Greetings and welcome to the Sinclair Broadcast Group Second Quarter 2020 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Lucy Rutishauser, Executive Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Operator. Participating on the call with me today are Chris Ripley, President and CEO; Rob Weisbord, President of Broadcast and Chief Advertising Revenue Officer; and Billy Chambers, COO and CFO of Local Sports. Before we begin, Billie Jo McIntire 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. The company uses its website as a key source of company information, which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website and will remain available until our next quarterly earnings release. Included on the call will be a discussion of non-GAAP financial measures, specifically adjusted EBITDA, adjusted free cash flow and leverage. The company considers adjusted EBITDA to be an indicator of the operating performance of these assets. The company also believes that adjusted EBITDA is frequently used by industry analysts, investors and lenders as a measure of evaluation. These measures are not formulated in accordance with GAAP, are not meant to replace GAAP measurements and may differ from other companies uses or formulation. The company does not provide reconciliations on a forward-looking basis. Further discussions and reconciliations of the company's non-GAAP financial measures to comparable financial measures can be found on its website, www.sbgi.net. Chris Ripley will now take you through our operating highlights.

Thank you. Like many of you, we eagerly await discussing the state of the company without the backdrop of COVID-19. These past five months have certainly been challenging for the country, the economy, the industry and us as we face the pandemic’s impact on businesses and consumers alike. First, I want to say how very proud I am of our employees who have done a tremendous job of adapting quickly to a new way of doing business. It is through their hard work and perseverance that we've been able to operate our business seamlessly without sacrificing the quality that defines our company. We are already identifying learnings that we can take away from this period of time that can make us a stronger company going forward. With regard to the second quarter trends, as we move through the quarter, we did begin to see signs of improvement in the advertising market just as we anticipated and guided on our last call. After a very challenging April in which core advertising for our broadcast and other segment declined 43% year-over-year, June improved to a 26% decline resulting in second quarter core advertising performance for those segments to be down 36% and in the middle of our guidance range. Our decision to give you second quarter guidance on the May call was driven by our commitment to be as transparent as possible while also acknowledging the limitations that giving guidance for the entire year was impractical due to the wide range of variants that could result from uncertainties and timing pace and magnitude to recovery. While we are still faced with many of those same challenges and changing dynamics around the effects of the pandemic making forecasting more difficult than usual, we have decided to once again provide guidance for the upcoming…

Thank you, Chris. First off, I want to echo Chris's appreciation of all of our employees who have done a terrific job of navigating the current environment and enabling us to perform at a high level as a company. Keep in mind that the inclusion of the sports statement this year which was that the inclusion of the Sports segment this year, which was not in last year's first eight month numbers, is responsible for many of the larger changes in our actual results versus the same period last year. Therefore, many cases I will be speaking about results versus prior year pro forma, which is a much more meaningful comparison and assumes we own the RSNs in those periods. Before getting into the results, let me walk you through the accounting for the distributor and team rebates and the sports rights amortization as a result of the fewer professional games played. Pursuant to GAAP, we are required to accrue the total estimated rebate amount owed to the distributors across Q2 through Q4 of this year, which will reduce distribution revenue in each quarter. The cash outlay to the distributors, however, is not expected to occur until after 2020. On the team side, the rebate associated with the overpayment for the fewer games to be played in this season is expected to be realized in part in the third quarter with the majority in the fourth quarter of this year as lower sports rights payments. Therefore, adjusted EBITDA for the year is expected to reflect both the team rebates to us and our rebates to the distributors. And as Chris mentioned, we do expect rebates from the teams to be greater than what we pay out to the distributors. However, there will be a timing as it pertains to the…

[Operator Instructions] Our first question is coming from Aaron Watts of Deutsche Bank. Please go ahead.

Thanks for having me on. I have a few questions I wanted to run through quickly. I guess first on the television station group. Encouraged to see the improvement month-to-month in core advertising. Are you seeing any fits and starts on that in your market that are seeing some ebbs and flows of COVID cases? And also, are the bookings coming in a lot later relative to where you've kind of trended historically or at least in the prior year?

Yes. I'll handle that. This is Rob. We are not seeing the fits and starts. It’s been pretty consistent. You're correct. It’s being booked a little bit later. We are holding on to it to see how the COVID is affecting the different DMAs that we're in. However, we've been encouraged through our virtual trainings, virtual sales presentations that we've been able to communicate in this new norm and being able to handle it and that's where you're seeing the positivity and the pace moving forward.

Okay. And in terms of bookings coming in later early?

No, the bookings are coming in later.

Okay.

