Greetings and welcome to Sinclair Broadcast Group Fourth Quarter 2020 Earnings Conference Call. I would now turn this conference over to your host, Lucy Rutishauser, Executive Vice President and Chief Financial Officer. Please begin.

Thank you, operator and good morning everyone. Participating on the call with me today are Chris Ripley, President and CEO; Rob Weisbord, President of Broadcast and Chief Advertising Revenue Officer; and Steve Zenker, Vice President, Investor Relations. 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 fourth quarter earnings release. The company undertakes no obligation to update these forward-looking statements. The company uses its website as a key source of company information, which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website and will remain available until our next quarterly earnings release. Included on the call will be a discussion of non-GAAP financial measures, specifically, adjusted EBITDA, adjusted free cash flow and leverage. 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 and 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. Looking back on 2020, it certainly was a year that will stand out for a number of reasons. Of course, top of mind is the pandemic and its impact on people’s lives, the economy and businesses. We saw just how resilient our company could be and how well our employees could respond and adapt to a different way of doing business. The media industry and Sinclair faced and continue to face many disruptions in core advertising, distribution revenues and live sporting events. However, built-in hedges to shorten professional sports seasons as well as record political revenues helped to offset some of the declines brought about by the pandemic. The strong demand from political advertisers validates the importance of the TV medium in effectively reaching mass audiences. And we learned as an organization how to dial back costs while retaining productivity and efficiency despite less than ideal working conditions and 60% of our workforce working remotely. A special thank you to those employees who ensure we continued broadcasting to provide important news and COVID updates as well as other content, including sports to our consumers.

Thank you, Chris. First, some housekeeping items to note. As a reminder, the RSNs were acquired in late August of 2019. And so while 2020 fourth quarter results do reflect a full period comparison to the prior year full year 2020 results do not. As such, for more meaningful comparative purposes, I will also include pro forma 2019 results, which assumes we own the RSNs for the entire year. I will also be referencing certain pro forma numbers for our broadcast business, which reflects the sale of three stations: Harlingen and Lexington, which were sold in 2020 and Paducah, which we sold in February of this year. Of course, as reported, numbers can be found in this morning’s earnings release. Also, as we discussed on our last two earnings calls, the shortened professional sports seasons in 2020 and 2021 impact the accounting for our local sports segment in a few significant ways. First, 2020 distribution revenue reflects an accrual for estimated rebates to be paid to our distributors based on the number of games delivered versus the minimum game guaranteed in our agreement.

Thank you. Our first question comes from Dan Kurnos with The Benchmark Company. Please proceed.

Good morning, everyone. Lucy and Chris, thanks for all of the clarifications from the additional numbers, super helpful. Two questions. Just one on the broadcast side, just on the distribution, I know, Lucy, you mentioned that we know that this year was going to be kind of tough one from timing. Can you just remind us of the MVPD renewal schedule this year and then just kind of your thoughts on net retrans heading into 2022 after kind of the big reverse step-up this year? And then on the RSN side, as much as I would love to ask a question about Bally’s acquisition of Monkey Knife Fight and any ramifications for you, I think I will stick with the more generic. The distribution again is very wide. I think Q4 was a little bit lower than people were expecting and then kind of Q1 a lot higher. I am just trying to understand what you guys are assuming in your distribution numbers? And then subsequently the impact on guide, are there things like the potential for Hulu, YouTube coming back, I just want to understand sort of what’s going into your forecast? Thanks.

So I will let Lucy answer the second one. I will take your first question, Dan. The only thing of significance that happens on the retrans side for broadcast is DISH this summer. And certainly, this is a unique set of circumstances that we are dealing with, where as Lucy mentioned, one-third of our big four affiliates had significant step ups at or near year end and that’s the first time that’s really happened for us. And then on the distributor side, you have – outside of DISH there really isn’t other renewal opportunities there to offset.

Yes. So, Dan, on your other question regarding like Q4, so remember, we booked an additional $49 million of rebates to the distributors that we weren’t expecting and that was because of the shortened NBA and NHL season. And then we will get the team rights rebate in 2021 on that. So, that’s why Q4 looks a lot higher, lower on the distribution revenues, but if you exclude that rebate, we actually beat our guidance for distribution revenue in fourth quarter.

And on your assumptions just around the go forward like are there things included in there like Hulu and YouTube coming back, like is there a wide range of outcomes to kind of get to that big range of adjusted EBITDA guide? Is it just around sports rights and reimbursements? Just want to make sure that we understand sort of your thought process on that?

Yes. I mean, look, it’s a wide range for a lot of reasons, right? There is a lot of potential outcomes that could happen. But what’s in that range is some assumption for some amount of carriage renewals. They come back on. We are not going to get into who, how much, when or anything like that. That’s why we have a range there.

