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Edited Transcript of SBGI earnings conference call or presentation 22-Feb-17 2:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Sinclair Broadcast Group Inc Earnings Call

Hunt Valley Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Sinclair Broadcast Group Inc earnings conference call or presentation Wednesday, February 22, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Amy

Sinclair Broadcast Group - Vice Chairman

* Lucy Rutishauser

Sinclair Broadcast Group - CFO

* Jill Hecklinger

Sinclair Broadcast Group - Director of Treasury

* Chris Ripley

Sinclair Broadcast Group - President & CEO

* Steven Marks

Sinclair Broadcast Group - EVP & COO of Television

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Conference Call Participants

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* Alexia Quadrani

JPMorgan - Analyst

* Aaron Watts

Deutsche Bank - Analyst

* Marci Ryvicker

Wells Fargo Securities, LLC - Analyst

* Kyle Evans

Stephens Inc. - Analyst

* Dan Kurnos

Benchmark Capital - Analyst

* James Dix

Wedbush Securities - Analyst

* Leo Kulp

RBC Capital Markets - Analyst

* Adam Center

JPMorgan - Analyst

* Barry Lucas

GAMCO Investors, Inc./Gabelli & Co. - Analyst

* Davis Hebert

Wells Fargo Securities - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Sinclair Broadcast Group fourth-quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to David Amy, Vice Chairman of Sinclair. Thank you, please go ahead.

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David Amy, Sinclair Broadcast Group - Vice Chairman [2]

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Thank you, operator, and good morning everyone. Before we begin today, it is with great pleasure that I can now turn over the quarterly earnings call that I have been hosting for the last 16 years to our new CFO, Lucy Rutishauser. I have enjoyed and have been honored to speak with you 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.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [3]

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Thank you, Dave, and thank you for your years of hosting the call for us. 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 statement disclaimer.

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Jill Hecklinger, Sinclair Broadcast Group - Director of Treasury [4]

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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 and 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 (inaudible). 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 Investors, Reports, and Filings.

Chris Ripley will now take you through our operating highlights.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [5]

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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 2015, is now in over 80% of the country with a loyal fan base and will 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 SEC has recently enacted some welcomed and overdue regulatory improvements rescinding the JSA processing rules and launching the ATSC 3.0 MPRMs 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 were 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 SEC completed the reverse portion of a 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 MVP carriage, and no material impact on operating performance.

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

With that I will hand it over to Lucy to take you through the fourth quarter results.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [6]

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Think 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 revenue for 2016 were $2.523 billion, up 18% from 2015 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 retrans 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 our 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 reversary trends, 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, primary 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 is a decrease of $3 million over the prior year.

Research and development cost, 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 of 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 retrans 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 of last year, on acquisition financings. 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%.

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 repack or 3.0 deployment. Cash programming payments during the 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 due to the holding company at quarter end was 4.4 times on a trailing 8-quarter basis. That excludes the DIE and non-guarantor debt, and net of cash.

The first lien indebtedness ratio, which is now based on a trailing 8-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, for 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.

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

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Steven Marks, Sinclair Broadcast Group - EVP & COO of Television [7]

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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 midterm 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 (inaudible) 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 repack. 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 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 food category, media, which shifted agencies and ad campaigns, and technical schools, which we spoke about last quarter.

For the first quarter we are expecting auto to be up low single digit percents 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 retrans 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 retrans, 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 lower 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, I would like to open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Alexia Quadrani, JPMorgan.

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Alexia Quadrani, JPMorgan - Analyst [2]

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Thank you. Started with the bigger picture question, the possibility of more deregulation, [I'd just love your] view of any sort of timing that we could see any changes for USS discount and then if we see sort of more industry wide -- wide-scale deregulation, I guess, if you could talk a little bit about the benefit of consolidation compared to the last major wave of (inaudible) we saw a few years ago. How do you see it different or better? And any color on that front would be great.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [3]

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Sure.

As I mentioned we do expect this new SEC to tackle the ownership rules more broadly, the exact timing of how that is 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 [UH] discount looking more broadly at all the ownership rules that were just reaffirmed last year in the quadrennial review. We expect good things to come from that.

