the quarter of 36 1,000,000 and those were really high returns, great Moix apartment buildings that were sold In Q1 and so they were more conservatively marked before, exited at higher values And you are now sitting in cash. So the combination of those realizations with Several assets, just continuing to perform, increase the value.

Speaker 7

Got you. And Would you guys be willing to share a little bit more color about the EBITDA that Tennis Channel is generating just roughly?

Speaker 3

That will come out in our quarters to come here after we finish The holding company reorg.

Speaker 7

Okay, awesome. Thanks guys.

Operator

Thank you. Your next question is coming from Dan Kurnos from The Benchmark Company. Your line is live.

Speaker 8

Thanks. Good morning. Chris, since you were gracious enough to give us a little more color around sort of the vision going forward, Maybe I'll ask it that way and try to keep it high level. And just note that your peer group has Obviously, invested in things that are tangential typically to broadcast or have synergistic Properties with it, you clearly have a more diversified portfolio in what will eventually be ventures.

Speaker 7

And I'm just wondering, as

Speaker 8

you think about sort of future capital allocation, How important it is to you that things be in or around sort of core competencies or historical legacy buckets

Speaker 3

Yes. It's a great question. When we take a look at the performance of our investment portfolio, which It's currently sitting at an IRR of about 19% since 2013. That, without it's kind of an obvious statement to say that that's Outperformed our equity value over that same period. And so, and that really is a quite diversified set of assets, Private Equity, Real Estate, there are some assets in there that are complementary To our core business like Playfly for instance, which is focused on college MMR and Sankhya Labs, which is focused NextGen Broadcast Technologies.

Speaker 3

That so it But when we take a look at what we've been able to do there, it's obvious to us and especially given the Regulatory backdrop that I mentioned in my comments that there are Better returns for our capital in other areas. And so we're not limiting ourselves just to Adjacencies within our core business, though if we do find good investment opportunities there, we We'll be that kind of view that as a cherry on top, if you will. So, it is a more diversified outlook. And I think it's instructed by our history and success in those areas. But there If we can find adjacencies or synergies with our core business, then we'll be all over that.

Speaker 8

Got it. That's super helpful. And then just on distribution, particularly around Hennes, you announced a new 2 deal. I thought I heard you say that the Hulu station issue, you had an agreement in principle, but I don't know if they took tennis. How do we just think about kind of The opportunity for incremental tennis carriage from here?

Speaker 3

Well, look, I think it's a very significant win for the company that YouTube TV It's going to be carrying Tennis Channel and all our multicast and T2. We will update you on the agreement in principle with Hulu once it's inked, But I can't really get into more details there. But I think there are incremental opportunities for tennis. It had not been on the virtuals for a few years. And Fubo was really sort of The only one it had, now it's adding YouTube TV.

Speaker 3

So I'm optimistic about ensuring that Tennis Channel is fully distributed on all

Speaker 8

Got it. And then maybe just the last kind of odd one for you or Rob, just on the writers strike, if there's any I don't know if there's any flow through or anything. Just be curious your opinion there if there's any impact.

Speaker 4

Yes. We're not really concerned about the riders strike. It happens. The networks have a lot of library ready to go as well as they could spin up reality shows fairly quickly, and the reality shows are right now are trending with higher ratings. So we don't see that impacting us at all.

Speaker 8

All right, perfect. Thanks for all the color guys. Really appreciate it.

Speaker 3

Thanks, Dan.

Operator

Thank you. Your next question is coming from Courtney Baumann from Barclays. Your line is live.

Speaker 9

Hi, good morning guys. Thanks for the question and congrats on the results. I have a little bit more of a general question. How do we think about Kind of the upcoming negotiations, you guys have scheduled for the second half of twenty twenty three in the context of what you already might have negotiated Earlier this year, are the contracts and I know you guys are probably limited in what you can disclose, but are the contracts both kind of A function of subscriber metrics or is part of them fixed, how are those structured?

Speaker 3

I assume you're referring to our MVPD contracts, which

Speaker 1

Correct. Yes.

Speaker 3

Yes. In the latter half of the back half of this year, we have about 50% Of our big 4 subs coming up with MVPDs and then another 40% actually front end loaded to At the beginning of 2024. So it's a big period of time there back half of 'twenty three, beginning of 'twenty four, Where a lot of our big four subscribers get repriced and those are done on a per subscriber basis with the MVPDs.

