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Edited Transcript of SBGI earnings conference call or presentation 26-Feb-20 2:00pm GMT

Q4 2019 Sinclair Broadcast Group Inc Earnings Call

Hunt Valley Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Sinclair Broadcast Group Inc earnings conference call or presentation Wednesday, February 26, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Billie Jo McIntire

KUTV - Manager of Investor Relations

* Christopher S. Ripley

Sinclair Broadcast Group, Inc. - President & CEO

* Lucy A. Rutishauser

Sinclair Broadcast Group, Inc. - Executive VP & CFO

* Robert D. Weisbord

Sinclair Broadcast Group, Inc. - President of Local News & Marketing Services Division

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Conference Call Participants

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* Aaron Lee Watts

Deutsche Bank AG, Research Division - Research Analyst

* Daniel Louis Kurnos

The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst

* Davis Hebert

Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Analyst

* Kyle William Evans

Stephens Inc., Research Division - MD

* Steven Lee Cahall

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Zachary Alan Silver

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Sinclair Broadcast Group Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host for today, Executive Vice President and Chief Financial Officer, Lucy Rutishauser. Ma'am, the floor is yours.

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [2]

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Thank you, operator. Participating on the call with me today are Chris Ripley, President and CEO; Rob Weisbord, President of our Local News and Marketing Services Division; and Jeff Krolik, President of our Sports Division. Before we begin, Billie Jo McIntire will make our forward-looking statement disclaimer.

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Billie Jo McIntire, KUTV - Manager of Investor Relations [3]

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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 as filed with the SEC and included in our fourth quarter earnings release. The company undertakes no obligation to update these forward-looking statements.

The company uses its website as a key source of company information, which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website 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. 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 these non-GAAP financial measures to the GAAP measures in our financial statements is provided on our website under Investors, Non-GAAP Measures.

Chris Ripley will now take you through our operating highlights.

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [4]

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Good morning, everyone, and thank you for joining our fourth quarter earnings call. We have a lot of positive news to share with you today, starting with results that met or exceeded our guidance estimates. Lucy will take you through those details shortly.

Sinclair ended 2019 as the largest provider of local sports and a leading provider of local news. With 23 RSN brands and 191 broadcast stations across our portfolio, we are the leading provider of locally relevant content. As we finish an incredible 2019, we are looking forward to executing on a myriad of opportunities to drive both our Local News and Sports segments.

We are intently focused on continuing recent successes in growing our share of political advertising dollars for our stations and now sports networks unique among our broadcast peers. We intend to roll out investigative reporting in over 20 markets this year, an effort that, so far, has been highly successful, both in terms of a claim as well as tangible community impact.

Our RSNs will be rebranding in the coming months. We are working on a new digital platform. And there is significant opportunity around legalized sports betting. So more to come on those fronts.

We are announcing -- when we're announcing -- when we announced the RSN deal, we expected legalized sports betting to lead to multiple beneficial impacts on the RSNs, such as the new ad category, enhanced viewer engagement and new ways of monetizing our assets. We are already starting to see some of those benefits play out with advertising dollars flowing to our networks in states that have made sports betting legal.

On the distribution front, we continue to enjoy productive relationships with our distributors, and we are making very good progress on renewals for the RSNs and carriage of Marquee. Approximately 70% of our total subscribers are locked in for multiple years, significantly derisking the company. And for our Sports segment, it's over 70%.

Just last week, Marquee announced that Hulu + Live TV will carry the network. We now have agreements in place for market-wide carriage of Marquee with more than 40 distributors, including AT&T U-Verse, DIRECTV, Mediacom, Charter and over-the-top providers Hulu and AT&T TV Now, which means that 100% of the Cubs' geographic footprint are able to watch Marquee.

Speaking of which, Marquee had a successful launch last week with the start of the Cubs' spring training. And with opening day on March 26, we are ready to go with a beautiful new studio.