Okay, great. And then actually, if I could just quickly – I don’t know what you’re going to do with it. I thought it was interesting you guys picking up the rest of ZypMedia, sort of just more of a ancillary curiosity given everything going on in the ad tech space, just curious how that kind of fits into the equation?

Yes. It’s – we had a piece of it. We wanted to buy the – buy out the whole entirety because we have business plan to focus on building out platforms for the local small and medium-sized businesses, being able to compete in – with the larger agencies out there and acquiring CTV inventory, OTT inventory, and we’ve had significant success utilizing the platform. And by taking internally, we think we can have a growth into a major SaaS business as well.

Got it. Appreciate all the color. Thanks, guys.

Thanks.

Thanks, Dan.

Our next question comes from John Janedis with Wolfe Research. Please proceed.

Hi, thanks. Lucy, you talked a little bit about this in your comments, and maybe a slight follow-up to Dan, but I may have missed it. So how are you thinking about churn this year? And do you think the launch or increased content on streaming services will have an impact in the other direction? And then you didn’t say much about it. So on capital allocation with the move the stock has had over the past few months, how are you thinking about the buyback into ‘21? Thanks.

Yes. So what we’ve built into our assumptions on the Diamond side for this year is high single-digit churn, right, which is kind of what we’re seeing right now and what the MVPDs themselves have put out there. So that’s what we’re building in for – again, we don’t have full year broadcast out there. But for first quarter, we’re looking at mid-single digit churn on the broadcast side, and I think that’s consistent with what you’re hearing from other broadcasters as well.

And John, on the capital allocation front, we have $880 million left on our authorization. Last year, we retired 21% of our shares outstanding, which is more than by a significant margin than any of our peers. We have received some feedback from investors that we need to make sure we have a healthy float to attract new investors. So we want to keep that balanced. And of course, we always consider what our future investment opportunities are as we look to deploy cash. But I think it goes without saying, we think our stock is an incredible value even as it stands today.

Thank you.

Our next question comes from Steven Cahall with Wells Fargo. Please proceed.

Thank you. Chris, maybe first, could you talk about how you’re thinking about approaching some of the performance criteria that allows you to take the additional options in Bally’s? Maybe what’s kind of the execution strategy there since it seems like that’s a really significant opportunity for value creation? And then, Lucy, I’d love to dig into the RSNs just a little bit more. If we took out the $155 million cost benefit for this year and took your midpoint kind of guidance, do you think that’s a good run rate for earnings power at the RSNs or does that really underestimate them? And maybe lastly, on Diamond, do you think you’ll need to draw on the revolver this year? Thanks.

Okay. So on Bally’s and our performance warrants, first, I’ll say the bar is very low, at least in our opinion, as to what needs to be delivered. We think we will deliver well in excess of those user thresholds. And also importantly, it’s users to the Bally bet platform from any source. As you know, it’s of times to track attribution. We are promoting Bally’s across all of our platforms. We are re-branding the network. We’re going to have deep integrations across our digital properties, across our newscast, talk shows, pre and post-game, it’s going to be a wide-ranging integration strategy which should drive significant audience and users into the Bally bet platform. And so the strategy is really to be as tightly integrated as if the companies were one. And in fact, we are going to even think about users as one. So a Bally vet user is the same as a Bally sports user, and we want it to be a seamless integration there, and we think that will drive more and more users over time. To Bally sports user sports – sports betting app, which should launch this, spring, and we should easily achieve the targets that were put on those performance warrants.

Okay. So Steve, your other question was around, I believe, the EBITDA run-rate without the rebates.

Yes.

And so look, we’ve given you a range for this year, right? We’ve got a lot of moving parts that are happening this year as we’ve mentioned multiple times throughout our scripted remarks. There is a lot of lack of visibility that we have into the year. So right now, we’ve given you the range for this year. We have a lot of the growth opportunities that we’ve talked about since we bought the RSNs, right, the two that have got put on hold because of COVID and disruption in gameplay, etcetera. So look, it’s – we haven’t really started to implement a lot of the things that Chris has talked about now for the past 1.5 years. So I can’t really tell you beyond 2021 because there is still a lot of moving parts there, but you do have a range for this year for our EBITDA expectations. And then I think you had one other question.

Yes. It’s – revolver draw this year is not expected.

Yes, not expected. And just – let me just follow-up with that because remember, Q1 is the lowest EBITDA quarter for the – typically for the RSNs. And so we’re not under a revolver right now. So again, assuming our current assumptions, we would not expect we would need to draw a revolver.

Great. Thank you.

Our next question comes from David Hamburger with Morgan Stanley. Please proceed.