We're very optimistic about this new SEC of the leadership of the G5. And in terms of what that could lead to on the consolidation side, we definitely anticipate that more or consolidation will happen. We actually think it is a necessary activity within the industry and just like the last wave there will be synergies from retrans which Sinclair leads the way in, in terms of rates and synergies on the cost side.

This next wave of consolidation will, I predict, allow broadcasters to compete more effectively with the big, first five media companies of the world within the telecom and cable players. That's more of a strategic -- long-term strategic benefit for the next wave of consolidation but it will definitely be the same things you saw before in terms of revenue and cost synergies.

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Alexia Quadrani, JPMorgan - Analyst [4]

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And just a quick follow-up staying on that topic, is there any concern or, I guess, thoughts that the larger networks may also be interested in adding stations to portfolios if the cap (inaudible). I think Fox may have indicated they are not interested. I think CBS said the opposite that 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?

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Chris Ripley, Sinclair Broadcast Group - President & CEO [5]

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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 [IC] deal on the football side. I do expect them to be buyers and I don't expect them to be big consolidator's per se but being selective in terms of picking up stations that fit their operating model.

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Alexia Quadrani, JPMorgan - Analyst [6]

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Thank you very much.

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Operator [7]

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Aaron Watts, Deutsche Bank.

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Aaron Watts, Deutsche Bank - Analyst [8]

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Hello, everyone. Dave, we will miss you on these calls. Steve, probably aimed at you with these couple -- housekeeping real quick, I think you said auto looks like it is pacing up low single digits in the first quarter. What was that in the fourth quarter?

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Steven Marks, Sinclair Broadcast Group - EVP & COO of Television [9]

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

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Aaron Watts, Deutsche Bank - Analyst [10]

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

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Steven Marks, Sinclair Broadcast Group - EVP & COO of Television [11]

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I think election was obviously very interesting and it did have an effect with people 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 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 minus and CW category for those stations and we won't lap that until August 2017. But I am very encouraged on I 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 the first quarter.

So our performance is there. We are beating our competition, we're beating them consistently and we're showing positive numbers. The audits show we beat the field in fourth and we will beat the field in first.

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Aaron Watts, Deutsche Bank - Analyst [12]

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

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Operator [13]

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Marci Ryvicker, Wells Fargo.

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Marci Ryvicker, Wells Fargo Securities, LLC - Analyst [14]

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I've a couple but the first one I'm going to start with is free cash flow guidance. Steve, are you assuming any changes in policies whether that is taxes, interest, acceleration in GDP, kind of figure out what is embedded in that cash flow guide?

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [15]

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Marci, I will take that one for Steve. In our 2017 and 2018 free cash flow we have not included any change incorporate income tax policy. It does not include the auction proceeds in there. And really this kind of more of a same operating environment as what we've seen. As Steve mentioned we have been tracking as an industry on the core low single digits. We have 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.

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Marci Ryvicker, Wells Fargo Securities, LLC - Analyst [16]

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Okay. Then he talked about a payout ratio of 38% in 2016, I think that is 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 a special year?

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [17]

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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 is what you saw in 2016. There were a lot of dips in the industry and we took advantage of that especially up at these levels we are not looking to do share repurchases up here. So right now we would be looking at our dividend plan, again looking to delever the company through our scheduled debt amortization and through our EBITDA growth.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [18]

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

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Marci Ryvicker, Wells Fargo Securities, LLC - Analyst [19]

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And 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 flops among companies?

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Chris Ripley, Sinclair Broadcast Group - President & CEO [20]

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A lot of that will depend on what happens at the SCC and as I mentioned we are 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. 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 the heels of that.

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Marci Ryvicker, Wells Fargo Securities, LLC - Analyst [21]

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Got it. Thank you so much.

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Operator [22]

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Kyle Evans, Stephens.

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Kyle Evans, Stephens Inc. - Analyst [23]

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Hello, thank you for taking my questions, we haven't seen scale participation and 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 have a follow-up question.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [24]

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Sure. 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 View, already. As I mentioned we are in discussions with everyone else, it is 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 insuring that our compensation this 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 we will probably start to see some movement on that as more of these players enter the market place and realize that they need the local affiliates to have a robust offering.