We remain in negotiations with Comcast and, ultimately, given the value of these properties and demand from local viewers, we are confident that we will come to an agreement and they will allow their subscribers to watch and enjoy their favorite home team. We continue to have discussions with DISH for the carriage of the RSNs and remain confident that our 2 companies will eventually reach mutually acceptable carriage agreement.

On the subscriber front, with the exception of 1 MVPD that is experiencing above-average subscriber losses, our subscriber churn for the fourth quarter was less than 1% on an annualized basis. And we actually added subscribers sequentially when excluding this 1 MVPD.

We reached an agreement in principle with 1 team, whose rights agreement recently expired, while another team exercised its right to put their minority interest to us. In addition, we have an agreement in principle to renew 10 station affiliate agreements with Fox, while another 7 stations, to which we provide services, also renewed their Fox affiliations.

On the ATSC 3.0 front, now officially called NEXTGEN TV, we have several initiatives in process that are moving forward. We had a successful CES, and we'll be demonstrating many of the same technologies in NAB. We launched Cast.era, our joint venture with SK Telecom. We joined Pearl TV, a broadcast industry organization committed to investing NEXTGEN TV. And the industry is on track to deploy NEXTGEN in many markets this year, while the consumer electronics manufacturers have announced plans to bring 20 NEXTGEN-enabled TVs to the market this year.

2020 is off to a strong financial start, with political spending running well ahead of the 2016 spending for the same period. And as a reminder, we expect 2020 to be our highest political revenue on record. For full year 2019, total company adjusted free cash flow was $607 million and, on a pro forma basis, almost $1.1 billion. That equates to $11.48 per share and $14.14 average 2018-2019 pro forma adjusted free cash flow per share.

I do want to mention that there has been some misinformation in the marketplace that has unfortunately depressed our stock valuation. In fact, if you do a sum of the parts on us, you will find that our current stock price ascribes no value to our Sports segment, despite having over 70% of the RSN subscribers locked in, including: multiyear deals completed with Charter, AT&T, DIRECTV, Mediacom as well as 200 other completed deals with medium and small distributors; having very few team renewals on the horizon; $1.6 billion of liquidity as of year-end 2019; exclusive rights on linear and digital; and future sports betting and synergy opportunities.

Based on the current trading levels of our stock, it's hard to argue that there's a better return for us than repurchasing our own shares. And while we repurchased over 4.5 million shares in 2019 at these trading levels, we will look to be more aggressive.

Now let me hand it over to Lucy to discuss our financial performance.

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [5]

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Thank you, Chris. We had very good fourth quarter results. But before I get into the numbers, I wanted to thank our investors and analysts for their patience as we evolve our public disclosures to reflect our transformation into a diversified media company and provide you information to confidently value our 2 financing silos and consolidated company.

Our goal is to be as transparent as possible in reflecting the results and valuations of our businesses, and we welcome any feedback you want to provide. I also want to introduce our new Vice President of Investor Relations, Steve Zenker, who recently joined to help increase our investor Relations efforts and outreach.

Going forward, we will be referring to the RSNs as well as other sports-related assets we report as part of this segment as our Sports segment. The remaining business will be referred to as our legacy business, which includes our Local News and Marketing Services segment and our Corporate and Other segment.

As we give you information related to the specific segments, it will be inclusive of the management and incentive fees paid by the Sports segment to the Local News and Marketing Services segment so that you can do your sum of the parts and credit valuations on each silo.

So while reflected in the individual segments, please note that these amounts eliminate in consolidation and, therefore, are not reflected in the total company consolidated results. So again, management and incentive fees will be included in the segments but eliminated for consolidation results.

Turning to the results. Consolidated media revenues for the fourth quarter were $1.581 billion, an increase of 86% and at the upper end of our guidance range. These results include the first full quarter of the Sports segment results, which contributed $788 million of revenues for the quarter.

Our legacy business media revenues, which exclude the Sports segment, were $820 million in the fourth quarter versus $849 million in fourth quarter 2018, which was an election year. The lower political revenue in Q4 of '19 was offset in part by higher distribution and core advertising revenues. In fact, core advertising was up approximately 7% for our legacy business in the fourth quarter and in line with our expectation of mid- to high single-digit percent.

