Sinclair, Inc. (SBGI) Q2 2020 Earnings Report, Transcript and Summary

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 quarter. As a reminder, we are starting to enter the peak political season which is still expected to be a record political year and will help mitigate the weakness in core advertising space. We are pleased with the professional sports leagues that have resumed their schedule although they are shortened. It is very clear that viewers are excited as well that ratings for the first day of the MLB season up 32% of our end as compared to last year’s opening day viewership. And as we discussed previously, our contracts with the sports teams already contemplates scenarios where there may be a shortfall in the number of lives being delivered to us. And in such cases, we are entitled to remuneration from the teams for any games falling short of the guarantees that are defined in the contracts. And commercially, we have distributors to whom we guarantee minimum games of live games in contracts with us. I'll leave it to Lucy to explain some of the ramifications of the timing and impact of rebates due to and from Sinclair as a result of the shortened 2020 season. I want to emphasize that contrary to reports out in the public at this time, we do not expect rebates from the teams to be greater than what we pay out to distributors. Given the differences in the way rebates are calculated in the team versus distributor contracts and other variances in the contracts. Speaking of our sports business, there are a lot of exciting things going on behind the scenes in Sinclair. As we announced several weeks ago, we hired Steve Rosenberg, a highly accomplished broadcasting and programming executive as President of local sports. Steve along with Billy Chambers who is the local sports COO and CFO will report into Rob Weisbord and help fill the void left by the upcoming departure of Jeff Krolik, who is retiring as the Head of our RSN business at the end of this month. I want to personally thank Jeff for all his assistance and hard work in helping integrate the RSN into Sinclair. He has been a valuable resource to me and the rest of the company, and we all wish him well in future endeavors. A few words about Steve, for over 25 years, Steve has been a dynamic force in broadcasting excelling in a number of sales, marketing, distribution, and executive management roles. During his career, Steve has been a true pioneer of innovative and creative sales, marketing, and programming efforts. Steve will play a key role in growing our sports business. His ability to challenge the status quo and bring about innovative ways to monetize opportunities will be fully utilized by Sinclair. One of his first priorities will be to use his programming expertise to help elevate our nongame programming on the RSN and our Stadium network. The majority of the programming hours on these networks does not involve live games so there’s a significant opportunity to improve our viewership and revenue-generating capabilities in these time periods. I also want to mention that Scott Shapiro has taken an additional role of Chief Strategy Officer of Sports and will focus on some of our larger growth opportunities such as those associated with legalized sports betting. We have other exciting developments in our sports business coming up as well with a number of significant growth opportunities on the horizon. As consumer viewing habits continue to evolve, we are committed to giving them an exceptional experience when and where they choose to watch us. We’re expecting the sports act that is in development will give viewers an experience unlike anything they have encountered in the past with enhanced graphics and sound as well as the ability to interact with the content in numerous ways including with advertisers and free-to-play games. We spend a lot of time meeting with many of the major players in sports betting. And we expect more - to be able to more fully detail our plans in this area later this year. As the exclusive provider of local sports content for more than half of the MLB, NBA and NHL teams, we believe we are in a unique position to monetize the significant sports betting opportunity that exist. Other highlights in the quarter include NEXTGEN TV launches in multiple markets including Las Vegas, Nashville, Pittsburgh, Salt Lake City and Portland Oregon with another 10 or so Sinclair markets targeted by the end of the year exciting to see this groundbreaking technology in action. There has been a great deal of effort within Sinclair for many years to create and bring this technology, the future of broadcast TV to the marketplace. Its impact however will be felt far beyond traditional broadcasting applications. Yet, NEXTGEN