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Kyle Evans, Stephens Inc. - Analyst [25]

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

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Chris Ripley, Sinclair Broadcast Group - President & CEO [26]

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It's both. I cannot speak to other broadcasters and their level of engagement but we are engaged with the affiliate boards and directly with the OTT players.

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Kyle Evans, Stephens Inc. - Analyst [27]

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One last follow up, could you give us -- I always have to at the obligatory retrans sub-count update. Thank you.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [28]

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

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Kyle Evans, Stephens Inc. - Analyst [29]

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Okay. Thank you.

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Operator [30]

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Dan Kurnos, Benchmark.

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Dan Kurnos, Benchmark Capital - Analyst [31]

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Thanks, good morning, the first one for Steve just a follow-up on the commentary on softness and retail in Q1. Since we cover the commerce space we have seen pretty ineffective advertising in digital by the retail guides both off-line and online. But I'm just curious if it's really just a reflection of software for traffic and it is more relation to you guys because if hurt some of those dollars are coming back to TV in the more proven audience reach platforms?

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Steven Marks, Sinclair Broadcast Group - EVP & COO of Television [32]

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Our digital stuff is doing absolutely excellent. As he said in our presentation this morning 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 is a few of them that are not doing well in the 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 is a huge category for us. Huge platform for us and we are adjusting to presenting this, literally on every presentation that we make.

So again, a huge plus digitally in fourth quarter. Followed by again substantial gains digitally in first quarter. As it pertains to the categories we are trying to help them out and focus where they're presenting their dollars and presenting to them solutions so that we can further grow their business for them.

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Dan Kurnos, Benchmark Capital - Analyst [33]

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Thanks.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [34]

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

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David Amy, Sinclair Broadcast Group - Vice Chairman [35]

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

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Dan Kurnos, Benchmark Capital - Analyst [36]

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I guess it is a good segue, I'll ask my 3.0 and audience measurements question next. Just curious on the one media investment. How much of that is going to either forward planning in FFNs? How 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 any expenses baked in for that or how that is coming along?

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David Amy, Sinclair Broadcast Group - Vice Chairman [37]

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We don't disclose the specifics of where we are putting the money for one media for competitive reasons. We are focused, we have highlighted the areas that we are focused on, which you just mentioned. I would say work since -- early days in the measurement side our focus right now is making sure that we can get 3.0 deployed and that we have all of the 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 are spending resources on.

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Dan Kurnos, Benchmark Capital - Analyst [38]

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So okay, one more. Lucy, if you could just remind us of the timing of return and then reverse and where you guys are at with [tennis] and if you change your focus to fundamental improvements like increase add inventory, that would be great.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [39]

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We 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 and grew our net retrans 21% and we are still on track for 2017 to grow net by mid-teens. And for 2018 by single digit percents, and again that is just a function of when the net worth versus when the MVPD contract come up that we would expect to see that accelerate as we get into the next cycle of the MVPD renewals in 2019. So still on track, no change there. Like we talked about it is a growing category for us.

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Dan Kurnos, Benchmark Capital - Analyst [40]

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And on the Tennis side of the equation.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [41]

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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.

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Dan Kurnos, Benchmark Capital - Analyst [42]

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Thank you very much.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [43]

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And that number should also continue to grow as we get into 2018. The number itself.

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Dan Kurnos, Benchmark Capital - Analyst [44]

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I assumed that, I was curious about the fundamental improvement of the add inventory but we can go into that more off-line I have taken a lot of time here. I appreciate it, guys. Thank you.

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Operator [45]

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James Dix, Wedbush Securities.

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James Dix, Wedbush Securities - Analyst [46]

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Good morning and congratulations. I guess I would say -- a couple of questions in terms of what you said, Steve, in terms of core local add growth you expect that as the year progresses. I just want to make sure the are you talking to all of your add growth or were you meaning to kind of exclude what might be national spot advertising in that Outlook and just focusing on one class of advertisers? I know sometimes you don't really focus that much on distinction between local and national, so I just wanted to be clear what your comments were related to when you said you expect core local add growth as the year progresses.

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Steven Marks, Sinclair Broadcast Group - EVP & COO of Television [47]

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We do count everything, whoever buys the spot whether it is local and national, we love them all. It really doesn't matter to us as long as they buy the spot at the rate we're suggesting. To further the comment, I do believe specifically local will grow as we get further into the year.