Speaker 9

Okay. And on the national side, are the majority of the contracts fixed or also on a per subscriber basis?

Speaker 3

Yes. So on the network side, and we've got a couple of 2 big negotiations coming up at the end of this year. Those, it's not universal, but they are more fixed than variable. And We do those every 2 to 3 years and adjust as subscriber trends change.

Speaker 7

75,000,000 in tech infrastructure spending on this year. How much has been outlaid in the Q1? And Is this bucketed in the corporate G and A line within the other and corporate segment?

Speaker 1

So we've spent about $10,000,000 of it in the Q1. And you're going to see that in media expenses. What's driving the corporate down versus guidance was really around Group and General Insurance in the quarter.

Speaker 7

Okay, okay. Got you. That's it. Thanks.

Operator

Your next question is coming from Avi Sterner from JPMorgan. Your line is live.

Speaker 10

Thank you for taking the question. I got 2 here. Just on the ad environment, and I apologize if I missed this in the opening remarks. But can you just talk about How it's trending Q2 better or worse? Maybe parse it out local, national and then talk about some categories.

Speaker 10

And then I've got one more follow-up. Thank you.

Speaker 4

Yes. We're watching the headwinds. But right now, like we gave the guidance, Low single digits. Vogtle is outperforming national, which tends to be that way when the macroeconomics Have some headwinds, but we have strength on our local side by creating specialty units in auto and legal where we're seeing positive results from those categories. So again, we'll keep our eye on it, but we're not seeing much differentiation from Q1 and we aren't taking any major cancellations.

Speaker 10

Appreciate that color. And then one last one for me. Chris, you noted the regulatory backdrop and reallocation, I'm trying to paraphrase you as best I can, reallocation of investment capital To non broadcast holdings, is M and A in that silo going to be funded By the TV silo or do you envision raising debt potentially at Sinclair Ventures? And I ask this obviously in the context of leverage and everything else. Thank you.

Speaker 3

Sure. So, there are significant resources on both sides of the house, if you will. And there is no need for either side to be supporting The other, and so we'll have to just take it as it comes in terms of what opportunities there are and where Each division is in terms of its goals around leverage, etcetera.

Operator

Your next question is coming from Barton Crockett from Rosenblatt. Your line is live.

Speaker 5

Okay, great. So one of the things I was curious about was last quarter there was the discussion about Fubo and the desire of the affiliate groups to negotiate directly with the virtual MVPDs versus being represented by the Now you're starting deals with the VNBPs. Are you able to negotiate directly or is that still Not something you're able to do and any prospect for that to change at some point?

Speaker 3

No, we are not Able to negotiate directly as of now. And we as I stated in the last Quarter and you probably heard from many in the industry believe that is a wrong that needs to be righted And feel that there is change afoot when it comes to Looking at this sector, which was sort of at least in the beginning, viewed as an upstart small Area that has now grown into a pretty significant part of the ecosystem and the rules of the road need to be conformed To the change in maturity and size and scope of what the virtuals are. So we're very much focused on that. That from both a regulatory perspective and also just how our relationships work with the networks. There's sort of the two ends of the coin that we're focused on getting that right sized.

Speaker 7

Okay. All right.

Speaker 5

And then one of the other things that came out last quarter that I was curious for an update if there's any was The need, the desire to have the FCC drop this requirement to broadcast The current kind of ATSC versus the next gen, so you have you're able to kind of more fully tap that capacity. Is there any progress there, anything to say? How long do you think it might take for there to be some action on that front?

Speaker 3

There actually has been quite a significant event as it relates to that question. While we were at NAB, Chairwoman Jessica Rosenworcel announced that the FCC at the request of the industry, Specifically, NAB, our industry association, is forming a task force, to accelerate the and complete The deployment of 3.0 in the marketplace and that's something that we were very focused on getting as an industry. And the details of that task force are being worked on now, but certainly sunsetting the 1.0 signals It will be a key area of engagement on that task force and There's really 2 important things from our perspective and really the industry's perspective on the task force. One is that it shows That the FCC who is largely taking up time, regulating much larger industries than ours Is on the same page as the industry in terms of advancing the 3.0 standard, which is very Positive from a consumer perspective, from a competitive and competition perspective. So there is alignment There between us and the regulators where there might not be alignment on other issues like ownership, for instance.