TV will deliver a significant enhancement to television broadcast quality but that just scratches the surface. The new platform gives broadcasters significant flexibility in using their broadcast spectrum. For starters, it dramatically increases spectrum capacity, allowing for more channels and targeted content to be sent over the existing spectrum band. Those signals will reach deep into buildings, moving vehicles and eventually people’s phones opening up a wealth of opportunities for applications, diverse targeted advertising, data deliver, premium content or sending advance emergency information. All in a mobile and portable manner. The signals also have interoperability with the Internet including 5G, creating even more ways to satisfy consumer needs and to monetize new technology. I applaud all of our employees who’s involved over the many years to make this game changing technology a reality. Innovation is the lifeblood of this company and it never ceases to amaze me, the accomplishments of our talented employees at Sinclair are able to achieve. In July, we came to terms with Comcast to renew distribution rights for all of our businesses including our broadcast stations, Tennis Channel, the RSN and YES as well as a full launch of Marquee in time for the Cubs first game of the season. The narrative that has been on the street regarding fears around completing the deal with Comcast or that terms would be unfavorable to some player or that our broadcast stations would be dragged down by the RSN was just incorrect. As we've said, we are - we were confident that we would reach an agreement with Comcast that was positive for us and we are happy with the outcome in all regards. This agreement is another example of the benefits that come from negotiating for a large diverse set of very popular programming assets in this business and it is an undeniable affirmation of the importance of local news and sports which consistently get high ratings and are highly valued by distributors and subscribers. It is also important to note that our deal not only includes the launch of Marquee but expanded viewing coverage of the new RSN beyond where the Cubs RSN was previously carried. This is something Comcast doesn't do for its own RSN in the Chicago area and didn’t even in the past when the RSN included the Cubs. This was accomplished without giving up carriage of other assets in our portfolio and while still achieving what we believe are favorable rates throughout our portfolio. With the completion of the Comcast agreement, we have now locked up almost 85% of the RSN’s total subscribers for at least two years and beyond. Also during the quarter, we agreed to have multiyear renewal for eight stations with Viacom CBS and on the sports side, we have an agreement in principle with one team that expired at the end of last season. In June, we announced we would be launching a new headline news service in early 2021 focused on breaking news stories as they develop and sourcing them from our comprehensive local news resources. Think of it as breaking meaningful local news stories on a national level. In its initial phase, the new service is expected to be launched on approximately 50 of our CW at MyTV network affiliates and will be broadcast from 6 AM to 9 AM each weekday as well as on our free ad supported app store. On the community front, we awarded our annual broadcast diversity scholarships to 10 talented students who are pursuing a career in the broadcast industry. And in July, we launched a new campaign with the American Red Cross for urgently needed broad nations utilizing our news production resources to create messaging and awareness of the urgency and to encourage viewers to donate blood. The campaign rehab commitment was held on June 30 with the campaign continuing through mid-August. Finally, I want to address the initiatives around our capital structure that we continue to evaluate and act upon. We continue to believe our securities are significantly undervalued. This belief is reflected in our actions including the continued purchase of our equity during the quarter. Since February of this year and through to-date, we have repurchased approximately 19 million shares representing 21% of the total share of outstanding as of the beginning of the year. While our proposed exchange of Diamond’s unsecured notes resulted in lower participation than we expected, we believe the lender's decision not to exchange indicates they believes in the long-term positive value of Diamond. As I indicated previously, we continue to engage with financial institutions on ways to optimize our cap structure, delever and lower our cost of capital. Now, I'll turn it over to Lucy to discuss our financial performance.

