Greetings, and welcome to the Sinclair Broadcast Group Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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; and Rob Weisbord, President of Broadcast and Chief Advertising Revenue Officer. 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 third 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 its assets. The company also believes that adjusted EBITDA is frequently used by industry analysts, investors and lenders as a measure of valuation. These measures are not formulated in accordance with GAAP are not meant to replace GAAP measurements and may differ from other companies' uses or formulations. 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 GAAP financial measures can be found on its website, www.sbgi.net. Chris Ripley will now take you through our operating highlights.

Good morning, everyone. These last 8 months, since the arrival of COVID, have tested all of us in numerous ways, requiring us to react quickly to a changing and challenging environment. Amidst all the upheaval that COVID has caused, I could not be more pleased with how our company has met these challenges head-on, ensuring our customers and consumers are receiving the quality content programming that have defined Sinclair over its history. Our third quarter results were better than we expected, with adjusted EBITDA of $736 million, which is almost double last year's as-reported third quarter level and 15% higher than pro forma third quarter 2019, which assumes we owned the RSNs for the entire quarter. As compared to our third quarter 2020 guidance, adjusted EBITDA was 19% above the upper end of our range, while adjusted free cash flow was $551 million in the quarter. Lucy will get into the finer details of the financials in a few minutes, but, first, I want to give you an update on each of our segments, starting with Broadcast. The strong political ad environment was a standout in the third quarter, outperforming our expectations and more than offsetting the decline in Broadcast and other core ad revenues, which was in the middle of our previously provided guidance. The political strength continued right up until the Election Day, with the total company recording approximately $363 million of political advertising this year, a 35% increase over the previous record year of 2012. Despite crowd-out from political, September core ad revenues improved over July and August for the segment. The rate of subscriber churn in the third quarter improved slightly as compared to second quarter churn. Year-over-year subscription churn on a same-station basis in the third quarter for the Broadcast segment was in mid-single digits.…

Thank you, Chris. First, some housekeeping items to note. As a reminder, the RSNs were acquired in late August of last year, and so 2019's third quarter reported results do not reflect a full quarter comparison. As such, in many cases, I will speak to pro forma 2019 results, which is a more meaningful comparison and assumes we own the RSNs in those periods. I will also be referencing certain pro forma numbers for our Broadcast business, which reflects the CL 2 stations, Harlingen and Lexington, this year. Of course, the as-reported numbers can be found in our earnings release from this morning. Also, as we discussed on last quarter's earnings call, distribution revenues in the Local Sports segment reflects an accrued deduction for the estimated rebates to be paid to the MVPDs based on the minimum games delivered. The rebate amount in the third quarter was $128 million. And for the year, the accrued revenue deduction is estimated to be $371 million, which gets paid after 2020. Offsetting this amount are overpayments owed to us by the teams, which reduces sports rights cash payments and which are expected to be realized in 2020. As Chris mentioned, the resurgence of COVID, the lack of a vaccine and the resulting economic impact makes visibility for the business extremely low. And so we will not be providing guidance or commentary around financial expectations for 2021 at this time. During the third quarter, we estimated an impairment loss on the Local Sports segment of approximately $4.2 billion relating to goodwill and definite-lived intangible assets of $2.6 billion and $1.6 billion, respectively. This was driven by a decline in distribution revenue brought on by a number of factors, including the recent loss of 2 virtual MVPDs as well as elevated levels of subscriber erosion,…

[Operator Instructions] Our first question is from John Janedis with Wolfe Research.

Lucy, I think last quarter, you talked about 85% of your subs being locked up, and Hulu and YouTube TV, I guess, are now about 10%. So can you update us on how you see the market evolving? Does that mean 95% of the subs are locked up? And is there a reason why the virtual players would find less value with RSNs in the bundle relative to traditional players? And with the write-down, has your longer-term distribution outlook changed meaningfully?