For the year, core advertising for the legacy business was up approximately 3%. We booked $23 million of political ad revenue in the fourth quarter, which was above our guidance range of $15 million to $20 million, and almost double what we booked in Q4 2015 pro forma. As Chris mentioned earlier, we expect record political advertising revenue for 2020.

Total distribution revenues were $1.1 billion in the quarter, meeting expectations, with the Sports segment contributing $724 million of the total. For the year, consolidated total media revenues increased 39% to $4.046 billion due to the addition of the Sports segment, which contributed $1.139 billion of media revenues.

Excluding the Sports segment, media revenues are -- at our legacy business were up slightly as lower political revenues were offset by strong growth in distribution revenues and core advertising gains. Our legacy business grew distribution revenues for the year by 13%.

On a pro forma basis, 2019 consolidated media revenues was $6.475 billion. Our Sports segment pro forma media revenues were $3.586 billion. And for the legacy business, including the management incentive fees, pro forma media revenues were $2.967 billion.

Consolidated media operating expenses in the fourth quarter, defined as media production and media SG&A expenses, were $1.080 billion, up from the fourth quarter 2018, and that's primarily due to the acquisition of the RSNs. Including the management and incentive fees, our Sports segment media expenses were $597 million.

Corporate overhead in the quarter, excluding $39 million of nonrecurring transaction, legal, litigation and regulatory costs and $4 million of stock-based compensation, was $27 million. EBITDA for our nonmedia businesses was approximately $5 million in the quarter, which was $4 million better than our expectations on timing of ONE Media expenses and higher repack revenue activities.

Total company adjusted EBITDA was $450 million, an increase of 32% and at the high end of our guidance range. Including the management fees, the Sports segment had adjusted EBITDA of $174 million, and the legacy business had an adjusted EBITDA of $276 million. Pro forma company adjusted EBITDA for the year was $2.147 billion, of which $1.270 billion was from the Sports segment and $876 million from the Legacy business.

Consolidated adjusted free cash flow for the quarter, adjusted for nonrecurring items, was $206 million, exceeding the high end of our expectations. For the full year, pro forma consolidated adjusted free cash flow was $1.068 billion.

Diluted earnings per share on 93 million weighted average common shares was $0.47 in the quarter, or $0.94 of income per share when adjusted for the nonrecurring transaction fees, legal litigation and regulatory. We bought approximately 600,000 shares in the fourth quarter and over 4.5 million shares for the full year 2019, which represented approximately 7% of the Class A shares outstanding at the beginning of 2019. As Chris stated, at current trading levels, you should expect us to aggressively buy the shares.

Turning to the balance sheet and cash flow highlights. Capital expenditures in the fourth quarter were $60 million, including $26 million for the repack. And for the full year, CapEx was $156 million, including $66 million of repack. For 2020, we expect CapEx of between $130 million and $150 million, plus another $90 million for the reimbursable repack spend.

In the fourth quarter, film payments were $22 million and sports rights payments were $460 million. And for 2020, we expect film payments to be $90 million and sports rights payments of $1.9 billion. At December 31, total debt was $12.438 billion. Cash at December 31 was $1.333 billion, of which $949 million was in the Sports segment and $384 million in the legacy business.

During the fourth quarter, we redeemed 300 million of Diamond's preferred shares and another 200 million in January, bringing the outstanding balance down significantly to $525 million from the original $1.025 billion. This will generate approximately $50 million in annualized cash dividend savings.

Total net leverage through Sinclair at quarter end was 5x. STG's first-lien indebtedness ratio on a trailing 8 quarters was 2.5x on a covenant of 4.5x, and 4.4x on a total net leverage basis. Diamond's first-lien indebtedness ratio on a trailing 4 quarters was 4.2x on a covenant of 6.25x, and 5.6x on a total net leverage basis.

Turning to our guidance for our first quarter and for the fiscal year 2020, consistent with our most recently provided guidance, DISH is excluded from the sports segment for all periods until carriage is resumed.

