Sinclair, Inc.

Okay, we're going to get started. I'm Aaron Watts, the Media Cable Satellite Research Analyst at Deutsche Bank. Very pleased to have Sinclair back with us again this year. On the dais with me is Chief Executive Officer Chris Ripley and Chief Financial Officer Lucy Rudishauser. To both of you, thank you for being here. So it has been a topical year in the space. So I'm glad we have a chance to sit down to discuss not only Sinclair, but also industry themes as a whole. Sinclair has had a lot going on this past year, though, specifically including a corporate reorganization. And this came against a challenging advertising backdrop, continued secular changes across media as a whole. Chris, to kick us off and level set, how have you repositioned Sinclair now to navigate the evolving landscape Where's your focus and your priorities over the next year plus?

So on the broadcast side, we are very bullish about the year ahead and the future. We are going to have significant net retrans growth from here on forward. We have had, as we guided previously, 22 to 25 net retrans going to be up low single digits there has been a decline in net retrans in in 22 or sorry in 23 and and so you can see that in order for the for the guidance to to to play out that 24 and 25 are going to be robust we're also seeing the ad market firm up here which is a good sign for from the macro economic backdrop And the advertising market for political, we're expecting to be record-breaking in 2024. And on top of that, we're investing heavily in transformation for broadcast. We've got $65 million worth of spend here in 23, focused on cloud transformation, a new unified ad sales platform, all things that are going to make us much more efficient in the future. and much more effective at running our business. We're at peak investment in 23 around that transformation, and that investment spend will subside in 24 and not be there in 25. So you've got extra expenses burdening 23, which will have benefits in future years. You've got significant growth across the advertising business and the retrans business projected for 24 and 25. And then on top of that, you've got ATSC 3.0 starting to contribute in 24 as the market gets fully deployed here across the U.S. We're currently sitting at 65-70% coverage. We're finally starting to get traction on some of the use cases that we've been talking a lot about beyond broadcast, and we'd expect that to start contributing in 24 so we're very bullish on the broadcast business in the years ahead and we feel like we've you know we've taken we've taken our hits there over the last couple years but setting up for a good a good couple years ahead in terms of visibility and then on tennis channel we're very very bullish on tennis channel it's got a number of growth factors that are all coming together here in the next couple years. Direct-to-consumer, which we think is a massive opportunity for tennis. The research that we have conducted points to a subscriber potential in the millions, two to four million potential direct-to-consumer subscribers at over $100 per subscriber a year. is a very significant outcome for tennis. And that's going to be launched next year. International has been going great. We're in nine other territories now, just launched Spain. And we're starting to acquire other rights. We have the WTA rights in Germany, Austria, Switzerland. We're having active rights discussions in other territories. We have the opportunity to build a tennis channel in every single one of those territories of significance in tennis. So an entirely new business. And our fast channel strategy is taking off on tennis. We launched T2 on Samsung only. It's now moving to other fast platforms. It's free ad supported. We have plenty of match content and other content to supply it for a very low incremental cost. And it'll be our front of the funnel, if you will, For tennis and then we've also. Doing a lot more in pickleball will be launching pickleball TV. Here in the next quarter. And we're also looking at pedal. In in Europe. So there's a lot. Going on in tennis. To be excited about. And I didn't mention e-commerce. Or sports betting. Compulse has. Has had a really significant year. Turned profitable. this year it's invested heavily in its platform its platform is a best-in-class local digital marketing services platform and now it's all about just adding scale so we're looking at transactions that can add more scale we're obviously growing organically there but getting it to the point where it is best-in-class and it's profitable was a significant milestone that we passed this year and then Last but not least, you've got an investment portfolio that's worth about $1.3 billion, including cash on hand, and that increasingly is turning into cash. The investments in that portfolio have returned almost 20% IRR over the last 10 years. They've done incredibly well, but we are actively monetizing them, and we'll look to redeploy them in majority control investments so that investors can see the results on our income statement.

