Sinclair, Inc. (SBGI) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to Sinclair Broadcast Group’s Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to your host, Lucy Rutishauser, and she is 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; 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 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 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 company’s uses our 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. And thank you for joining us. I want to start off by expressing how honored and proud we are at Sinclair having recently been added to the Fortune 500, which started 50 years ago as a single UHF station in Baltimore has grown into a sizable diversified media and technology company with best-in-class local news and sports content. We look forward to even greater accomplishments in the years ahead. Now, getting to the results. We are pleased to report a strong second quarter, which came in at the upper end and in many cases exceeded our expectations and guidance, as the ad market continued to recover and we continue to prudently manage our costs. Of particular note the Local Sports segment performed well. Ad revenues on a per game basis were higher than forecast and we’re up over the second quarter of 2019. A trend we expect to continue over the remainder of the year. Local Sports distribution revenue was aided by lower distributor rebates than expected. Our Broadcast and other business media revenue came in at the high end of our guidance range. Core advertising adjusted for station sales was down only 1.5% from the second quarter of 2019. And distribution revenues exceeded our guidance. Adjusted EBITDA also exceeded guidance driven by lower than expected expenses in a number of areas. Total company adjusted EBITDA was $433 million was well above the high end of our guidance range of $378 million, with both segments exceeding expectations driven in large part by lower than expected expenses in the quarter. Lucy will give you more details later in the call. Finally, total company adjusted free cash flow beat the high end of expectations by $55 million. Adjusted free cash flow per share is almost $17 or $1.264 billion in total over the trailing 12 months. Viewership stats for our regional sports content have held up well compared to 2019 far outperforming national NBA, NHL and MLB viewership comparisons over the same period. This really underscores the power of local content. The demographics of our viewership continue to show strength and younger viewer cohorts groups which are a key focus in our efforts around making sports viewing more interactive and personalized attributes favored by younger viewers. Now, I’d like to give you an update on Tennis Channel. In July Tennis Channel completed a long-term rights renewal with the All England Lawn Tennis Club that will see Wimbledon the world’s oldest tennis tournament, remain on the network through 2036. The channel saw its highest rated June ever culminating in the most watched match in the channel’s history, a French Open men’s semifinal that generated over 5,000 average viewers. In late May Tennis Channel unveiled a new app and website that gives fans an unprecedented experience with the most access to tennis statistics and news than anything previously on the market, which currently rates a 4.8 out of 5 stars on the Apple App Store. Standalone subscription service Tennis Channel Plus stream more than eight million hours in the first half of the year was the number two paid sports app in America during the French Open and top 10 for all paid apps on iTunes. Meanwhile, the network continues to expand its global reach with Tennis Channel International Games in Germany, Austria, Switzerland and Greece. During this time Tennis Channel also earned 15 Telly Awards for excellence in video and television. On the topic of sports, I’d like to spend some time addressing our direct-to-consumer or DTC efforts. We continue to push forward on our business plans and have made many key hires as we march towards our initial product launch date targeted for the first half of 2022. You may have seen materials disclosed via an 8-K in June as a result of expiring non-disclosure agreements with certain Diamond creditors, which – in which we provided an overview of how we think that – or how we think about the DTC product. We continue to engage with the advisors of various stakeholder groups on financings and exchange offers for Diamond. There’s no question video consumption habits have and are continuing to change, with people opting to consume content outside of traditional linear channels. So, we need to be able to provide them with content however and wherever they want to receive it. Having said that, we believe that demand for sports content within the traditional cable and satellite bundle will continue to be strong as evidenced by the rating strength of local sports that I referenced. In fact, our proprietary research shows that any cannibalization that a DTC product may have on cable and satellite subscribers is expected to be relatively low. And we also believe distributors will continue to value local sports content as important programming, not only because their customers desire it, but because it remains economically attractive for distributors. Cable and satellite providers as well as virtual MVPDs that carry the RSNs will continue to benefit from obtaining this programming from us at a favorable wholesale price, which provides the consumer a good value for their cable satellite or virtual subscription. DTC is not expected to appeal to everyone. Consumers that are most likely to gravitate towards the product are the younger demographic cohorts who are more likely to be cord cutters or cord nevers who desire a more interactive, personalized and community driven experience. We’ve done focus group studies on what functions and features the younger generation wants from a sports app. They are more focused on the community of fandom, interactive elements that they can engage and talk about with other fans, as well as contests, rewards, promotions, games, merchandising, and of course, legalized sports betting were permitted. For some fans watching the entire game is less important than being entertained by the experiences built around the games and their home teams. Importantly, the economics of monetizing a DTC user are different from your traditional linear local sports viewer. Having fans access games via an app that is on our platform gives us a direct line to the viewer and as a result unlocks a whole set of opportunities to engage and monetize these consumers, given the direct relationship with viewers, we’re able to create a Metaverse or marketplace, where we can serve up a more personalized and optimized experience for the viewer. At the same time, the platform supports targeted advertising, which commands a premium price, as well as creates marketing opportunities for other interactive elements within the viewing experience that can also be monetized. So having said all that, we do believe the market opportunity for DTC is attractive. If just 5% of our homes that we reach with RSNs were to subscribe to a local sports DTC service it would represent 4.4 million households. And while the subscription revenues alone would be meaningful, we would expect the total revenue to be around double that level due to the advertising and other monetization opportunities that I just mentioned. And our research shows that a 5% penetration rate is very achievable