For first quarter, we are expecting consolidated total company media revenues to be between $1.605 billion and $1.633 billion as compared to pro forma first quarter 2019 media revenues of $1.617 billion, which this -- that number last year includes 3 months of DISH and Sling distribution revenues, which are not in this year's guidance.

The guidance also includes $34 million to $46 million of political revenues versus $2 million last year, and it includes $1.160 billion to $1.160 billion (sic - $1.166 billion) in distribution fees versus $1.228 billion of pro forma distribution revenues last year. Media revenues are expected to be $838 million to $843 million for the Sports segment, and $793 million to $817 million for the legacy business, which includes $27 million of management fees.

For the first quarter, consolidated total company media expenses are expected to range from $1.169 billion to 1.179 billion compared to pro forma media expenses of $1.038 billion in first quarter of 2019. For the full year, consolidated total company media expenses are expected to be approximately $4.839 billion to $4.879 billion versus 2019 pro forma media expenses of $4.314 billion.

The increase over pro forma 2019 is primarily driven by higher network fees; the addition of Stadium, which is now consolidated; and Marquee, which is a start-up; as well as sports rights amortizations, which are added back for EBITDA purposes.

Consolidated total company adjusted EBITDA in the first quarter, adjusted for $8 million in nonrecurring costs, is expected to be $241 million to $259 million, as compared to pro forma first quarter 200 -- first quarter 2019 adjusted EBITDA of $414 million, and that's adjusted for $2 million in nonrecurring costs. Our Sports segment is expected to generate $30 million to $33 million of adjusted EBITDA, and our legacy business is expected to generate $211 million to $226 million of adjusted EBITDA.

Now as highlighted last quarter, the Sports segment traditionally experiences its lowest EBITDA in the first and fourth quarters due to contractual timing of team payments. So with the baseball season beginning in March, team payments are at their highest for the year in the first quarter, which you can see in our guidance.

So more than 1/3 of the full year payments, more than 1/3 will occur in the first quarter alone. And the gap between the payments, and the amortization is in media expense, that's driving some of the analyst models to be too high on EBITDA for the Sports segment in first quarter.

So again, while Q1 guidance includes $487 million of sports rights amortization, payments are expected to be $644 million, resulting in EBITDA being lower by the difference of that $157 million. However, and this is important, for the year, payments are expected to be lower than the amortization by $153 million. So really, any difference that you're seeing in Q1 consensus is primarily going to be related to timing of the payments versus the amortization in 2020.

And then finally, consolidated total company adjusted free cash flow in the first quarter is expected to be approximately $50 million to $73 million. We are increasing our adjusted free cash flow per share range for '19 and '20 to an average of between $11.75 and $12.40, from our prior guidance of $11.50 to $12.50. So with that, I'd 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) We'll move first to Aaron Watts at Deutsche Bank.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [2]

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I have one on the TV station side and then a couple on the Diamond side. On the TV side, it sounds like a good strong quarter for core ads in the fourth quarter. Can you talk about how that's trending in the first quarter, and also how auto played into that in the fourth quarter and first quarter?

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Robert D. Weisbord, Sinclair Broadcast Group, Inc. - President of Local News & Marketing Services Division [3]

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Yes. It's trending as a carryover into first quarter. We're off to a very good start on core. And auto was slightly down in fourth quarter and expectation is to be flat in Q1 '20.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [4]

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Okay. Got it. And on Diamond, curious on the seasonality you were just talking about, Lucy. Clearly, more impact on the cost side. Anything we should think about, about the cadence of seasonality on the revenues as we think about the full year?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [5]

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No. There's no real seasonality on the revenue side for D Sports.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay. And with the discussions you're having, Chris, I know you talked about DISH and Comcast. Are those specifically for Marquee? Or are they more fulsome discussions on potentially with DISH kind of bringing back all of the RSNs or with Comcast extending all of the RSNs?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [7]

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Typically, these are wide-ranging negotiations that include all of our assets.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [8]

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Okay, got it. And 1 clarifier on the subscriber trends you're seeing on the D Sports side. Can you just cover again what were the themes kind of in the fourth quarter on the declines you saw, both on the vMVPD and traditional MVPD side? And maybe any color you have so far for first quarter?