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 cash flow with us rising the benefit of the lower sports rights payments this year in advance of the distributor rebates being made in - after 2020. Sports rights amortization which is included in the media and programming production expense line and which is noncash and not factored into the calculation of adjusted EBITDA gets recognized over the applicable sports season. So, in the second quarter, there were no professional games played. And therefore, sports rights amortization was minimal. We expect sports rights amortization for the third quarter to increase nearing the high level of sports games currently scheduled in the period. For fourth quarter, the sports rights amortization is expected to be much lower with baseball's regular season likely completed and with NBA and NHL games for the 2021 season likely starting later in the quarter than normal. All right. So, turning to the consolidated company results. Consolidated media revenue for the second quarter increased $539 million due to the inclusion of the Local Sports segment, which was not in last year’s second quarter results. On a pro forma basis, total media revenues of $1.260 billion were down versus last year’s second quarter media revenues of $1.710 billion due to a number of factors which we have previously discussed. Most notably, the weakness in the advertising market due to the pandemic, the absence of live sports, the associated accrual for the distributor rebates and the absence of these carriage fees. As compared to guidance, media revenues came in below the range we gave on our last earnings call $519 million. However, this is important. This is due to the $124 million of the distributor rebates that we accrued during the quarter which was not included in our guidance last quarter because at that time we didn't know how many games were - the leagues were going to schedule. So, if you exclude the accrued rebate, we - our revenue would have been within our guidance range. Media revenues of $669 million for our broadcast and other segments which excludes the RSNs were within our guidance range with both advertising and distribution revenues coming in as expected. As Chris mentioned, the advertising market improved as we move through the quarter. June ended with our broadcast and other segments declining 26% over the same period last year which was a significant improvement over the 43% drop in April. July has seen the improvement continuing finishing down 20% for the month. And even as political ramps up in the third quarter and it's expected displace other advertising categories, we still expect to finish the third quarter down 15% to 22% in core advertising which is an improvement over the second quarter performance. Subscriber churn in the second quarter across all of our segments was 7% on a year-over-year basis that's slightly higher than the trend over the past few quarters but understandable given the impact of COVID-19 on the economy and the number of people that are unemployed in the country. Consolidated median operating expenses of $569 million were down 50% on a pro forma basis compared to last year's $1,139 million and that's due to the absence of the live games, the lower sports rights amortization and proactive cost controls. Our focus on managing our expenses during the quarter drove the $11 million positive variance to guidance. Adjusted EBITDA on a consolidated basis increased 31% to $254 million due to the inclusion of the Local Sports segment. On a pro forma basis, adjusted EBITDA declined $391 million driven by a $330 million decline at the Local Sports segment. And a $61 million decline at the Broadcast and Other segments. The Sports segment adjusted EBITDA of $110 million was down from last year's pro forma $440 million and that's due to the distributor rebate accrual, the absence of Dish, which was in last year's numbers, and the impact of COVID on the number of games. It is important to keep in mind that unlike GAAP results for the Sports segment, which included minimal amortization due to no live sports being played, Local Sports adjusted EBITDA reflected the continuation of sports payments made during the quarter. So, just to put this simply, the sports segment results during the quarter reflect the accrual for the rebates to the distributors, but no benefit from the expected rebates from the teams, which are expected in the second half of the year. Again, excluding the accrued rebate, we beat total company adjusted EBITDA on additional cost controls at the Broadcast and Other segments. Consolidated adjusted free cash flow excluding the nonrecurring legal litigation, COVID, transaction, and regulatory items of $9 million was $46 million. That’s $79 million below the lower end of our guidance, but again excluding the rebate accrual, we have - we exceeded our guidance slightly. For the first six months of 2020, adjusted free cash flow was $156 million; and using our estimated share count through yesterday of approximately 79 million shares outstanding, that reflects additional shares that we bought back here in the third quarter, that results in free cash flow per share of $2.11 in the six-month period. Diluted earnings per share on 81 million weighted average common shares at June 30th was $3.12 in the quarter or $3.21 when adjusted for nonrecurring items. Our liquidity position in both credit silos is strong with neither silos’ revolver drawn and both silos having ample cash on hand. During the quarter, we launched an exchange for all of the outstanding Diamond 6.625% senior notes. $66 million of the aggregate principal amount or approximately 4% of the outstanding issue was exchanged for $31 million of new 12.75% notes and cash payments of approximately $10 million. In total, the transaction reduced our debt by $35 million. Now, while we would have liked to have exchange more of the bonds, the feedback we received was that the noteholders agreed with us that the bonds are undervalued and so chose to hold on for the future upside. And as Chris said, that is a strong message for all holders of