Greetings and welcome to the Sinclair Broadcast Group's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lucy Rutishauser, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, operator. Participating on the call with me today are David Smith, Executive Chairman; Chris Ripley, President and CEO; David Amy, Vice Chairman; Rob Weisbord, Senior Vice President and Chief Revenue Officer; and Steve Pruett, Executive Vice President and Chief TV Development Officer. Steve Marks is unable to join us for the call today. Before we begin, Billie-Jo McIntire (00:56) will make our forward-looking statement disclaimer.

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 second quarter earnings release. The company undertakes no obligation to update these forward-looking statements. Unless otherwise indicated, pro forma results do not reflect the impact of the Tribune acquisition. The company uses its website as a key source of company information, which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website later today and will remain available until our next quarterly earnings release. Included on the call will be a discussion of non-GAAP financial measures, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements, but are provided as supplemental detail to assist the public in their analysis and valuation of our company. A reconciliation of the non-GAAP financial measures to the GAAP measures in our financial statements is provided on our website under Investors, Non-GAAP Measures. Chris Ripley will now you through our operating highlights.

Good morning, everyone. We're looking forward to sharing our results with you from a strong quarter. On today's call, we'll be focusing on those results and our guidance. Because of the developing nature of matter surrounding the Tribune acquisition and any regulatory items, we will not be providing an update on the Tribune acquisition on this call, although we expect to be able to do so in the near future. We also expect – so, we also ask that your questions focus on our results and guidance as we will not be commenting on any Tribune-related questions. Before we go through the results, let me review some highlights. We couldn't be prouder of the achievements of our dedicated news professionals who bring their communities impactful journalism with a local focus. All-in, our stations and digital national news platform, Circa, have won 258 awards and counting in 2018. That includes 45 Regional Edward R. Murrow Awards at 21 newsrooms and 50 Emmy's at 11 stations. I'm happy to now include Circa among our group of award-winning news operations this year, winning the very prestigious national Edward R. Murrow Award this past June alongside our station in Seattle, KOMO. We also wrapped up six National Press Photographers Association awards for photojournalism, including the Medium Market Station of the Year award for WLOS in Asheville. Congratulations to all of our winners this year. Our stations do more than just report the news. We're partners with the local communities and play a vital role in serving our viewers. In July, Sinclair's Las Vegas stations, KSNV and KVCW, were recognized for this part of their missions when St. Jude named them collectively the 2018 St. Jude Dream Home Station of the Year and the stations ran a successful campaign to raise $850,000 for St. Jude Children's Research Hospital and the giveaway of a home. Incidentally, the next drive has already begun with a fundraising goal of $1 million. Our stations are helping their communities in times of crisis such as in Redding, California and the CARR wildfires. One of our stations, KRCR in Redding, is at the center of the fire, playing a critically needed role to disseminate emergency alerting and lifesaving information. With the support of neighboring Sinclair stations, KRCR has been able to offer over 110 hours of around-the-clock continuous coverage of the fast-moving wildfires. Additionally, with the help of the entire Sinclair news footprint, the station has been promoting fundraising efforts across the country that have raised almost $400,000. The funds raised will be used by the Salvation Army locally for short and long-term relief efforts. This is a fundamental part of our company's mission over the years, newsrooms with deep local roots that can leverage our financial, technical and operating resources across the company for the betterment of the local community. Now, Lucy will take you through the second quarter results.

Thank you, Chris. I am pleased to report we exceeded our second quarter guidance in all key financial metrics. Media revenues for the second quarter were $696 million, an increase of 9% or $59 million higher than second quarter 2017 and exceeding the low-end of guidance by $12 million on higher political advertising. On a pro forma basis, second quarter 2018 media revenues were 6% higher than pro forma second quarter 2017 on higher distribution, political and digital revenue, offset in part by lower core advertising as a result of a decrease in certain categories. Included in our second quarter media revenues is $319 million of distribution revenue, a 15% increase over the prior year period. We're still on track for pro forma net retrans to grow by low single-digit percents this year. Political revenues in the second quarter were $28 million versus $5 million in the second quarter of last year, a non-election year. Media operating expenses in the second quarter, defined as media production and media SG&A expenses, were $452 million, up 14% from second quarter last year and up 11% on a pro forma basis, in both cases primarily the result of higher reverse retrans fees, digital license costs and costs related to our growth initiatives. Our reported media expenses were $8 million favorable to our previously disclosed guidance due in part to lower rating services and favorable sales events. Corporate overhead in the quarter was $30 million and includes $6 million in onetime transaction cost. Corporate overhead was above our prior guidance due to higher group insurance claims and the higher onetime transaction cost. Non-media EBITDA, which includes ONE Media and R&D expenses, was approximately $3 million in the quarter, better than our prior guidance in part on timing of expenses to be incurred in the…