with minimal cannibalization to the traditional MVPD subscribers. Now, I would like to address the valuation of our securities, which we believe are significantly undervalued. It may help to walk you through a sum of the parts valuation of the company to demonstrate the true value of Sinclair. I will start with the four assets that are not explicitly part of our Broadcast or Local Sports segment that nonetheless have real value that must be considered in a sum of the parts valuation. The first of these assets is our stake in Bally's for which we have penny warrants to purchase 7.9 million shares, and another 3.3 million in penny warrants that can be earned subject to performance targets, which we believe are very achievable, and options for another 1.6 million shares at various strike prices for a grand total of 12.8 million share equivalents. At Bally’s current share price these warrants and options would be worth over $600 million with a cost to exercise of approximately $60 million. Then there is the value of our licensed spectrum, which we have quantified in the past at an approximate valuation of $1.7 billion based on applying a $1 per megahertz spot valuation, which was the average price in the last SEC spectrum auction. During – third, is an approximate remaining $1.2 billion net present value tax shelter benefit that came as the result of our RSN purchase back in 2019. Forth, there are non-core businesses and equity stakes we have in such things as Playfly, Saankhya Labs, Dielectric, ONE Media, and dozens more investments which together we believe have a book value of approximately $200 million and which we believe have significantly higher market value. We have a strong history of deriving value from our non-core asset investments. When you include what we believe the value of just these four groups of assets are worth alone, they equate to a per share value well over what the share price is today. Even after accounting for the cost to monetize these assets. We do not believe the value – this value is reflected in our market price based on where our stock is trading today. When you put even a conservative valuation on our 185 TV stations, Tennis Channel, stadium, news on STIRR and RSNs and account for the net debt of Sinclair, you will get a per share value that is more than double the current level of where our stock is trading today. Finally, I’d like to highlight some of our work we’ve been doing to demonstrate our commitment to corporate social responsibility and sustainability through our ESG initiatives within the company. While our organization has been involved in with many activities in these areas in the past, we have taken steps over the last 18 months to better measure and quantify our progress in these areas, as well as put a framework in place to more formalize these efforts. We have formed several internal groups to help actively guide our activities in all three areas of ESG. In addition to our ESG Committee, which is made up of executive leadership, we also have formed working groups dedicated to sustainability, employee experience and diversity and inclusion. The sustainability group is tasked with finding ways to help lower Sinclair’s carbon footprint through lowering the company’s electricity consumption, purchasing greener supplies and recycling. We have started to measure our efforts in these areas to be able to compile and report our progress in the future. Already, we’ve identified 14 gigawatt hours of annualized energy savings potential from just – from just replacing our lights with LED lighting, and those efforts are underway. We are also working on quantifying expected electricity savings from HVAC and transmitter replacements, which we plan to roll out over the next five years. And of course, as we are able to measure these actual savings we get from these activities we will be able to report them to you in the future. In terms of environmentally friendly purchasing activities, we are proud to be one of only 19 organizations that Office Depot recently recognized for being a leader in green purchasing. This award is given to an organization that – to organizations that have high degree of expenditures with eco friendly attributes such as recycled content, energy efficiency, and reduced use of harsh chemicals. Soon we’ll be launching a contest within our company to ask all of our employees to suggest ways they believe we can reduce our carbon footprint. We believe it is important that all of our employees are thinking responsibly about the future of our planet for generations to come. We also have made good progress on the social responsibility front, which we break into two areas, community outreach, and workforce wellbeing. Sinclair has a long history of supporting the communities in which we operate, and in national causes such as disaster relief, blood drives and airing public service announcements for a variety of causes. 2020 was the first year in which we sought to measure and aggregate our community wide initiatives across our many TV stations, RSNs and other businesses. As a result, the end the results were amazing. In just 2020 alone and what was certainly a not a normal year do that due to the pandemic. Sinclair engaged in partnerships with over 340 charitable organizations. Our efforts during the year raised over $37 million, in addition to collecting over nine million pounds of food, providing two million meals and gathering over 320,000 toys, backpacks, school supplies and coats. We recently chose the recipients of our Seventh Annual Diversity Scholarship awarded to minority students who demonstrate a promising future in the Broadcast industry. Another important component of our community efforts and central to our company mission is our dedication to raising issues of local importance through deep investigative reporting on our stations, which helped us earn 350 awards in 2020 alone. This is just scratching the surface of how we give back. There are numerous community forums we sponsor and facilitate such as parades, health expos and most importantly, town halls that allow the voices of the community to be heard. The other aspect of our social focus is the well being of our workforce, our most important asset. We’ve taken steps over the last 18 months affirming our commitment to our employees, such as forming employee led workgroups, focusing on diversity inclusion and the employee experience as well as adding positions to focus on developing these important areas. We also have increased our recruiting outreach efforts to historically black colleges and universities, launching a new employee recognition program, and have enhanced our learning management system, so that our employees can have a more active role in furthering their learning and development and career progression efforts. Lastly, we’ve made good progress on the governance front. We recently announced the expansion of our Board of Directors from nine to 11 members, and already added Laurie Beyer, a new Independent Director and female Board member. Ms. Beyer has an impressive background and unique perspective, and has joined our audit committee. We also announced that we hired our first Chief Information Security Officer. And earlier in the year, we added our first Chief Compliance Officer. I continue to be energized by this commitment and focus of our management team and our entire employee base who make a difference every day to our clients, our viewers and our communities. With that, I’ll turn it over to Lucy for a deeper commentary on our financials. Lucy?