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James Dix, Wedbush Securities - Analyst [48]

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Okay. There is no potential offset from national that would cause your overall add expectations to be not sub-growth.

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Steven Marks, Sinclair Broadcast Group - EVP & COO of Television [49]

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Nationally we are doing fine. So when you take a look at our performance it is beating our peer group.

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James Dix, Wedbush Securities - Analyst [50]

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Okay. Great. And then just one other on deregulation. Chris, I guess is your expectation that we are not going to see any piecemeal changes through petitions to reconsider or anything, in terms of SEC rules and it is more likely that we could see in a more comprehensive larger proceeding? I just want to make sure I am clear on the scenario that you think is the most likely.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [51]

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

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James Dix, Wedbush Securities - Analyst [52]

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

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Chris Ripley, Sinclair Broadcast Group - President & CEO [53]

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My sense is that will be relatively soon.

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James Dix, Wedbush Securities - Analyst [54]

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Okay. Great. And just on the auction, now that you look back at it and see your participation and how you monetized in it, how did it compare to your individual expectations and what do you think drove the variance? And secondly, one question that I have had from people is, does the forward demand that we have 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.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [55]

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

In terms of your questions around the Ford auction and how much was deployed, I think there is a couple of things I'll say on that. One is this auction was set up where it started off with 100 MHz being available to the wireless industry which was a very large chunk of spectrum; in fact larger than most historical precedents in terms of availability. It was a well supplied auction. I think that is what you saw and that is why it took down four stages to reach an 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 our focused more on densification, smaller sales, and higher spectral bands for that reason and at the end of the day this lower band spectrum is still incredible spectrum beach front property but it really is best used for broadcasting and that is what we intend to do with it with 3.0. And our fundamental view of the value of the spectrum hasn't changed at all. From the Ford auction -- we looked at other Ford auction comparables when we set our reserve prices but our internal valuations of what we thought we could do with this in the 3.0 world were higher than those and so that is what instructed our reserve prices in this auction and the Ford auction hasn't changed that view.

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James Dix, Wedbush Securities - Analyst [56]

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Okay great. That is very helpful. Thank you.

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Operator [57]

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Leo Kulp, RBC Capital.

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Leo Kulp, RBC Capital Markets - Analyst [58]

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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 in smaller markets, medium larger markets and then how high would you be willing to take leverage? And on the free cash guide could you give us some high level thoughts around 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.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [59]

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On the M&A front we don't have necessarily a specific profile that we are 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 have done acquisitions up and down the via the DMA scale and we have become very proficient at operating at different levels so that we can take advantage of those opportunities. So I wouldn't say that it is a specific characteristic that we are looking for here in terms of that question. And what was your second question as a relates to M&A?

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Leo Kulp, RBC Capital Markets - Analyst [60]

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Leverage. How high --

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Chris Ripley, Sinclair Broadcast Group - President & CEO [61]

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So our long-term target is a high three and low fours. We are well on our way to do that on a status quo case by the end of the year. We do have some room to go up for a bigger deal. But our intent would be to have a quick pass back to that target if it did go up for a transaction.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [62]

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Let me do the political one. Just to frame this for you, in 2014 which was the last midterm election on a pro forma basis we did about $148 million of political and as Steve pointed to, we are already hearing rhetoric that 2018 is heating up to be pretty contested. And potentially a lot of issues 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.

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Leo Kulp, RBC Capital Markets - Analyst [63]

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Thank you both.

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Operator [64]

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Adam Center, J.P. Morgan.

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Adam Center, JPMorgan - Analyst [65]

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Thanks for taking the questions, a couple of credit ones real quickly. Does the high speed times leverage target [here in] 2017 and that eight quarter basis assume any debt repayment above normal course amortization? And maybe thoughts on the 6 1/8.

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [66]

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That is a net GAAP number so it is net of cash, so at this point in the model all we have done is moved our schedule debt amortization. But again, even if we repaid any debt it is a net leverage number so you would have the same results.

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Adam Center, JPMorgan - Analyst [67]

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Could you remind us what the credit agreement and indenture say with respect to proceeds from the spectrum option?