Okay, that's a great overview. We'll dive in on a lot of that further over our time here. I wanted to start, though, with current events. I think it's fair to say there's been a decent amount of hand-wringing that's gone on recently centered around the Disney Charter dispute, which ultimately got settled a couple weeks ago. As we've now had time for that dust to settle, it would be great to hear your thoughts on the new template set by the two companies, which obviously includes both D2C and linear and seems to preserve the cable bundle for now. What does it mean for local TV broadcasters broadly and for Sinclair specifically? Was this a good outcome?

I think it was a great outcome. And it reminds me that five or six years ago at a conference – Like this, I was asked about the advent of streaming and direct to consumer. And one quote that I gave the industry that was played up in a lot of industry rags was I said, streaming will be a sea of blood for the industry in terms of losses. And that, so far, has played out. it's had a very detrimental impact on the pay TV ecosystem because direct-to-consumer streaming has been way underpriced. It was priced to grow subscribers, not to grow profits. And the industry has finally, and the market has finally woken up to the fact that that is not a great business model. And we're seeing the market change in reaction to that. And the Disney charter deal is just one more proof point that the market and the industry has become more rational as it relates to how to keep, how to maximize revenue from your content. And I think it's truly a watershed deal. I take my hats off to charter and Disney for figuring out a way to support the pay TV bundle, which is the large discounted offering to a consumer while also growing direct-to-consumer a la carte SVOD for Disney. I think it's a path forward for the industry. And why it's so important from my perspective is it is now incorporating those direct-to-consumer offerings directly into the pay TV bundle. So the fact that Disney Plus and ESPN Plus are now going to be included in charters base offerings I think is very significant. What it does is it improves the relative value equation for the consumer. Now the consumer that's paying 80 90 hundred dollars a month to charter or their pay TV can look at that and say OK. I'm now getting more value. I may not be paying less but I'm getting more value for what I pay. And the alternative of them leaving pay TV And largely, when people leave, it's because they are getting what they need from, say, a Disney+, or a Paramount+, or a Netflix, et cetera. These things are now included in what I get in pay TV. So the value equation changes quite significantly. The more value that can be put into the pay TV bundle, the better it is for the entire media ecosystem. It is the ideal business model from a content distributor or producer perspective it maximizes revenue and it also maximizes consumption and the optionality to consume for the consumer so it is a model worth preserving and I think most media companies have now realized that in fact have really come to the to the to the undis you know sort of unavoidable fact that keeping that ecosystem as sustainable is vital to everyone's future And that's what I see in the Disney charter deal. And at the same time, on the other side of the equation, you're seeing a la carte SVOD get more expensive by the day. Price increases, password sharing crackdown, advertising being added. So the value equation on a relative basis for a consumer, I can pay more and more for an a la carte SVOD on one side, or I can stay with pay TV on the other. and get much more value. And I'd expect the rest of the industry, the rest of the MVPDs and media companies to follow suit. I think it's going to have a dramatic impact on churn going forward. Okay.

And that can play through into your outlook for net retrans going forward if this kind of shifts.

And by the way, our guidance did not expect this deal to happen. Right. or what impact it may have. But I think it's very positive for churn, especially as it migrates to other MVPs and other media companies.

Do you feel the outcome of this dispute in any way tilted the negotiating leverage to distributors in discussions going forward, whether from a pricing standpoint or otherwise?

What we saw in the deal, as reported, is that the premium must-have content held its pricing power. And the undifferentiated, you know, not highly viewed content like the nine or ten channels that Disney basically let go of, a lot of it is children programming, low-value programming, you know, did not. But the premium content, which when you take a look at what we're offering, is what we offer in spades, got its price increases, held its pay on in packaging, requirements and so it really I think points to a barbelling of the industry in terms of if you've got a premium must-have content you still have your pricing power and you still have your negotiating leverage if you don't then you've lost it okay you know one additional question along these lines was whether the new template now makes it possible or or easier for distributors

and their subscribers to access network content, including nationally televised sports, even if there is a dispute going on with the local affiliate. The obvious implication of this being a distributor may not feel as much pressure to meet an asking price from the local affiliate like Sinclair or settle a blackout dispute expeditiously if they can access that nationally televised sports like Monday Night Football via the direct-to-consumer apps. that would be a part of the bundle now. Can you talk about all this and perhaps provide some color around your exclusivity protections?