Going more month-to-month, then they are quarterly, semi-annually, or annually.

And then as best as you have clarity on today, can you give us the latest on the stability of the underlying sub base for your station group and the RSMs? And has your near-term, medium-term outlook for cord-cutting changed at all based on what you're seeing right now?

Yes. So, I'll take that one. So, Aaron, as I mentioned, we saw across all the platforms subscriber churn year-over-year down about 7%. Again, that's really coming from one primary MVPD. But we have - what you’re going to see in our guidance for Q3 is that we have pretty much mirrored that level of churn and that's really based on some of the public commentary from the distributors themselves here recently as well as just really not having a lot of visibility as to what's going to happen with the churn. As we talked about, there is two schools of thought that are out there. One is that people currently maturing just because of the status of their employment and the economy. But on the other hand, right, you do have government assistance for those people. You also have the fact that, again, the TV is really the only form of entertainment that's out there right now and especially right now with the games, people not being able to go to the games, in order to watch their favorite team, local team, they would have to see those on the RSN. So, two divergent views here. I really don't know where it ends up. So, to be conservative, we have forecasted our Q3 to near the Q2 levels.

And then just a couple of questions for me on the Diamond Sports side. With the Comcast renewal now inked, I assume you have a pretty large percentage of your distribution locked up over the next few years. Is that a fair statement? Do you have a percentage that you could give us of kind of what is locked in now and for how long?

Sure. So, 85% of the RSN subscribers are locked in for two years or more.

Perfect. And, Lucy, I just want to make sure I was clear on your comments and I appreciate all the color around kind of the rebate and the refund from the teams. If I'm just specifically thinking about cash-in, cash-out, to be clear, when do you expect kind of cash in from the teams in terms of the rebates there? And I think you said the cash-out to the MVPDs will happen next year. Am I hearing that right or thinking about that right?

Yes. So contractually with the distributors, because of the measurement periods, the cash-out would occur after 2020. Each contract is different. So, I'm not going to get into the wins after that. But the rebates and the overpayments to the teams all occurs this year, some in Q3, but the majority really in Q4 once we get through the full season.

And in the end, those cash-ins, cash-outs, obviously, differences in timing, but you're saying that those should be relatively equal or the rebates from the teams to you should be greater than what you have to pay out to the MVPDs?

Yes. So, what I'm saying is the amount that we get in will be greater than the amount that we pay out and that's really because of the variability, the differences in how the minimum gains are all calculated from one contract to the next.

Okay. Perfect. And last one for me…

Just to be - Aaron, just to be clear…

Yes.

Aaron, just to be clear because again there are a lot of misinformation on the street as it relates to this with people modeling, the Diamond is going to pay more than what they get in. And as Chris said, those are just not correct. We expect to get in more than what we will pay get in more than what we will pay out because of the differences in the calculations.

Okay. Perfect. I'm glad. Thank you for that clarity. Last one for me. And, again, I appreciate the time. You repaid your revolver outstanding balance. It sounds like you're comfortable with liquidity. How do you think about that liquidity now going forward as you look at where your bonds are currently trading? I don't think I heard anything about more bond buybacks this quarter. I know you also still have preferred stock outstanding. How do you kind of weigh the order of importance of attacking those different opportunities? And that's it. Thank you.

Yes. Look. Sure, Aaron. So, you know, look, so we have, you know, our first and foremost right is priority to continue to grow Diamond, right, whether it's through acquisitions and investments for the growth opportunities, but we are also committed to strengthening the capital table, lowering our cost of capital and deleveraging, right. So, you know, as we previously have discussed on other calls and we will continue to look for ways, right to deploy the cash and end it - and to optimize the capital structure so. You know, look, everything is on the table right now. We're evaluating a lot of things, so it could be anything from redeeming the preferred, additional debt exchanges, receivable financings, designating subs as unrestricted as well as looking at new acquisition opportunities and again investing for all the growth opportunities which is the reason why we bought Diamond. So, all of these things are being evaluated and on the table.

Our next question is coming from Dan Kurnos of Benchmark Company. Please go ahead.

Good morning and appreciate all the color, everyone. Just so we’re I guess maybe all clear in terms of some more granularity just around Comcast and Marquee. Just you know, Lucy thanks for the color around subs that it helps solve part of the equation. Just trying to understand sort of the timing of when Marquee with it all just won the Comcast deal was done. I'm just trying to sort of understand the distribution Delta from 2Q to 3Q on the RSN side or if there is some other rebate, increase rebates nuance that we might be missing. And then on the core side, maybe Rob, you just give us some more color on the sort of category improvement and sort of where you're seeing the particular pockets of strength and what gives you the confidence that we kind of continue to sequentially improve throughout the year. Thanks.