our cap structure. We continued our stock buyback program during the quarter repurchasing over 5 million shares of our common stock at an average price of just over $16 per share. So far, for the third quarter to-date, we have repurchased over 4 million additional shares. Since the start of the year, 21% of the total shares outstanding and 29% of the float had been bolt back. During the quarter, we continue to execute on our plan to reduce cost with savings going for the short term and the longer term. We continue to scrutinize all spending, delaying or eliminating non-essential expenses including open positions, medium promotional spend, G&A, and CapEx in addition to the variable expenses to come with fewer gains and lower revenues. And we continue to look for additional opportunities. We are confident that we can handle a prolonged period of weakness by executing the opportunities identified as well as additional steps we could take if necessary. Turning to segment details for the broadcast and other segments. Media revenues decreased 7% versus the same period a year ago as advertising revenue was significantly impacted by the pandemic. A 36% decline in core advertising revenue was partially offset by higher political revenue and an increase in distribution revenue. The Broadcast segment’s revenue also benefited from $25 million of management incentive fees paid by the Local Sports segment that was not in last year's Q2 results and gets eliminated in consolidation. We came in at the middle of our revenue guidance range and $12 million over the high end of our adjusted EBITDA guidance. For the Sports segment, media revenues of $616 million, decreased 38% versus pro forma results of $992 million in the second quarter of last year. Much of the decline was expected and was due primarily to the absence of DISH, the lack of advertising revenues related to the postponement of the games, subscriber churn and the cruel distributor rebate and the accrual distributor rebate. Diluting the accrued rebate, we were very close to guidance. Media expenses in the second quarter were $106 million and 84% decline to last year's pro forma $659 million. As explained, this is primarily the result of minimal sports rights amortization being booked in the quarter due to no professional games being played. As compared to guidance, media expenses were slightly higher as a result of slightly higher than expected production programming expenses. Local sports adjusted EBITDA of $110 million for the quarter was below pro forma results of $440 million last year and below our guidance range of $190 million to $202 million, again, due to the distributor rebate accrual and if you exclude the rebate accrual, we would have beat our local sports adjusted EBITDA guidance. So, hopefully, you're seeing a trend here as it relates to the distributor rebate accrual. If you back that out, we were - we either met or exceeded all of our guidance in the second quarter. So, now turning to the consolidated balance sheet. The consolidated cash at the end of the quarter was $622 million, that includes $171 million at STG and $436 million at Diamond. Total debt at the end of the second quarter was $12.399 billion and the net leverage ratio for consolidated Sinclair at quarter-end was 6.4 times. Sinclair Television Groups first-lien indebtedness ratio on a trailing eight quarters with 2.6 times on a covenant of 4.5 and 4.5 times on a net leverage basis through the bonds. Diamond’s first lean indebtedness ratio on a trailing four quarters with 6.5 times on a covenant of 6 in a quarter, which again only springs if the revolver is drawn over 35%. On a total net leverage basis through the bonds, Diamond was levered 8.5 times. In terms of guidance, there is still much uncertainty around the resilience of the economy in COVID’s impact. Our guidance will therefore be limited to the third quarter. Keep in mind that any change to the expected plans in the sports leagues could cause our reported Local Sports results to deviate meaningfully from our guidance. For our Broadcast and other segments, our third quarter media revenue guidance is $777 million to $805 million that is up approximately 6% to 10% from last year's pro forma $733 million. This is driven by higher political and distribution revenue, which is partially offset by a projected 15% to 22% decline in core advertising. Adjusted EBITDA for the Broadcast and other segments is expected to be between $187 million and $211 million compared to $216 million pro forma last year. For the Sports segment, third quarter media revenue is expected to be $718 million to $727 million. That's down 15% to 16% of last year's pro forma $858 million. The projections include the impact from the distributor rebate accrual. Adjusted EBITDA is expected to be $402 million to $410 million as compared to $425 pro forma last year with the decline primarily due to the distributor rebate accrual, the absence of DISH carriage fees and subscriber churn offset by lower rights payments to the teams. I do want to point out that there is a sizable increase in GAAP media expenses in Q3 that is as a result of MLB, NBA, and NHL sports rights amortization be an expense in the quarter again reflecting when the games will be played. While this increase is expenses on a GAAP basis, it is a noncash item that does not impacted adjusted EBITDA which is based on sports rights payments not the rights amortization. Mentioned before the sports rights payments reflect the offsetting benefit from the teams on the fewer games with some of that partially reflected in Q3 and the majority in Q4. For the consolidated companies, third quarter media revenues are expected to be a $1,460 million to a $1,497 million. Adjusted EBITDA of $589 million to $621 million, and a just a free cash flow of $374 million to $411 million. Based on our current share count of approximately 74 million shares, this equates to free cash flow per share of approximately $5.05 to $5.55 in the third quarter. So with that, I would like to open it up for questions. Operator?

[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.