Hi, thank you. Good morning. If I could – I have one clarification and then two bigger picture questions. If I heard you right, Lucy, I think you said you had $420 million of distributor accruals in total, and then you mentioned $697 million in reduced sports rights payments. So does that mean the net benefit to EBITDA in some total was $277 million? I think last quarter you had mentioned the net benefit would be about $200 million. So I am wondering if that’s the right math?

That is on a – that goes over 2 years, right. So, not all of that – all the $420 million is accrued in Q4 of ‘20, but only $542 million of the team rebates if we benefit in Q4 of ‘20. The other $155 million, you won’t see in the numbers until 2021.

Right, okay. So, it was a total of $277 million. Okay, thanks. Kind of bigger picture, I believe in January, Viacom CBS had renewed their affiliate agreement with Hulu Live. And at the time, Sinclair did not opt into that renewal for the CBS affiliates that you own. But my understanding, if you could verify this, is that you did opt back in just before the Super Bowl for the CBS affiliates of Sinclair, yet I believe you didn’t get carriage of the RSNs once again with Hulu. I’m wondering if discussion with Hulu – discussions with Hulu around that opt-in before the Super Bowl for the CBS affiliates had or had not included a discussion of carriage of the RSNs once again. And if not, I’m wondering, why not? And would this kind of negotiation differ from, say, how you would approach DISH this summer with the renewal at the Sinclair level versus, again, carrying the RSNs?

Yes. So look, we always come and talk to distributors about all of our content assets. We can’t – we don’t get into specific negotiations on specific distributors because those are confidential, but we are satisfied with the deal we did with Hulu. Our carriage is only just one form of consideration in the mix. And I think, as you know, it’s a little bit different with the virtual MVPDs as it relates to how that works. There is a decision we made with opt-ins, and we maximize the value of that decision. And in terms of your question going forward on DISH, we’ve had tremendous success with all the traditional MVPDs coming with incentives to take broader packages of content. And I would expect us to continue to have that success in the future.

So if I might just follow. So could you kind of characterize what’s different about the relationship with the MVPDs? I mean I noticed as well that YouTube last year, they only renewed for the baseball season, which is certainly not traditional what you’ve seen historically with MVPDs. I mean should we anticipate, again, this greater level of kind of volatility in the distribution contract with the vMVPDs?

Yes. Well, the vMVPDs are – have a different business model. There are skinnier bundles, lower-priced targeting lower economic, socioeconomic strata for consumer. And there is a difference in the way we interact with them. The networks do a master agreement with the virtuals and then we opt in. And so there is a difference in the way that mechanic works, and there is a difference in their business model as well in terms of what they can afford and what they value. So that’s – that does tend to lead to different outcomes.

Okay. And if I could just one more question, we noticed that you put out a press release that you renewed your programming contract with the Milwaukee Brewers. And I was curious, last year, with the Kansas City Royals, you have given the Royals equity in the station. I’m wondering as well if that renewal included giving the Brewers equity in the station. And do you have any other renewals upcoming were if you did, where you would approach the negotiations in a similar manner?

Sure. So we have binding term sheets for all the teams that we had near-term expirations on, which include the Brewers and the Marlins. Both included equity participation, which, as we’ve been saying for a while now, we prefer because it variablizes more of the compensation, it aligns interest and so both of those deals had that component. And we have – generally, every year, there is a few teams that come up. So we have some more that will expire for next season, and those discussions are just getting started. But equity because of the reasons that I’ve stated in terms of variabilization and alignment of interest it will be increasingly a component of the mix of consideration.

Are you able to discuss the dimension of the variabilization of the cash compensation? I mean maybe even just directionally, how we might expect sports rights payments over the next – near-term intermediate term might trend as a result of these types of transactions?

Yes. So contrary to the national market, which you are hearing about NFL wants to double and big increases happening across the board, the local market where we plan is much less competitive. We're not seeing those types of cost pressures. And so we're not expecting rights to escalate by very much at all. And when you give a team equity consideration as part of the mix, it’s in lieu of cash fixed rights payments. So it's really just a rights payment, but in a different form and a different sort of risk return dynamic for them.

Okay, thank you very much. Thanks for the questions.

Thanks, David.

Our next question comes from Alexia Quadrani with JPMorgan. Please proceed.

Thank you. Just on the sports side, I’m curious what has been the feedback or the response from the sports leagues, NBA, NHL, MLB, for example, excuse me, on Bally’s partnership and plans for gamification of the presentation? And I’m just sort of staying on that sort of topic. The return of the NBA, NHL in the upcoming MLB season, has that accelerated conversations talks with DISH, Hulu or YouTube?