Okay, Dan. I'll speak to Comcast, and Rob will speak to the core question. In terms of changes, not much changed with Comcast at all. They continue to carry all the - agrees to carry all Tennis Channel, our broadcast stations. The only real change was Marquee, and they picked up Marquee the moment they signed the agreement. And as I noted in the prepared remarks Marquee ended up getting into new geographies that the Cubs were not previously distributed on so we were very happy with that outcome.

And Dan, let me just answer your question on the dollars. So with the - so, there we do have the distributor rebate accrued in Q2 raise. We said that'll hit key Q2, Q3, and Q4. So, you are seeing that delta. As well as remember, the RSN contract doesn't actually come up until the end of the quarter. That’s when it expires. So, you would not see the Comcast impact in Q3 numbers.

And just a side note there, so you understand. Even though the RSN contract was renewed early and it doesn't actually expire until the end of September, that’s because we did this all as one deal and everything will be coterminous on the other side.

Rob, before you answer, just Chris just on that is that on the TV side then is pushed back to the RSN start date now because I think that's a bit of nuance that might be there.

No. Actually, the TV side going forward to the RSN expiration.

Okay. And then Rob, your comments on core?

Sure, yes. On the [indiscernible] we continue to see services performed well. We have pharmaceutical that has joined the [indiscernible] and we’re seeing the education category pickup as well. We expect in the back half towards the end of third quarter going in the fourth quarter to see auto getting healthy and then what we’ve seen it, they’ve had a supply chain issue. We expect that to be fixed as the plants have been reopened and the 21s will be hitting the dealership. So, again, we’ve become less reliant on the auto business to drive our revenue. And as in the past, we reiterate that we’ve gone from we've gone from ourselves being generalist specialist. And that continues to lead to better performances.

That's helpful. And, Chris, I apologize if I missed this. But did you give us an update on where you're at with the DTC?

No, we haven't. That was not in my remarks. There's a lot of work going on in DTC right now. It’s definitely going to be an important part of the future for the RSN, for tennis and also for broadcast. And it's too early right now to give specific guidance, but we are busy adding that feature to our new digital reboot which will come out next year. And it will be complementary to the MVPD product that we have today.

Our next question is coming from Davis Hebert of Wells Fargo. Please go ahead.

I want to ask on the current accruals and the rebates. I understand, I think the cash flow piece. How firm are those rebate levels? I mean to the extent MLB stops and starts or maybe further underdelivers on those live games?

Yes. So, the numbers could obviously change if the number of games change and it’s just – it’s really just a mathematical calculation and the sort of hedged nature of our contracts would continue to apply as the games continue to shrink.

But would it be fair to say that if there are a few delivered or underdelivered, it’s not going to be material to what you've already accrued for?

So, it shouldn't be material to our actual EBITDA at the end of the day but it could certainly increase the amount of rebates from the teams and the amount of rebates to the MVPDs.

And then on the team payment side, is all that getting taken care of this year or have you had negotiations with the teams to perhaps smooth that out for a longer period of time or that there are other negotiations going on?

It should all happen this year to the extent some teams, you know, have issues for cash flow perspective, we'll have to see but no indication of that so far. And what we've been doing is essentially withholding current payments right now to chip away the balance.

And thank you. And then Lucy, you mentioned a lot of different liability management possibilities. I wondered would a tender offer perhaps be in the conversations index to capture discount in Diamonds sports bonds, just thinking you'll be sitting on a decent amount of cash after political, maybe that's a win-win versus an exchange? But just curious on your thoughts on something like that?

Well, so the political revenues are really belonged to STG and again, you know, we've, you know, we've said in the past that each silo would be self-funded. So, STG’s, you know, political is really going to shareholder returns whether it's the dividend or the share repurchases and Diamond’s cash flow is there to fund Diamond. So, we would not look to pull STG’s cash over to Diamond for that but, you know, again, when you're talking as much debt as Diamond has outstanding, anything we do I think you should expect it would be a bigger-type transaction.

And then my last question is I believe you had a year to rebrand the RSNs. Just curious the timing on that or if you got a reprieve with the COVID-19 situation?

We hadn’t spent more than a year on that and the new name will be announced and released early next year.

[Operator Instructions] Our next question is coming from Steven Cahall of Wells Fargo. Please go ahead.