So they vary depending on network relationship. And so this potential issue hasn't had any impact on any negotiations. In various relationships, there are contractual items that do deal with exclusivity. that potential but it's not uniform across the industry. But what it really comes down to from our perspective is economics and alignments of incentives. Each affiliate body sends roughly two billion dollars a year to the network to each network in the form of reverse retrans or programming fees. The network is not viable without that payment stream it's it's a huge part of their economics and a huge part of how they pay for the NFL and all the other programming that they do so I'd expect that if this becomes an issue that undercuts the ability of affiliates to negotiate with the distributors the industry would act swiftly because it's not just an affiliate issue it's an ecosystem issue it's a network issue and so I Because of that alignment of interest and the way the money flows, I'm not worried about it.

OK. One last question around Disney. There have been recent headlines suggesting they may be willing to sell all or parts of the linear TV business. A couple broadcasters have reportedly put themselves in the mix as potential suitors. What's your interest level here? How high a hurdle would that be from a regulatory standpoint? and maybe importantly also your current leverage profile and how that would play into it.

Well, it's a good question. We certainly would be very interested if ABC was going to be transacted. I don't think anything's eminent by any stretch of the imagination. I also think that... The likely, if there were to be a transaction, and I think that's a big question mark from a regulatory perspective, whether that could be a transaction. It would be value destructive if you pulled apart the various pieces. ESPN from ABC, ABC from the various linear networks. So the most, and by the way, probably value destructive too, The the other offerings like the DC offerings so. You know they are they actually are complementary and. I find it you know although a transaction could be done generally value destructive transactions don't tend to get done. When it really comes down to it unless someone's just desperate to unload. And I don't think Disney's there so. We'll have to see. how it plays out but I'm not you know breaking it all up into various pieces and so I think is a very unlikely outcome.

So I wanted to touch on retrans one more time just to make sure I had kind of the lay of the land straight. I believe you have up to around 90 percent of your big four traditional pay TV subs up for renewal currently and into next year. Is that correct? And as we now sit in October, can you give us a sense for how those discussions are progressing to the extent you already kind of have dived into it and your outlook for achieving your desired price increases to fit into that two, three-year guidance that you spoke about earlier?

Well, we don't like to comment on active negotiations, but all I can say is so far we don't see anything

in those discussions which would change our guidance okay all right and on the other side of the coin with network affiliation renewals uh anything upcoming that you would highlight or more broadly what are your expectations in terms of network comp growth rates over the next few years again there the trend continues where the leverage has switched the network's ability to continue to

push through significant increases has diminished and I think that's more a factor than anything else that is just so much aggregate dollars that are being sent from the affiliates to the to the networks and we feel confident our ability to manage that down into you know increasingly sort of a flattish arrangement okay

Let's change gears to the advertising environment. It's been a sluggish year plus for advertising, most notably on the national side. On your earnings call, you noted 3Q trends appeared largely unchanged from 2Q trends, with the notable exception of national advertising, which was showing signs of improvement. Has there been any material change to that outlook in the time since? Are you seeing any evidence that advertising is better or worse than you were expecting?

Yeah, so I would characterize the current ad environment as stable. As you pointed out, we did see national start to improve late in second quarter. That is continued through the third quarter and looks like it will be slightly positive for the full third quarter. And then local is, I would call it a little bit more delicate. And, you know, really based more on, you know, what's happening with, you know, fiscal and monetary policy. So we're keeping an eye on that one. But, you know, if you think about the categories, though, automotive, it's 20% of our ad spending. That category continues to grow this year. It's grown in third quarter. We're beginning to lap insurance. We've talked about The insurance category being down for the past year, so now we are lapping that. And then we've seen in the third quarter and heading into the fourth quarter, growth in home products and then legal is always an all-time favorite of broadcasters. That one continues to grow.

Luciana, Otto, have you seen any impact yet from the strikes? Has that caused any pullback in spend? At any tier one, tier two, three?

No, we have not seen anything at this point.

Okay. And on political, you mentioned, Chris, earlier that you were expecting next year to be a big year. What's your latest view on how that shakes out relative to what you collected specifically over the last couple elections? And last cycle, we saw some shifting of spend from traditionally competitive markets to more solid blue and more solid red markets. Do you see that happening this time around with the presidential election?