Okay. So I'll take a couple of those, and Chris can talk to the outlook for the retrans. So yes. So YouTube and Hulu did represent approximately 10% of our most recent months, gross distribution revenues in the local sports segment. On the RSN side, we really only have about 5% of the subscribers that come up next year. And then on the Broadcast side, we have about 25% that come up next year, and those are primarily in the back half of the year. And then the underlying network subs would be -- are about 50%, which occur in the first half of '21. So just to give you some sense of the cadence there. And then, look, as Chris mentioned in his remarks, the Broadcast churned about mid-single digits year-over-year. And third quarter, the RSNs were high single-digit year-over-year churn. Our fourth quarter estimates do reflect some slight improvement in sequential quarter churn on a same-station basis. And then just on the impairment question, we're not going to get into assumptions. It went into our calculations. Just know that we've followed the accounting guidance in how to calculate that.

All right. John, so to the other part of your question, look, on the one hand, we were certainly disappointed that Hulu and YouTube made the decision they did. It seemed contrary to their previous stance. Hulu, for instance, picked up Marquee at the beginning of this year. And if you take a look at all their advertising, it's very, very focused on live sports. But on the other hand, due to COVID, the timing of their renewals was such that we don't have any live sports right now and probably will not have live sports until the beginning of next year. And that's sort of a moving target right now based on what the NBA and NHL are trying to figure out for those seasons. And then as I think you all know, virtual MVPDs are still very much a proof of concept. They're running at negative margins. And so cost control is a big focus for all of them, and I think that's what drove their current decision-making.

Chris, maybe just a quick follow-up there. On a go-forward basis then, specific to Hulu and YouTube, you referenced the increase in the pricing that they have pushed through. Does the base case now assume going forward that those 2 don't renew? And then maybe, separately, on cost control is there a bit better than we thought? Is there a way to break them down a bit more and talk to the magnitude of permanent versus temporary?

Can you repeat the last part, John. I don't know if I understood your...

Yes. So on the cost side, maybe this is a bigger picture, but -- across the company, but the cost controls were a bit better than we thought they'd be, and I think Lucy referenced that, too. So can you break them down a bit more and talk to the magnitude of permanent versus temporary in terms of costs?

Yes. So John, I'll take that one. So what I would say is the -- what we've done this year? So we were one of the first ones to really take an active stance on cost control measures in the early part of March, and the company has done a great job. And without getting into how much is permanent and how much is temporary because there's a lot that goes into this because some are variable direct expenses, some are delayed or deferred, some are actually permanent. But the way we think about it -- if I was to compare our internal budget for the full year pre-COVID--up against now what our guidance looks like, across the entire company for both OpEx and CapEx, ignoring the rebates--we've been able to reduce our OpEx and CapEx expenses by several hundred million this year. And so while we're not going to talk about '21 estimates, it really depends what happens here with the state of the economy and the COVID pandemic as far as what that cost structure looks like going forward.

Yes. And then just in terms of these virtuals coming back, there definitely will be another conversation to be had with them when visibility on the NBA and NHL return. And of course, we can't predict what that outcome will be, but we know that, that will change the dynamic.

Our next question is from Dan Kurnos with The Benchmark Company.

So Lucy, maybe you could just give us a little bit more color. You're not the only person to say -- the only group to say this in terms of Q4 expectations on sub-churn being a little bit -- expectations being a little bit better on the TV side. It's obviously contrary to what I think a lot of investor expectations are. So if you can give us any thoughts on why you have kind of confidence in making that statement embedded in your guidance. And then, Chris, I'll be respectful and will try not to ask anything about 2021, but just, overall, obviously, there's been a lot written, in terms of sort of the cash flows of Diamond and sort of working with the debt holders, and I'd just love to hear any update you can -- are willing to provide in terms of what options are on the table, what's being discussed, what you guys are thinking about and kind of the sense of urgency to get something done, understanding that Hulu and YouTube were probably a bit of a surprise, but I assume you expect they will come back when sports starts up again next year?

So Dan, let me take out the -- why we have in our estimates for fourth quarter a little bit better subscriber churn. And that's really following what we saw as third quarter progressed for the reporting that we had. But mainly, if you look at the public disclosure of the traditional MVPDs, which most of the large ones have already read it now for their third quarter numbers, and remember, we're on a little bit of a lag to them, there are sequential quarters. Q2 versus Q3 showed improvement by about a full percentage point improvement. So again, given what they are saying for their video subscribers, that's why we've built our estimates to show a little bit of improvement as well.