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [9]

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Yes. So as we mentioned, Aaron, if you exclude 1 MVPD, who's been churning a lot higher than what the averages have been, we only churned across the whole company by less than 1% on a year-over-year annualized basis. And in fact, if you look sequentially from Q3 to Q4, we actually added subscribers, which is something we talked about last call because of a lot of the blackouts that were occurring in the industry in Q3 and then the reporting lag for the virtuals. So we saw that catch-up in fourth quarter versus third quarter. But again, outside of just 1 MVPD, we're churning less than 1% across all the segments.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [10]

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Okay. That's helpful. And one last one for me. Lucy, this, I think, is directed your way. You redeemed preferred stock, and I heard you say a couple of times that you think your stock is attractive now in terms of being a target for buybacks. But your debt securities are trading on the D Sports side at a discount to par value. How attractive are those to you in terms of potentially buying them back? And how open would you be to using cash towards that end?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [11]

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So we really think about our cash in 2 different buckets, and to like -- because we have the 2 different silos. And the STG silo, cash, we're focusing in on our shares right now as one of the more attractive investments. And for the -- for D Sports, the emphasis is deleveraging. And of course, we're considering the preferred there and the senior notes as well.

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Operator [12]

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We'll move next to Dan Kurnos at the Benchmark Company.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [13]

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Can we just maybe start on TV or -- actually, just take broader distribution. I think RSN distribution, a little bit higher. And I guess you guys assume that goes maybe even a little bit better if you get Comcast and/or DISH.

But just on the TV side, in particular, I know, Lucy, you called out kind of the sub churn issue. Just trying to understand sort of a step-up or a limited step-up between 1Q and 4Q? And then maybe an update just on kind of net retrans expectations, given sort of what's going on in the sub environments through both 2020 and maybe even to 2021?

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [14]

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Yes. So really, the step-ups are really just going to be a function of what contracts come up for renewal. And really, for this year, the big one is going to be Comcast later this year, for both the broadcast and the RSN division. So any step-ups is really just going to be then outside of renewal is going to be related to just annualized increases.

And then on the net, so I'm glad you asked that question, Dan, because the networks have moved primarily to fixed programming fees that aren't tied to retrans. And so looking at a net retrans number is really no longer a good indicator of the distribution margin. So we actually are going to just be reporting on the gross distribution numbers because, again, this -- it's really not a reverse payment that the networks are charging. It's more of just a fixed programming fee.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [15]

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Okay, got it. And then maybe just on political, if there's any timing, we've heard about some pull forward into Q1. And it didn't sound like, Chris, you're willing to sort of put your -- put the line in the sand anywhere. But just if there's any sort of thoughts on order of magnitude over pro forma, either '16 or '18, would be helpful.

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [16]

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Well, we did say that we expect this to be the highest year on record. And our previous high was on a pro forma basis, $266 million.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [17]

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All right. And then, I guess, just one last one, Chris, I'm just not trying to read between the lines, but the press release talked a lot about more focus, it seemed, on organic. I don't know if that means that you're less focused on doing M&A, but just wanted some clarity from you on that?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [18]

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Well, I think that that's really in reference to a number of initiatives that we have ongoing, like the digital reboot of the RSN, digital footprint, sports betting and then also additional sports rights, which could be organically acquired. And so there just are a number of organic opportunities that we have in the hopper, not to say that we aren't still active on the M&A front but very disciplined on valuation as always.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [19]

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And Lucy, just so I'm clear, just on the full year, what -- is there a full year onetime transaction impact to -- I guess, I'm trying to triangulate EBITDA, is there any noise in there that would impact that number?

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [20]

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For 2020?

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [21]

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Yes.

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [22]

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Yes, it will be minimal. We are looking at -- call it about maybe $25 million to $30 million of onetime nonrecurring.