So the response has been overwhelmingly positive from the leagues and our team partners. There are very excited about the new branding, about our efforts around gamification. There is a keen, keen interest amongst those parties to increase engagement among younger audiences. And as I noted in my remarks, all of our data and research points to a high propensity for sports betting in the younger cohorts for gamification, there are the video game culture and sports betting is a great tonic to increase that engagement among the younger viewers, which still have great affinity for these sports, just don’t consume the games and nearly the same capacity as their parents. And having interactive engagement, having rewards, we believe in all the data points to that being a key to unlocking their fandom and so the leagues and teams are perfectly aligned with that and very excited about it. Very excited about the Bally’s partnership, Bally’s just announced they have become an authorized partner of NHL. So essentially, we are bringing the leagues a new customer which they definitely appreciate. And so nothing but good news in terms of the new partnership and the implications it has for the teams and the leagues. And then in terms of your second question, look, undoubtedly, the return of sports is very, very important to us in terms of our value proposition to distributors. These are some of the highest-rated programs on television. They have tremendous value, and that definitely plays a role in our discussions with distributors.

Thank you very much.

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

Hi, everyone. Thanks for having me on. A couple of questions. First, on the station side, core advertising seems to be moving in the right direction. Could you just highlight some of the things that are driving the improvement and what’s still lagging? And perhaps you can mention auto specifically in there. And then what’s your current view on when or if core advertising can ultimately recover to pre-pandemic levels?

Yes, I’ll take that, Aaron. Fourth quarter automotive quarter-over-quarter was up 38.5%. So we’re very encouraged as the supply chain gets fixed, that the spend will continue to see upward increases. And services was up 27% quarter-over-quarter. And we’re bullish on this ad revenue business. We established the Sinclair Sports Group, and that will unlock value across the RSNs, broadcast and the Tennis Channel as well. We are working on several deals that will be unique to what we have done in the past. So once COVID seems to stabilize, we see advertising returning to the pre-pandemic levels and coming out of first quarter with the vaccinations. Even though there is uncertainty, we’re very confident on that we will exceed the budget first quarter revenue numbers from an ad perspective. So all that leads to very good optimism. Also, the sports fantasy gaming category will see a breakout year from expenditures as well. So it will be a new category that will help drive our ad growth.

Yes. I want to just add to that, Aaron, that we were very pleasantly surprised by the strength of core advertising in Q4, given all the political we were absorbing. As I mentioned, December was basically flat. And so lots of markets are still in shutdown. Businesses are not fully operational. But as I’m sure you’ve read, as I’ve read, economic indicators are very strong for a strong recovery next year in the general economy, and advertising is a derivative of that economic activity. So to be where we are – where we were back in March and April compared to now, I wouldn’t – I’m very pleased what’s going on in the core. And then when you start to lift some of the reduction in activity levels from COVID, which we’re having a very strong rollout of the vaccine in terms of numbers of people getting it, and I’m very optimistic about how that release of economic activity will impact our core.

Two other factors that lead us to be optimistic is that across most of our day parts, we’ve seen audience share growth, which leads to more revenue for us as well as, as Chris mentioned, the launch of T&D and that expansion. So it gives many of our stations that weren’t in the news game, a news outlet and has gotten some critical claim from our viewers, which leads us to believe that the ratings will follow as well. And so it opens up a new day part for revenue for us.

Alright, great. That is really helpful. If I could shift gears over to the Diamond Sports side, just two quick ones. Thinking about the cost base in ‘21 versus 2020 and trying to set aside kind of the shifting team payments, but can you highlight how many – how much incremental cost comes into play in ‘21 that wasn’t part of 2020, perhaps related to the app launch or other things along those lines?

Yes. So Aaron, we probably have – remember, there is initiatives related to launching the app and re-branding, but there is also cost in there as we move off of the Disney and Fox TSAs that we get out of Woodland and into the Encompass facilities that Chris talked about in his remarks. So you’re looking at, I would say, for these transitional and initiative growth opportunity costs, probably about $100 million that are embedded in 2021. But again, these are all either things that we are required to do, and then we’ll save TSA cost of repaying to Disney or Fox as a result of those, where these are things that are going to propel the growth opportunities that we’ve been talking about.

Okay, got it. And then last one for me, and I appreciate the time. You completed a debt exchange last summer, in part I think the capture discounted trading levels on the Diamond Sports debt. As you consider ways to bring down leverage and/or the interest burden now at that entity, is another exchange offer or liability management exercise still being considered? And if so, any sense of timing you can give us on that?

Yes. No, we are very interested in that. We have active discussions. We are not – timing, I can’t predict. We are more interested in doing the right deal as opposed to just any deal. And another exchange, I think could be very likely.

Okay, thank you again.

Okay, thank you.

Thank you. We have reached the end of the question-and-answer session, and I would like to now turn the call over to Chris Ripley, President and Chief Executive Officer, for closing remarks.

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

This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.