Yes. In terms of your second question, Dan, I can't get into specifics for obvious reasons. But our stance and positioning right now is very similar to what it was in the summer when we did the exchange offer. We look to be opportunistic. We have plenty of liquidity and headroom. So there's no need to do anything. We're not out there soliciting any sort of response from any of our various stakeholders. But of course, if they have proposals to put forward, we listen to those.

Okay. And then, I guess, maybe one more, if I can, just on the use of cash, not buying back shares this quarter, and I assume you believe the stock is still attractive value. I don't know how much the pending Supreme court case factors into this. If you want to keep some capital dry in case you get more in-market relief, I don't know if we'll get the cap release, but maybe in-market changes things. Is that a factor? And how do we think about, on the TV -- on the broadcast side, the STG side, use of capital as it relates to either M&A or share buyback?

Yes. Look, I would say on that topic that we've retired a tremendous amount of shares this year, about $350 million in total at the average price in the $17s. So we had hit all our targets and then some in terms of what we were trying to do this year. We took a pause just to see how the business would react to everything going on in the macro environment in COVID, and we will continue to be opportunistic if valuations warrant it. So I do think there could be some other growth opportunities on the horizon, like you referenced. M&A, I think, will start to pick up here shortly. The Supreme Court picking up the case from the third circuit is a big deal. And we need to -- as always, we balance our use of free cash flow between what can be done outside the company and what can be done with returning cash to shareholders.

Got it. That's super helpful. And then just tongue-in-cheek, will we get outsized political in December at this point?

Who knows? We'll see how long it takes to count all the votes.

Our next question is with Aaron Watts from Deutsche Bank.

Just a few questions I hope to run through quickly here. On the station side, Lucy, I want to make sure I've heard what you said right on the core advertising environment. I think it was down 36% in the second quarter. What was it down overall in the third quarter? And can you give us some monthly cadence on the improvement you saw and maybe specifically touch on the auto category?

Yes. So for the Broadcast and other segments, they were down in the mid- to high single digit percents for core advertising in third quarter, and Rob can speak to the cadence.

Yes. Aaron, every month has picked up, which is encouraging, especially with the political -- record political spending and crowd-out that the core has been able to strengthen. It's too early to tell in fourth quarter as we come down from this record political spending and COVID spiking. November appears to be the strongest month since pre-COVID, since we've gone into this pandemic. But again, with the spike, we want to hold off and see the core advertisers returning from the crowd out. We didn't expect to -- we expected to see this political, but it came in, in big droves in the last few weeks, which caused this crowd out.

And has the auto category continued to improve?

Yes, it's continued to improve, and we expect it to improve. It's kind of the haves and the haves-not. Those that have been selling during the pandemic are being allocated those cars. And so we saw a strong Tier 2 with the Sports segment, and Tier 3 is coming back as well.

Okay. Great. Shifting over to the Diamond sports side. Lucy, I think I heard you say that the draw on the AR facility there grew from September to October. What was that additional draw used for?

Yes. So right now, that is cash that's sitting on the balance sheet. So really, the incremental draw -- the better way to think about it, Aaron, is because we got that facility in place at the end of September. That was basically -- we had already collected most of the receivables in September. And so then you get into October and we grow into the receivable balance. So that $196 million is more of the sort of the -- more reflective of the run rate of what you would expect. And so that is sitting there as cash on the balance sheet. And as we said, the proceeds from the facility, we would look to use those for just general corporate purposes and potential acquisitions.

Okay. And you have that stub piece of preferred stock still outstanding. Is that in the mix in terms of priorities as well?

Yes. Look, so we have $175 million that's outstanding. We just paid down in the third quarter $350 million of that. So look, as we think about uses of free cash flow, it's really just sort of at any point in time, figuring out what's in the mix of things that potentially could come up and other -- just other potential uses is how we think of it.

Okay. And last 2 for me, just quickly. Lucy, you laid out kind of what the accrued rebates were for the distributors. Can you give us any color on what cash or rebates have been received from the teams or what you expect to receive in the near future?