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Operator [23]

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We'll move next to a Zach Silver at B. Riley FBR.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [24]

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Okay. Great. The first one, just in some of the recent retrans deals that you've done and getting carriage of the RSNs as well. Can you talk about your willingness in upcoming deals to potentially subsidize the RSN carriage via lower retrans, step-ups on the TV station side?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [25]

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Well, we really, from a practical perspective, can't do that. We have an arrangement between the 2 silos to not discriminate between the 2. And the way the contracts work and the history there is really what drives the negotiation.

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Zachary Alan Silver, B. Riley FBR, Inc., Research Division - Associate [26]

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Okay. Fair enough. And then just given some of your recent renewals with some of the teams, given the MLB putting the in-market streaming rights back to teams, have the talks with them changed at all?

And then a follow-up on that, there's been some reporting that you guys entered into a deal -- a technology partnership with Deltatre, a sports streaming tech platform. I'm just curious to see how that potentially impacts your thoughts on a DTC streaming service going forward.

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [27]

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So yes, the talks have started to change. This is a new thing for MLB. We already have the direct consumer rights for NHL and NBA, and so that's a new area that we're currently exploring with the teams. And so of course, any new deal that we do will include these.

And as it relates to the Deltatre rumor, the -- no decisions have been made there, I'll note. But we are doing a lot of work around a digital reboot, which we think is a fantastic opportunity to create something on the scale of ESPN Digital.

And not only would that include various different content types, aside from just video, but would be the ideal launching point for any direct-to-consumer offering, be that a SuperFan upsell packages or straight up the entirety of the RSN on a direct-to-consumer basis, which is not being done today. We have no plans to do that. But certainly, the new digital footprint that we're building out would be fully capable of doing that.

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Operator [28]

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We'll move next to Kyle Evans at Stephens.

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Kyle William Evans, Stephens Inc., Research Division - MD [29]

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A few TV legacy questions. As a follow-up to Barron's 4Q and 1Q auto, can you update us on where auto is as a percent of your nonpolitical legacy core and kind of speak to the 2020 outlook?

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Robert D. Weisbord, Sinclair Broadcast Group, Inc. - President of Local News & Marketing Services Division [30]

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It is, on a continuous basis, we're less reliant on auto. Our sales structure has been to focus on many different categories. So we're looking for the full year to be flat to slightly up. But our services business, from legal to pharmaceutical to insurance, we're seeing big success in those categories. So --.

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [31]

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In terms of the percentage of the whole, it's still running at about a 1/4 of the ad sales and nonpolitical ad sales. But as Rob points out, we see that declining over time as we grow some of these other segments.

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Kyle William Evans, Stephens Inc., Research Division - MD [32]

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Got it. I've got a follow-up. I think this is probably a Rob question. The national piece of nonpolitical core has kind of been a drag on the business over the last 3 to 5 years. It sounds like we're hearing some green shoots and signs of growth there. Any commentary on national? And then 1 more follow-up, please.

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Robert D. Weisbord, Sinclair Broadcast Group, Inc. - President of Local News & Marketing Services Division [33]

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Yes. National is off to a very robust start ex political, so just on our core, and we expect it to see this throughout the year. So we're very bullish on what we're seeing coming out of the national holding companies' ad agencies.

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Kyle William Evans, Stephens Inc., Research Division - MD [34]

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Got it. Great. And this is probably, Chris, just an update on STIRR and Compulse and kind of the growth that you've seen in 2019? And maybe what you're roughly looking for in 2020?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [35]

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No. I'll let Rob speak to the growth we're seeing in digital marketing services, which is powered by Compulse. And they -- we have spent a lot of effort and time over the last 5 years, making sure that we have best-in-class digital marketing services, so that we can offer all of our advertisers a full suite, one-stop shop solution on an integrated campaign. And that has been a very powerful offering to the marketplace, and this has been a big part of our digital growth story that will continue into 2020.