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [68]

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

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Adam Center, JPMorgan - Analyst [69]

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I am sorry. How big with that carve-out?

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [70]

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$300 million.

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Adam Center, JPMorgan - Analyst [71]

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Lastly, not to beat the SEC change into the ground but anything from the now Republican-led SEC indicating a change in view on the current state of re-transed negotiations, and thank you for taking the time.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [72]

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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 for the new administration.

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Adam Center, JPMorgan - Analyst [73]

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Terrific. Thank you guys.

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Operator [74]

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(Operator Instructions)

Barry Lucas, Gabelli.

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Barry Lucas, GAMCO Investors, Inc./Gabelli & Co. - Analyst [75]

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

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Chris Ripley, Sinclair Broadcast Group - President & CEO [76]

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Key milestones for 3.0 will be up SEC approval which the PRM was just released and we are hoping it gets through that process by sometime this summer. And you are going to start seeing beta tests hit the market this year paralleling that process and I would expect it to start deploying in 2018 on a commercial basis in conjunction with repack activity. Just to give you an idea, we're going to be re-packing here at Sinclair 93 of our 170 stations. And the benefit to that is that there will be a lot of new equipment bought on these stations; equipment that would 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 that would start in earnest in 2018 sort of loosely following the footsteps of the repack and at that point you'll start to see receivers hit the market -- TVs hit the market. You need a certain level of receiver penetration for there to actually be a business within 3.0 and that is the part that is a little bit harder to predict. So certainly as it relates to Wall Street and putting anything in your models over the next couple of years, I wouldn't. But it will have a big impact on us in the longer-term.

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Barry Lucas, GAMCO Investors, Inc./Gabelli & Co. - Analyst [77]

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Great. Thanks for that, Chris. If we could maybe go deeper into the model issue, if you would, when you think about the other new initiatives and products charged 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 will?

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Chris Ripley, Sinclair Broadcast Group - President & CEO [78]

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On the new networks we are very happy with Comet it is -- out of the gate was profitable and has been growing, that is why we have launched two more. I would say charged to be very similar to Comet, TBD is a little bit more experimental. It is a little bit more unpredictable how that will turn out. I would expect those to really start showing up the numbers in 2018.

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Barry Lucas, GAMCO Investors, Inc./Gabelli & Co. - Analyst [79]

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Thanks very much, I appreciate that.

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Operator [80]

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Davis Hebert, Wells Fargo Securities.

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Davis Hebert, Wells Fargo Securities - Analyst [81]

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Good morning, thanks for taking the questions, most of mine have been answered. But I just wondered, Chris, if you could comment on the industries 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 is morning or evening?

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Chris Ripley, Sinclair Broadcast Group - President & CEO [82]

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On the news front, I will 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. It has been a positive to your question. Terms of use news viewership overall benefiting cable, news outlets, and our news outlets. What is your first question again?

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Davis Hebert, Wells Fargo Securities - Analyst [83]

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On the programmatic. I think you had the consortium aux mix.

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Chris Ripley, Sinclair Broadcast Group - President & CEO [84]

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Yes. Programmatic has been kind of slower than we would like in terms of organizing both the technology and the people together, we are still very focused on it. We have had great success selling in a non-automated fashion our footprint -- our 40% footprint into the network marketplace. We are 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. The by the end of Q1 we should have the technology ready to start doing that and we are still in active discussions with several other broadcasters to group ourselves together making them more robust buys. So it is a focus. It is a big long-term opportunity for us. Our industry -- our inventory is massively undervalued relative to other marketplaces and it is something that we are very focused on. We will get there eventually and I think it will be big for us.

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Steven Marks, Sinclair Broadcast Group - EVP & COO of Television [85]

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

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Davis Hebert, Wells Fargo Securities - Analyst [86]

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Great. That is interesting color. Thank you so much.

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Operator [87]

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

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Lucy Rutishauser, Sinclair Broadcast Group - CFO [88]

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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. Thank you for participating on our earnings call this morning and if you have any questions please feel free to contact us.

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Operator [89]

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Thank you. This concludes today's question and answer session. Thank you for your participation. You may disconnect your lines.