Yes. So on a net basis, right, so we're -- as we've said, we expect to get more in than what we would pay out, and really, this is due to a couple of things. One is variability in the contracts between what the teams have and the MVPDs, but also the fact, remember the MVPDs all through, even though you didn't have games, they continue to get 24/7 content. And so it will probably be about $200 million on a net basis. But remember, right, the MVPDs continue to get content. But we also, because we had fewer games, also had fewer advertising dollars because we didn't have those games. So that's the other part of this whole equation.

Okay. Understood. And last one for me. I appreciate the time. Maybe this is for Chris, but your latest YouTube TV agreement was for just one season, the one that just expired in September. Is that an anomaly due to COVID? Or are these distribution deals for the RSNs going to be shorter in nature, more broadly or for the OTT distributors specifically going forward?

Yes. That was not COVID-related. That was really an anomaly related to specifically YouTube. And they are just incredibly focused on cost cutting. And so I don't -- I wouldn't read into that in terms of what happens with the other distributors.

Our next question is with Steven Cahall with Wells Fargo.

So maybe first, Chris, I know you have continued investment plans for the RSN that you talked about. I think the big issue for investors is still whether it makes sense to try to restructure the debt versus just outright walking away. And until these have stabilized, you're going to get questions from idiots like me every quarter about whether you're cannibalizing some of the retrans revenue that you could get at the stations and co-terminus deals. So you did a really good job of structuring Diamond. You have a lot of ability to walk away. I'm just curious how you and the Board think about the ability to create equity value at these assets versus that option and where you go from here.

Yes. Look, it's a great question, Steve. Look, taking a step back on sports rights, Diamond and just sort of sports rights, in general. The reason we -- and one of the core reasons we went forward with this transaction is -- still true today, is that we fundamentally believe that sports rights will be worth more in the future than they are today, that this is a growth industry. It needs to change. It needs to evolve. There is going to be a cash flow valley that we'll need to traverse here as we go through this evolution. But we're very excited about the growth opportunities we have with the RSNs, and we think we'll have something to talk more about on the sports betting front that we think is going to be a game changer. And we intend on reinventing the RSNs around gamification, around community-based fandom and around direct-to-consumer. And that's going to be, we think, incredibly exciting and rewarding for Sinclair, and that's where we're focused.

And then you must be thinking about DISH for next year at this point. Just based on the fact that they lost a lot of their subs that would value the RSNs, how do you think about going into that renewal in terms of a co-terminus deal for both versus focusing more just on the TV stations and trying to maximize value on retrans?

Well, we have been very successful in negotiating packaged deals for all of our programming, with all of the traditional MVPDs. And so I'd expect us to continue that strategy with DISH.

And then lastly, Lucy, just wondering now that we have a really good idea of what gross retrans is doing in 2020, I was wondering if you could give any color on how you think about net retrans or maybe an update on your reverse comp cycle.

Sure. So just to say our guidance for full year 2020 estimates, the net retrans to grow mid-single-digit percents for this year. So for 2021, what I would say is, it's still too early to talk about net retrans just because of the uncertainties around COVID and its effect on subscriber churn. But I will say this, that when I think about the renewal cadence for next year and the fact that we only have 25% of the broadcast subs that renew in the back half of '21 and almost 50% of the underlying network subs that come up in the first half of '21, so given the difference, the mismatch in the number of subscribers as well as the mismatch in the renewal timing, I think it mathematically will be difficult to increase the net retrans next year.

Our next question is with Alexia Quadrani with JPMorgan.

One of your RSN peers, earlier this week, indicated there would be a price at which they would consider maybe bringing their content direct-to-consumer. I'm curious if you think that makes sense for you guys to get back the potential opportunity at some point, at some price point? And how you think your existing sort of MVPD partners might react to something like that?

It's a great question, and it's something we've been doing a lot of work around. And it's not an either/or, right? We will -- we are going to do direct-to-consumer. As I mentioned, we're going to reinvent the RSNs around gamification, community and direct-to-consumer. And that doesn't mean that we're issuing our MVPD business. It will be at a premium price to what we sell the product to MVPD. So there's sort of a wholesale and a retail price dynamic there. And we're -- as I mentioned on a previous question, we're really excited about the potential of unlocking the hidden value here in the sports rights that we have.