Thank you, Lucy. We had a much better second quarter than anticipated, driven by strong political spending. Political revenues in the second quarter were $28 million versus $5 million in the second quarter of 2017. We are increasing our expectation for full year political revenue to approximately $160 million compared to our previously disclosed expectation of between $140 million and $150 million. In addition to the higher fundraising and ad spending, we have more ballot issues in our markets versus 2014. Our digital business continues to perform very well with pro forma revenues growing 27% in the second quarter as compared to the same period last year. Turning to our outlook, which does not include Tribune. For third quarter, we expect the media revenues to be approximately $710 million to $722 million, up 13% to 15% as compared to third quarter 2017. This assumes $45 million to $50 million of political revenues versus $7 million last year and includes $333 million in distribution fees versus $285 million last year. On a pro forma basis, third quarter media revenues are expected to be approximately 10% higher than third quarter of 2017 and higher distribution in political revenues. Pro forma core advertising revenues in the third quarter, excluding political, are expected to be down low to mid-single digits versus the same period last year. This is to be expected as we head into the height of political season with heavy political demand crowding out normal advertisers. Distribution revenue, net of reverse retrans fees for the year, is still expected to grow by low single-digit percents. On the expense side, we are forecasting media expenses in the third quarter to be approximately $460 million versus $402 million in the third quarter of 2017 with the majority of the increase coming from reverse retrans, acquisitions and growth initiatives. Media expenses in the third quarter 2017 on a pro forma basis were $411 million. For the year, media expense guidance is $5 million lower than our previous expectation. We are estimating approximately $1.810 billion versus 2017 pro forma media expense of $1.623 billion. The year-over-year increase is due primarily to higher reverse retrans on the large number of network agreements that renewed at the beginning of this year, annual compensation increases, growth initiatives and sales commissions on the added political revenues. EBITDA in the third quarter, adjusted for $3 million in onetime transaction cost, is expected to be approximately $202 million to $213 million versus as-reported third quarter 2017 EBITDA of $184 million and $189 million pro forma. The increase is driven by net retrans and political revenue, partially offset by timing of ONE Media expenses. Their full year guidance remains unchanged. Free cash flow in the third quarter, adjusted for the onetime cost, is expected to be approximately $154 million to $162 million. With that, I would like to open it up for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from John Janedis with Jefferies. Please go ahead.

Oh, hi. Thank you. Two quick ones from me. One, given the release last night on the OTT platform, I was hoping for a little more color. How large do you view the addressable market today and how quickly do you see the adoption scaling and I guess what kind of margin do you expect to see from that business? And then, separately, with the Disney or Fox RSN sales, would you have an interest in expanding your portfolio?

So, on CompulseOTT, we're very excited about that new product. It really fills a niche within both the local marketplace and the national marketplace for greater targeted advertising. So, we've already soft launched it and ran over 5,000 campaigns with 2,000 unique advertisers. We think that marketplace is already a multibillion dollar marketplace, but it's underserved. So, there's more demand than there is supply and we expect it will grow double digits for the foreseeable future. So, we put together a really top-notch product with multiple premium inventory suppliers mixed in with our own inventory and with the great data and analytics and daily dashboards for advertisers. So, we think that's going to be a nice growth opportunity for us moving forward. What was the – can you restate your question on the RSNs?

Maybe one more on that, Chris, is just would that be margin dilutive in terms of that business versus the broadcast portfolio? Was it similar in terms of, say, a spot ad sale and then separately on the RSN, just with, I guess, Disney selling the Fox RSNs, any interest and maybe particular markets, if you will, to expand your RSN portfolio?

Yeah. So, look, on a variable contribution basis, the margins will be less than just a pure spot. But on a fully loaded basis, because stations have extensive news operations and other costs, it is not margin-dilutive. And in terms of the RSNs, look, we're always active. We continue to seek scale within the broadcast industry. There's a lot of deals coming on the marketplace as I'm sure you've all heard, adjacencies, they continue to be an interest to us including cable, content, digital media and I would put RSN squarely in that adjacency bucket. I think they are fairly interesting. They are a good fit with the broadcast footprint and operations. Of course, it all has to be for the right value and the right deal.

Thanks a lot, Chris.

Thank you.

Our next question comes from Barton Crockett with B. Riley. Please go ahead.

Okay. Great. I wanted to follow up a little bit first on the question about M&A and we are expressing, I guess, some openness to RSNs, which is an adjacency. I was wondering how you think about your capacity to do deals, given the Tribune acquisition, which is still on the table. How does that affect kind of your appetite to do deals? And then, secondarily, is there some advantages maybe to looking at deals that are maybe less regulated? RSNs would not be regulated the same way that TV stations have been. In this environment, is there some advantage to looking outside of your typical breadbox at this point?