STIRR is a different strategy from that. It is our ad-supported, direct-to-consumer AVOD platform. It's been growing very nicely, been open for about a year and usage continues to climb. And we're adding more and more content. We're over 100 channels now. It has mobile channels based on what markets you're in, which are soon going to be adding on the syndicated programming of our various stations.

So we're happy with the usage progress on STIRR. And what it does is it provides additional O&O and OTT ad inventory that we are very successful in selling into local businesses as part of our Compulse offering. So that's how it ties into Compulse, and it generates additional inventory for us to sell into those sales channels.

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Robert D. Weisbord, Sinclair Broadcast Group, Inc. - President of Local News & Marketing Services Division [36]

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So we have a continuous training program, 52 weeks, and the focus is not to just focus on selling the core spots. That's part of the 360 solutions. So when we do our needs analysis in the local markets for our clients, it's to include all the digital assets as part of the solutions. And OTT is kind of the flavor of the day. But we have 80 assets in our bucket, and they all come into play at some point in time based on the needs of the clients.

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Kyle William Evans, Stephens Inc., Research Division - MD [37]

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Great. Maybe just 1 more. Lucy, what I heard you say is that the net retrans margin is, I guess, less meaningful, given fixed programming agreements with the networks going forward. I understand exactly what you're saying there, but if you guys could kind of step back and characterize network relationships today versus, say, 2016, when CBS told everybody they were going to get 2/3 on the dollar. Just kind of update us on how friendly or unfriendly the network relationships are?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [38]

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Yes. There has been no real trend change to note of in terms of network relations. We continue to have very productive relationships with them. They, of course, want maximum dollars for their programming, and we use our scale and importance to try to minimize that. But really, I wouldn't note any specific change in the way they operate over the last several years.

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Operator [39]

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(Operator Instructions) We'll move next to Davis Hebert at Wells Fargo.

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Davis Hebert, Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Analyst [40]

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On your Q1 guidance, Lucy, you talked about the difference between amortization and the cash payments. Do you think the right approach would be to get a more normalized EBITDA for the RSNs to adjust that higher by $157 million to give a more normalized number?

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [41]

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When you say adjust, what is it in that case?

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Davis Hebert, Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Analyst [42]

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Sorry, the $30 million to $33 million of EBITDA guidance for the first quarter, and then adding the difference between the amortization and the cash payments.

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [43]

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Yes. So I think what you're saying is, whether or not we should just use the sports rights amortization, as opposed to the sports rights payment when calculating EBITDA.

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Davis Hebert, Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Analyst [44]

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Correct. Exactly, to get a more normalized look at it.

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [45]

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Yes. I mean, look -- I mean what I would say is, as investors, let us know. We can do it either way, just let us know which one you would prefer. I mean, certainly, the amortization adds more -- adds less volatility within the ER when trying to calculate EBITDA. But I mean, look, we can take this off-line and we can get feedback from people, which way they would prefer us to calculate it.

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Davis Hebert, Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Analyst [46]

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Okay, that's helpful. And then as you think about attributable EBITDA on the RSN side, adjusting for things like DS distributions, how do you think about the leverage outlook for the Diamond Sports side in 2020?

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [47]

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Well, I mean, so far, Diamond is outside of the DISH blackout. Diamond is on track for what we've indicated all along. And so really, the way we think of it, because we don't believe DISH -- the RSNs being dark on DISH is the permanent state. You're really just looking at an elevated -- temporary elevated leverage until they come on. But outside of that, we really are on track for all of the estimates that we originally expected.

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Davis Hebert, Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Analyst [48]

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Okay. And on the balance sheet for Diamond Sports, I think you have $949 million of cash there. Should we adjust that for the raise put and then the preferred redemption? Are those the only 2 adjustments we should make for the first quarter?

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [49]

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So we did have 1 team that exercised their put. So -- and that happened in the first quarter. We did take out the $200 million of the [CREF]. So those would be the 2 large items to adjust for.