Yeah, so as Chris pointed out, we do expect political to be another record-breaking year. Next year, it seems like every year we're saying that. So just to put in perspective, 2020, excluding the Georgia Senate runoff, we did 350 million. And so we do expect to beat that number significantly. When you look at what's happening here in 23, in a non-political year, and compare that up against 19, which is the relevant year, at the midpoint of our guidance, which is about 40 to 45 million for this year, at the midpoint, that's about 30% more than what was happening in 2019. And one of the areas that's generally overlooked, because everybody thinks about what's happening on the candidate side, is the issue advertising. So this year, 75% of our political spend is coming from issues. And there's a lot of big issues, abortion, immigration, gun control, ballot measures, you know, the list goes on and on. And that's been a big driver. We expect that to continue throughout 2024. As we come into the fourth quarter, we should start to see some of the early presidential primary money uh coming in uh you know independent uh research that's out there is calling for also record levels of uh fundraising you know that should you know broadcast is usually where that money goes and then to your to your other point you know after 2022 um there's a distrust of you know political ad ads that are on social media And so, you know, we have seen that start to, you know, minimize. And that should also be money that comes back into broadcast, you know, to the extent that it went over to social.

So it sounds like you expect local broadcasters to maintain your share of the overall political spending pie. Is that a fair?

At a minimum, maintain the share.

Okay. Let's talk about the financial profile of the company. You ended the second quarter with leverage of a little over five times at SBG, net of cash. While excess free cash flow will be more limited this year, that will obviously step up next year. Can you remind us what your target leverage is for the business when you see getting there? and how you're balancing your investments, M&A, share of purchases, debt pay down, et cetera.

Yeah, so I'll let Chris talk about the investments in the M&A. But, you know, the target leverage remains high threes, low fours on a total net basis. That's trailing eight quarters. So 23 is really an anomaly year for us. We have, as Chris mentioned, net retrends, which is down. There's 65 million of investments back into, the broadcast business, whether it's on cloud, data distribution, our marketing services, ad tech. Those are all things that will drive future growth as well as help us have CapEx and OpEx cost avoidance. So when you start to look at 24, and again, given the trailing eight quarter calculation, 24 political, we expect to be more than 2022's political. Net retrends, we expect to grow. It declined this year. The investments, $65 million this year, we expect that to be less next year. So those are all things that will naturally de-lever us as we go through the year. The political, of course, comes in the second half of the year. And then as you look forward, you kind of need this anomaly year to drop out of the equation, 23 to drop out and get replaced with 25. And that would further deliver us. So we expect to work back down to our target leverage. It's very important to us. One of the other things that we've done is we had bought stock back through early May. And then we changed our focus to buying back the debt, not because we think that the stock is fully valued. We still believe it's at a big discount, but the debt is also trading it at discounts. And so we started buying the debt back. We've continued to do that through the third quarter. To date, we've bought almost $65 million of principal value back for about $50 million. So call it almost 25% discount on that. And we'll continue to be opportunistic on that front. So we are focused on delevering the company and getting back down to the target leverage.

Is the plan to kind of, in terms of priorities, keep debt repurchases a little bit ahead of share of purchases for now? It sounds like you've continued to buy back debt, but is that kind of the mindset at the moment?

Yeah, I mean, so right now, as I said, you know, we've been, debt has been the focus, you know, for us.

And as you consider your debt maturity profile, which really steps, starts in it in 2026, as well as kind of where your debt's currently trading Where do you think leverage needs to be in order to smooth the path to refinancing or extending out those maturities?

So look, we still have just under three years, so we do have some time. But I want to be clear that those 26s are top of mind for us. It's one of the reasons why we have been buying back some of the 26s, even though, and we fall back, let me just say, we fall back across both the bonds and the term debt. So the term debt, the 26s are attractive because they are the near-term maturity. The long-dated bonds are attractive because they're trading at the biggest discount. So we've been opportunistic across all of those. But we do believe, for all the reasons that Chris has talked about for the drivers of the business, what I've talked about, comparing 23 and 24 and into 25, and the EBITDA that there is a path to address the 26s. Okay.