So, our appetite to do further transactions has not changed based on the current status of the Tribune transaction. So, there really is no change there. As I said, we will continue to seek scale within broadcast and in adjacencies. Look, if a less regulated opportunity, like an RSN, makes sense from a business and a value perspective, that obviously is a benefit. I think that'd benefit for anyone. The less regulated industries are generally easier to operate in. I think that's a statement any management team would make.

Okay. And then, secondarily, I just wanted to probe a little bit on the political, which seems to be strong for many, including you guys. There's been this persistent concern that this money would flow to the Internet and I think I just wanted you to comment on what you're seeing about Internet relative to spending on TV and how you're seeing that being balanced and whether TV is keeping its share in what seems to be a very competitive kind of cycle.

So, I'll let maybe Rob comment on Internet-related political spending, but what we're seeing so far is very encouraging on the political front. As you all know in 2016, there was a hiccup in the political cycle with the entry of Trump and the lack of fundraising that was done and the lack of fundraising led to a lack of spending. And what we're seeing in this cycle is exactly what the standard pattern is. There's going to be record amount of spending this year on the political campaigns. And it looks like we're headed for another record year of TV spot political spending. They're also spending on the Internet and I don't know, Rob, if you have further color on that. But that spending is – it is going on, but it's smaller dollars and the spot TV market is maintaining its historical share.

Yes. So, we haven't seen really any impact on the broadcast side. There is some spending on the digital side, but in many races it's really – has been previously bought programmatically and with the issues of the bot traffic, it has curtailed some of that spending. And I think we're reaping the benefit of it as being a regulated and sourced media that the spending as the proof of how it's coming in through our second and third quarter is that we're not really impacted by any of the digital spend.

Okay. That's great. Thank you.

Our next question comes from Marci Ryvicker with Wells Fargo. Please go ahead.

Thanks. A couple questions, first, can you talk about your use of cash options if there is no Tribune deal? And then, is the Fox renewal, I assume that, that was separate from any of the station sales, so that those economics are in place? And then, related just to the total fundamentals, can you talk about auto in the third quarter and maybe what you might be seeing for the fourth quarter? Thanks.

So, in terms of how we think about spending money, it really again doesn't change our priorities and our view of the world. It doesn't change in terms of what ultimately happens with Tribune. We will continue to balance our M&A pipeline and the returns there with the returns that can be had by repurchasing our own stock. And so, when clarity comes on the outcome for Tribune, then that evaluation will be made and it will also be weighed against other opportunities, of which there are quite a few, right now, coming on to the marketplace. So, we'll look to balance that equation, like we always do. And whether Tribune happens or not doesn't really play into a change into our philosophy there. What was the next question you had?

On Fox, right?

Okay.

Fox renewals. Yeah.

So, the Fox renewals, they are in place to the extent that the Tribune acquisition does not happen, Fox does have the right to cancel those. And if that were to happen, then it would be like just any other renewal negotiation.

Auto?

Okay. And then, on auto, any color on your auto category?

Yeah. We we're seeing in third quarter auto rebounding. We expect it to be down low single digits due to a political crowd out. However, on the domestic side from both the dealer group and factory led by Ford and Chevy, we've seen a big turnaround in their investments into broadcast television.

This may be a silly question, but do you know why, because no one seems to know why auto is rebounding.

I think that, typically, what we've seen, especially on a dealer group, that they were, again, dabbling on the digital side with co-op money and it takes away from the long tail of the brand and when you are in the marketplace to actually purchase the funnel. And we've seen this typically in the local market places that sales won't drop off for a short period of time and then they dramatically drop off and they come back to the broadcast.

Great. Thank you.

Marci, if I can just add also, we shouldn't overlook just the strength in the economy right now as well. We have GDP, which is up over 4%, whether or not some of the strength in auto is also coming from our tax reform implications, but I don't want you to overlook the fact that the economy has also been improving as the year goes on.

Okay. Thank you.

Our next question comes from Dan Kurnos with The Benchmark Company. Please go ahead.

Kurnos. (28:39) Thanks. Chris, you mentioned some of the stuff coming up in the pipeline on M&A. And, look, so, if Tribune, for example, doesn't happen, there are a lot of opportunities out there. Do you still feel compelled to get bigger, faster – I know you kind of weigh the M&A opportunities, do you think that the heavy political season is going to influence the timing of any of this stuff coming to market maybe on some of those smaller stations as their way to kind of collect their checks, the regulatory environment being very favorable and if you have a thought process on the cap raise or not by the end of this year?

Look, I think the regulatory environment is very favorable in terms of the rules that are currently on the book. The UHF discount is in place and that was a bit of an uncertainty for what ultimately happens with the national cap is an unknown. We really have no insight into what the FCC will do there. They did open an NPRM on the national cap. However, now that the UHF discount is not going away, they may not touch it. They may, they may not. So, only time will tell. And in terms of other opportunities, I think there's several other station groups that have decided that it's time to hit the market and they're already essentially committed to go. So, I expect to see more M&A activity in the near future. And the industrial logic for the industry for us and anyone else is still very much there.