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Davis Hebert, Wells Fargo Securities, LLC, Research Division - Director and Senior High Yield Analyst [50]

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Okay, got it. And then lastly, before I hand it over. You had a dispute, I guess, with fuboTV, where you're no longer on that platform. I know that's relatively small, but did that have any impact on your guidance for this year? And then are there any other virtual contracts -- virtual MVPD contracts we should be aware of, like YouTube or Hulu? Or is anything near term?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [51]

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So we did take fubo out of our guidance. And -- but it was immaterial, as you noted. And we just recently added Hulu, Marquee on to Hulu, and YouTube is an active negotiation that's near term.

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Operator [52]

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We'll move next to Steven Cahall with Wells Fargo.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [53]

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Maybe, first, just a question on the guidance. You raised 2019-'20 free cash flow. Could you just help us maybe think about where that raise come from? Did it come in '19? Is it your expectation for '20? And if we look at it at the kind of divisional level, did the increase or outperformance come from legacy Sinclair or the regional sports networks?

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Lucy A. Rutishauser, Sinclair Broadcast Group, Inc. - Executive VP & CFO [54]

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Yes. So look, the legacy business had a phenomenal fourth quarter. And so you're seeing the free cash flow increase primarily coming from that. But again, the Sports segment has done exactly what we thought it would do. In fact, it also beat its revenue and EBITDA or internal guidance there. And so it's -- so that's a driver. But look, our political numbers are coming in a lot higher than even what we budgeted for internally in the first quarter. So we're seeing that driver as well flow through.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [55]

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Great. And then on the RSNs, could you maybe just take a longer-term view when you look at this business, how should we think about the revenue growth rate over the medium term? And I think you've talked in the past about low single-digit cost growth. You've had some recent renewals. Are you still confident in the low single-digit cost growth? And kind of how does that compare to your long-term revenue expectations? Could you give us a bit of like an algorithm around run rate, EBITDA or free cash flow growth?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [56]

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Sure. So yes, we are still confident in our ability to keep expense growth in the low single-digit area, and despite even renewals flowing through there. Obviously, 90% of the revenue is distribution. So in the near to medium term, it's going to be highly influenced by subscriber trends, but that will be offset by mid-single-digit escalators.

And then the things that we're working on top of that, like sports betting, we think, will have a large new revenue pool associated with that we think, ultimately, will be bigger than advertising, but not as big as subscription. Though it does help viewership, which helps advertising and viewership, which helps you with your MVPD negotiations. Those are tangential. We see a new revenue stream forming around sports betting, which ultimately we think will be a bigger opportunity than advertising.

And then we've got our digital reboot, which there really isn't much revenue right now digitally for any of these assets. And we think that's a very significant opportunity there in the order of magnitude of what ESPN Digital is. And on the ad side, although ads are only 10%, so moving up their yield would be more of an incremental process.

We're already seeing progress there in terms of just doing better basics around local selling and yield management. Political, obviously, is going to be a growth area. We're already seeing that come through with the stations being in the flow and sharing that flow with the RSNs. And then bringing our top-tiered suite of digital market services to local sellers at the RSNs will also add to the yield.

And then on top of that, you've got DTC opportunities, which could include add-on subscriptions to the RSNs or cost synergies, which are well underway. And then better nongame programming as well. And as we go through renewals, I think we're going to have an opportunity to actually be fairly aggressive with our rights cost management, given how much of a payer that we are to the teams and the leagues.

And so really, that's sort of the -- how we look at esports. But as I pointed out, they're really, in the near term -- they're really -- a large part of the revenue will be driven by subscriber trends.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [57]

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Great. And then lastly, I know that you've got the businesses siloed from a leverage standpoint, net debt standpoint, is the cash between them fungible? I mean should we think about overall company free cash flow as being available for both debt repay down of both silos and for share repurchases over the next year?

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Christopher S. Ripley, Sinclair Broadcast Group, Inc. - President & CEO [58]

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The cash really is siloed as well. And as I mentioned earlier, we think about it that way as well in terms of what are the priorities for D Sports, which is focused on deleveraging right now, and then there's different priorities for STG.

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Operator [59]

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Thank you. Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time, and have a great day.