Speaker 3

And but that is an important, I think, statement. And then the second part is having a task force of both industry participants and regulators That are focused with the goal of accelerating 3.0, we believe will accomplish that goal of Accelerating 3.0, getting it over the hump, getting it through to the rest of the country, figuring out when we can Sunset 1.0 and when you can Sunset 1.0 is when you're going to open up a significant amount of spectrum capacity That will really unlock the revenue and value opportunities that we've been talking about on 3.0 As it relates not only to better, higher quality and interactive programming for our communities, but also to data casting Opportunities around things like enhanced GPS, IoT devices, Low latency sports, mobile video, these are all, we think, excellent use cases that will amount to Significant economic opportunities for the industry and it's a big reason why we announced that we're building the core network to be able to To facilitate those use cases at scale, you need to have a network, an operating system, if you will, if you're going to do that. But the last piece of the puzzle is opening up much larger amounts of capacity To do those use cases and that's going to mean sunsetting 1.0 and we think the task force

Speaker 4

And I'll reference back to what Chris said earlier is independent studies have valued it As being a $10,000,000,000 unlocking of revenue for broadcasters, so we can't lose sight of once one data gets sunsetted, what that revenue

Operator

Your next question is coming from David Karnovsky from JPMorgan. Your line is live.

Speaker 7

Hi, thank you. Lucy, just one on the Q2 guide. Can you just confirm if other media revenue line includes a management fee from Diamond? And if it does, how do we think about any risk to that going forward just given Diamond's Chapter 11 process? Thanks.

Speaker 1

Yes. So there is a management fee that's in there based on status quo from And see that's in there based on status quo from the March 2022 restructuring.

Speaker 3

And in terms of the yes, it's currently paying at the level that was agreed to back in March of 'twenty two, which is the deferred On a deferred basis, we expect that to continue until a new agreement is reached with Diamond. There isn't a new agreement At this point in time, so, until that happens, we can't speculate.

Operator

Your next question is coming from Aaron Watts from Deutsche Bank. Your line is live.

Speaker 11

Hi. Thanks for getting me in. You've covered a lot of ground. I just had 2 quick ones. One really a clarifier.

Speaker 11

As you move past the $75,000,000 of infrastructure investments you highlighted that you'll be making this year, Will Sinclair Ventures be self funding via cash flows or distributions or should we expect cash from the stations

Speaker 3

So there was 2 different things there, Aaron. The $75,000,000 investment Doesn't really have anything to do with ventures per se. That's focused on our broadcast Operations and investing in their transformation. So I want to make sure we don't conflate those 2. But in terms of your Question on ventures, you will see a much fuller financial picture of that once we complete The reorg in June, but it is expected that entity will be self sustaining.

Speaker 11

Okay, great. And then maybe pointed at Lucy with this last one, just given the current Great environment, macro backdrop, secular evolutions continue to play out in the industry. Has your mindset around where you'd like leverage to live For the business changed at all and you talked about how you bought back stock in the quarter and post quarter end. How do you balance that opportunity against buying back your debt, which is currently trading at a discount to par value?

Speaker 1

Yes. So, Erin, that's actually a great question because the debt is also massively undervalued From where it should trade. So that's something that we're taking a look at. And to your leverage target question, Look, our for broadcast STG, the target remains high threes, low fours. As I said, we are going to be over that this year and then it will start to come back down next year with political.

Speaker 1

And one thing to just Keep in mind from a leverage standpoint because it's a trailing 8 quarter calculation. So what you have going on also in part this year is that 2023 EBITDA is less than 21. But then even when we get into next year with 2024's political year, we expect it to be higher than 2022s. We still have this drag from 23 in there. So we've got to kind of deal with Everything that's happening and we've talked about quite a bit around the negative net retrans and absence of political and the investments, We'll need to live with that here through the end of 'twenty four in that leverage calculation, but it doesn't mean that the fundamentals Of the business and the returns that we get on some of the things that we're doing now aren't playing out.

Speaker 1

So The focus for broadcast will be to get back down over time to that target leverage.

Speaker 11

Okay. Thanks, Lucy. Thanks, guys.

Speaker 3

Thank you.

Operator

Thank you. That concludes our Q and A session. I will now hand the conference back to Chris Ripley, President and CEO, for closing remarks. Please go ahead.

Speaker 3

Thank you all for joining us today. If

Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
Sinclair Q1 2023
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