And then, I apologize if I missed this earlier, but on 3.0, if you could update us on some of the testing that's going on right now in your kind of your broader thought process as the game plan is starting to unfold there.

Yeah. Phoenix is up and running. It has a signal for a 3.0. Dallas, in about 60 days should launch a 3.0 signal with a full single frequency network around it. So, that will be a first of that sort of deployment. And there is a lot of work going on in the background right now amongst all the various broadcast groups in agreeing on a deployment plan for the rest of the country and how channels will be shared. That's probably the most complicated part of the organization is getting everyone to agree to that, but we're making good headway there. And so, things are moving along and we still expect deployments to happen as the repack rolls through the industry.

Got it. Thank you.

Our next question comes from Leo Kulp with RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking the question. I just had two. First, can you remind us what your long-term leverage target is? And then, second, on the core ad front, Charter saw 3% non-political ad growth and they say it's some of their targeting capabilities. Are you seeing any evidence that local cables share gains are accelerating and that's weighing on broadcast spot?

Yeah. So, I'll do the target leverage first. So, we're still at our high 3 times, low 4 times in a normalized environment.

And as far as the targeting in cable, they obviously over the last 20 years have seen growth and – taken away from when there was a broadcast exclusive business. However, I don't see any enhanced targeting capabilities that haven't been around for the last couple of years. So, they might be having some cess on the GO (32:42), but there aren't really significant premium ad rates right now in the marketplace that that we've seen for addressable.

Yeah. I think that the punch line there is that cable for decades now has been a strong competitor within the local ad marketplace and we don't see any sort of acceleration in terms of that trend.

Got it. Thanks for the color.

Our next question comes from Aaron Watts with Deutsche Bank. Please go ahead.

Hi, everyone. Thanks. I had a couple questions. First one, more of a clarifier. I heard your comments around what auto is going to look like in the third quarter. Did you say what auto did in the second quarter?

We didn't. It was down high single digits.

I got it. And then, just more broadly, I think same theme, with pro forma core in 3Q, I think you said looking down low to mid-single digits, what's the comparable kind of metric for what that did in the second quarter, kind of pro forma core?

Yeah. We would have been down about 5% in second quarter.

Okay. Great. And then, the last one for me, just bigger picture thinking about future potential M&A opportunities, for the company, from where you sit today, is there any reason to think you're experienced with the FCC and DOJ regarding Tribune impacts your ability to transact on broadcast assets in the future?

Look, I think as we said, we're not going to comment on Tribune-related questions and that clearly falls into that bucket.

Okay. Fair enough. Thank you for the time.

Thanks.

Our next question comes from Davis Hebert with Wells Fargo Securities. Please go head.

Hi. Good morning. I realize you probably can't answer a lot on the Tribune deal, but I do want to ask about the ticking fees ending on August 8. What happens with the term loan commitments, if you could just walk us through the mechanics of that, please?

Yeah. So, same thing there, Davis, that as we stated at the beginning of the call, we're not going to be commenting on anything Tribune related and the ticking fees and commitments would fall there.

Okay. Thank you.

Our next question comes from Clay Griffin with Deutsche Bank. Please go ahead.

Hi. Good morning. Chris, I think on the last call, you mentioned the company was starting to get opportunities to implement targeted advertising through virtual MVPDs. And just curious how that opportunity is progressing and I guess, from a couple of fronts, what that platform growth with the virtual MVPDs, how that's affecting your sub base? And two, is there any change in the way those platforms engage with networks as it relates to targeted advertising?

So, yeah, we're getting several different sources of targeted advertising inventory at this point. It's coming through the virtual MVPDs both on our channels. And as you saw with the CompulseOTT announcement, we're also selling other channels' inventories through on virtual MVPDs on a targeted basis. And, of course, our websites, our OTT apps like NewsON for instance and the upcoming launch of our direct-to-consumer platform. So, the amount of inventory that's becoming available to us through all these different sources, and I forgot to mention Sorenson as well, is growing and that is why we launched our sales initiative around CompulseOTT to really focus on that. And as I said, it's already soft launched and it's been a big success so far and we think it's going to be a big growth driver for us. And it's a very underserved marketplace, especially in the local marketplace, which really hasn't had access to this. In terms of subscribers, the virtual MVPDs have really started to contribute this year. We're seeing those numbers grow quite significantly and they've really helped our overall subscriber base.

Great. Thanks.

I would like to turn the call over to Lucy for closing comments.

Thank you, operator, and thank you for participating on our earnings call this morning. And if anyone has additional questions, please feel free to contact us.