And just one follow-up, if I may. There's a lot of moving pieces, obviously, when looking at the core underlying advertising environment in your business. And I'm curious, I totally get that we can't really discuss 2021 because there's so much unknown. But I'm curious if you think that when we get to a more normalized environment, whatever that may be when we sort of circle the COVID impact and everything else. Do you think that the core ad market kind of bounces back to kind of the pre-COVID levels? Or do you think there's been some sort of reset in the market at a lower level just given everything that's gone on?

Yes. Look, from our vantage point, we think things will return to normal when COVID goes away. I think one of the great data points that I mentioned earlier in my comments is that, on the sports side, we were up mid-single digits on our advertising revenue. And there has been a dislocation in the market because of COVID, there is no doubt about that, but our inventory still is highly valuable. In fact, it's only getting more valuable as advertising-based content shrinks and amount of avails that you can get in front of people as people migrate to more ad-free platforms continues to get more scarce. And so, certainly, we do a big business in digital and digital. We've been talking about this for years that digital is a key component to any campaign. And we go to the marketplace with a full suite of products, including spot and digital. But we don't think that COVID has caused any structural change in the market, if that's your fundamental ask.

Our next question is with David Hamburger with Morgan Stanley.

I'm curious. I see that you renewed your media rights agreement with the Kansas City Royals recently. And I'm wondering, at Fox Sports Kansas City, I guess, as you look at managing costs and you talk about your guidance for the fourth quarter, but as you think more broadly about managing costs, can you talk a little bit about the renewal? My understanding is maybe you gave the team equity in the station. Was that part of the Midwest RSN previously? Is there a new Fox Sports Kansas City, at which the team also has an equity stake? If that's the case, can you talk a little bit about the rationale for that move?

Sure. Look, I think, giving -- we did give equity in that deal. We have many teams that do own significant portions of our RSNs. We believe it aligns interests better. It also variabilizes compensation for the rights as opposed to having it all on a fixed basis, which helps manage our cost base as revenues change. And going forward, that is going to be a bigger part of the equation, where -- as we move to a more variabilized rights compensation structure.

Can you help maybe kind of quantify how much that attenuates or helps that equation? I mean, obviously, as your distribution revenue has become more variable, given customer churn, how closely might you be able to align renewal of media rights agreements on the cost side to correspond to those types of trends, so that you see the teams kind of participating in that?

Look, I don't have a specific number to give you, but what is undoubtedly true is that we bring a lot of value to the RSNs and our teams on multiple facets. And so that is something that as a distributor need that does the type of work that we do brings the value that we do deserves to make a margin on that. And so that is -- that's sort of the way we think about rights going forward. And stay tuned in terms of what that may mean financially.

As just a quick follow-up on that then, kind of more technical question, but does that mean that now that subsidiary, that station is no longer a guarantor or maybe even would be undesignated subsidiary or unrestricted subsidiary as part of the credit agreement? As well as does that also mean that the collateral that, that station might have provided to the secured credit agreement and bonds is no longer -- has been released?

Yes. So David, the way this works is, we -- our ownership in that joint venture is pledged to the lenders. And from an attributable EBITDA standpoint, what we count are the -- towards attributable EBITDA is the -- are the cash distributions that the JV pays back to Diamond. So you have the pledge of the -- of our interest in the JV as well as the cash distributions back into Diamond.

Okay. But no longer maybe collateral in the subsidiary and the assets themselves, but you pledge the ownership?

The shares are collateral.

Right.

Our last question is with Zack Silver from B. Riley.

Okay. Great. Just on the 50% of the subscribers coming up on the reverse side in the first half of 2021, just curious to your thoughts on, are these renewals long enough in duration where you think that your network partners are going to bake in your expectations for the step-up in NFL rights into the negotiations? Or is that more something that may be a bigger factor in the later reverse cycles?

Yes. We're not seeing that as part of the discussion. I think we all recognize that the networks will have to pay to keep NFL, and that appears to be the expected outcome. We already paid the networks a substantial sum in terms of reverse retrans. And so I think it would be hard for them to justify given how much that has increased over the last few years, some sort of NFL-specific increase.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to Chris Ripley for concluding comments.

Thank you all for joining today. If you should need more information or have additional questions, please don't hesitate to give us a call.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.