Yes. Thanks. So, maybe if we've learned one thing about the RSN business, it's just that the earnings power may be a little lower and so the debt level that you originally decided was appropriate might be a little too high. And Davis asked and we've talked a little bit about ways to renegotiate that debt level down. It's just a really big overhang on what's otherwise a really good TV broadcast business. So, if you kind of step back, how do you really think about just steps that you can take to remove that overhang from the debt on the RSN business. So that you can capture more of the fair value in the TV business?

Well, as we mentioned, we're busy looking at several alternatives to delever Diamond that we think there are many options there. And as we've stated many times that we see these entities as independent and self-lending. So, we don't see any reason for value or cash to be going from one silo to the other. And really when you're looking at our valuation, it should be done on a sum-of-the-parts basis.

Yes, and, Steve, look, what I would add is I think what people are missing is the investment thesis of why we bought the RSNs in the first place, right? So, as we look ahead, right, you've got it, including all the growth opportunities and the synergies which again is the reason we bought the RSNs, we love the business. It is a good business. Are we – is leverage here in the near term more elevated? Yes, I think that’s probably though for just about any company that's out there in the U.S. today as a result of COVID. So, we have some elevated leverage. It will take us a little bit longer to get down to our target leverage, but we are focused on getting down to the target leverage. But part of how we're going to do that is through all the growth opportunities, again, whether it's the production programming synergies, cross promotion, cross programming, digital opportunities, legalized sports betting, rebranding and selling all of our digital impression, so much there that we haven't even started to mine with the - with Diamond.

And then maybe just on the retrans side, you've done some recent station renewals with Viacom, CBS, and with Comcast as you pointed out. Do you feel like you have the ability to maybe give us either a qualitative or quantitative outlook on net retrans growth for 2020? Thanks.

So, as you know, we do not have full year guidance on the table. So, at this point, we're not ready to put that out there. As I said, there is a lot of variability in what's happening in the pay TV universe, which is a factor that would go into that. So, at this point, no full-year guidance.

Our next question is coming from John Janedis of Wolfe Research. Please go ahead.

I’ll be brief. One is a follow-up on the ad side, [technical difficulty] ways of COVID across the portfolio, what impact are you seeing or do you expect to see on back-to-school spending, and is that typically a swing factor come into [technical difficulty] separately given that we are on the political side increasingly we end up seeing – or do you see a Democratic sweep in the fall, how does that change the regulatory landscape and any progress to your businesses? Thank you.

Okay. Go ahead. Sorry.

No, no. I was just going to say, hopefully, you heard that. John was a little muffled, but Rob, why don’t you handle the back-to-school question and I will handle the regulatory?

Back-to-school typically is not a large revenue driver for the company. But with COVID going on the hybrid learnings of some markets going back, some hybrids, some school-from-home, we’re in the midst of launching several creative non-traditional programs to generate revenue that we typically wouldn’t be thinking of. So, in that space, we expect to be able to scale several concepts across our platform. So, we do think we’ll be able to capture revenue that we probably haven’t had in the past in regards to back-to-school.

Okay. So, in terms of your question around the election and the regulatory environment, I think it is worthy to note that broadcasting has significant support on both sides of the aisle. You saw that with letters from both a very large amount of both Democrats and Republicans supporting local media and in promoting its survival is vital to the communities we serve. So we feel as if the industry in good shape with bipartisan support. So, we're not concerned about a change in the administration. And the notion of reregulating broadcasting would be a keen to picking on the little guy. I do think some of the bigger companies like VTech will have more regulations in the future. But our industry is so small and fragmented, it just a – it wouldn't make sense.

If I could just stick in one more. Just follow-up on Comcast and maybe a bit more broadly look, as you said, the market's been negative RSNs. Can you give us an update on how you're viewing the landscape? Obviously, you’ve talked about 85% of the subs being locked in, but have distributors in those spaces have taken a harder look at that business, any change in hiring or anything else to highlight?

Sure. So, we have seen in all of our negotiations essentially status quo environment in terms of terms, tiering, pricing, all the various elements that go into a distribution agreement. So really and we've now cycled through all the major and small MVPDs and, you know, say for one DISH, we found what we expected which is that this is very valuable content to the distributors drives – that drives subscriptions and we have achieved what we set out to achieve with them which was status quo renewals.

Thank you. At this time I'd like to turn the floor back over to Mr. Ripley, President and CEO, for closing comment.

Thank you. I would like to conclude by thanking all of our employees, customers and stakeholders for their patience during this unprecedented time. We are comfortable that the actions we are taking are not only helping us manage the challenges in the short-term, but are also positioning the company for continued success in the future. Thank you for participating on our earnings call this morning. If anyone has any additional questions, please feel free to contact us.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.