So, Chris, I wanted to ask, or Lucy, I wanted to ask about the corporate reorganization that occurred earlier this year. Not necessarily to dive back into all the details, but as part of that, you did move some assets out of the television group and into your new venture silo. and you ascribe significant value to those assets that were moved, how should lenders think about the potential for similar actions in the future? And I would add to that, to the extent that the TV group at some point was in need of additional cash or could use cash to help pay down leverage, could we ever see value flow back the other direction from silos to the TV group, from the venture silo to the TV group?

Right. So, Aaron, I think the Important to revisit the reason why we did the reorg one was to highlight and show to Wall Street that some of the parts valuation and the second reason was to give transactional flexibility to Tennis Channel and to Compulse to let them pursue their own value maximizing path. And you know we're already in deep discussions around you know both and how to optimize their capital structures and how to optimize their growth path. So going forward, we don't have any plans to move assets around. And our first, second, and third priority is deleveraging SBG, getting back down to our target leverage. So that's what we're focused on. you know, the notion of, to your last question, of it is all one company, right? So the notion of funding coming from ventures to SBG is certainly something that could happen, but it's not something that we think needs to happen in order for SBG to return to its target leverage.

Okay. And Chris, I know you're somewhat Tied on what you can say here, but on Diamond Sports, I think one overhang with the Sinclair credit is the uncertainty around how that situation plays out and what the outcomes are of it. Is there anything you have to update us with today that in terms of a timeline or magnitude of outcomes that could help us with that overhang or with that uncertainty?

I can't comment on ongoing litigation of any type, including Diamond. The only thing I can point you to is that we did file our motion to dismiss. It's currently in front of the courts, so our expectation is that will reduce the exposure.

Okay. You mentioned ATSC 3.0 in your opening remarks. that's obviously been something that's been talked about throughout the industry as a potential future growth driver. But we've been hearing about it for a long time, right? So what gives you confidence that, I think you said next year, you actually start to see some tangible P&L benefits from that? And maybe you could also comment on some of the reports that came out last week about LG maybe pulling back on support in terms of putting that into their TVs next year and maybe some others following suit. And if that impedes the progress or the momentum that's been building.

So just very quickly, I'll deal with LG first, because I think it's a one-off. It can be easily explained. But we had a patent troll that was in a very patent troll-friendly court, won a case against LG. So they obviously want to stop the bleeding in terms of having to pay this patent troll, so they've temporarily suspended putting 3.0 in. They haven't sued any other TV manufacturers. We think they'll win on appeal. And we think that's just a temporary one-off issue. So I wouldn't read anything into that. In terms of 3.0, we are getting to a critical mass on the distribution front, currently sitting at 65%, 70% of the country covered. With 3.0, we have an active process going on with the FCC, the Future Television Committee, that's working with the FCC to pave the way for the final transition and hopefully the eventual sunsetting of 1.0. So it's been painful and it's been like herding cats to get the industry here, but we are finally getting to the point where we can have real discussions with customers about... use cases that we've been talking about beyond broadcast that we've all been excited about and some of those include automotive connectivity we're active with Hyundai Mobis we just did you know several demonstrations for other manufacturers around updating their software and their cars which is now happening on a regular occurrence among other applications that we can have within automotive We think delivering high quality, low latency sports, something we already do in our core business, is going to be a huge part of the 3.0 story, especially as people look to add interactivity around these viewing experiences. Enhanced GPS and GPS backup, which is a big focus for the government right now on the backup side, we think is going to be an incredibly powerful application for 3.0. Enhanced GPS, which brings the accuracy rate of GPS that is uncorrected, 1 to 10 meters, corrected down to 3 to 6 centimeters, we think is going to have a very, very robust demand in urban areas, especially as more and more devices become and start doing things autonomously. And that's probably where some of the first revenue will come in next year. And then IoT device control, as more and more devices get connected and require connectivity, this is a far cheaper and more effective way to communicate than, say, adding a full cellular capability to a device. So we're getting real traction with consumers or customers, I guess would be a better word for them, around these use cases now that there is more capacity and we're getting close to nationwide coverage. And the promise of using our spectrum for its highest and best use, which is mobile connectivity, is finally coming into focus.

Great. We are unfortunately out of time, but Chris, Lucy, thank you so much for being here.

Thanks, Aaron.