Thank you, Chris. Good morning, everyone. As Chris mentioned, we had a strong second quarter across all of our segments coming in at the high end of guidance, and in most cases, beating expectations. Additional financial details and comparisons can be found on our public website. Turning to Broadcast and Corporate and other businesses, they came in at the high end of media revenue guidance and beat on media expenses and adjusted EBITDA. Media revenues for the quarter increased 18% to $789 million versus the same period a year ago, due primarily to stronger ad revenues, as last year second quarter was significantly impacted by the pandemic, comparing the results to the second quarter of 2019, which is perhaps a more meaningful comparison, media revenues increased 9% after adjusting for station sold, and that’s driven primarily by higher distribution revenue. Second quarter Broadcast and other core advertising sales increased 51% compared to the same period a year ago. And we’re down just over 1% from 2019 pro forma. While the automotive category was the primary driver, the decline versus the second quarter of 2019 solid growth in our largest category services, as well as strengthen the sports betting and pharmaceutical categories offset much of the decrease. Distribution revenues for Broadcast and other increased 3% versus last year and was above our guidance range. Media expenses were 15% higher in this year’s second quarter versus last year. That’s on higher network programming fees, higher variable interest entity expenses, which were required to consolidate in our financials, as well as last year’s spending being limited to essential cost only due to the pandemic. Media expenses, however, were favorable to our guidance on both continued cost management efforts across multiple areas, as well as timing of expenses during the year. Adjusted EBITDA excluding $12 million for non-recurring items was $193 million up 33% from the second quarter a year ago, and exceeding guidance. Turning to the Local Sports segment, as discussed on previous earnings calls, distribution revenues and sports rights payments in the Local Sports segment can be impacted by the actual number of games delivered versus minimum game guarantees, which can result in rebates to be paid to distributors or to be received from the teams. As a result, our prior estimate of rebates due to our distributors was reduced this quarter by $11 million, as we provided more games than expected and which benefited our local sports revenue in the quarter. From a cash payment standpoint, there remains $180 million of distribution rebates to be paid, of which $15 million is expected to be paid in the second half of 2021 and $173 million is expected to be paid in the first half of 2022. In addition, rebates owed to us from the teams increased by $3 million for the year and which reduces our local sports rights payments. Media revenues for the Local Sports segment increased 36% to $838 million as compared to the second quarter a year ago. The increase was the result of higher advertising revenues as no professional games were played in the second quarter last year. Lower distributor rebates with the $11 million credit taken this quarter, and the absence of $124 million rebate accrual booked in the second quarter of last year. Excluding the impact of the distributor rebates, media revenues were up 12% on the higher advertising revenues. As compared to pro forma second quarter of 2019 core advertising was favorable in part due to more games played. Media revenues exceeded the high end of guidance. Local sports media expenses for the second quarter were up from a year ago, as there were no professional sports played in the second quarter of last year and therefore no sports rights amortization were production costs were professional games reflected in last year second quarter results. Of note is that our production costs per game are down from 2019 benefiting from certain cost savings implemented since the start of COVID that we believe should be sustainable going forward. Also included in this year second quarter expenses was approximately $23 million of transition services and other onetime costs primarily related to the move of our RSN production facilities, the new Bally Sports app and the rebrand. Media expenses were favorable to our guidance in part due to timing and in part due to expense controls. Our local sports adjusted EBITDA for the second quarter, excluding the $23 million for non-recurring items was $240 million up significantly from the prior year and exceeded the high end of our guidance. For the consolidated company Sinclair’s total company media revenues for the second quarter increased 27% from the second quarter of 2020 to $1.6 billion. Adjusted EBITDA which excludes $35 million of onetime expenses increased to $433 million. And again compared to expectations, media revenues were within guidance and adjusted EBITDA exceeded the high end of our guidance range. Second quarter consolidated adjusted free cash flow, which excludes the adjustments was $290 million, which is $55 million higher than the upper end of our guidance. For the quarter, we had $4.41 of diluted loss per share on $75 million weighted average common shares compared to $3.12 of diluted income per share a year ago. Adjusting for the non-recurring items, loss per share was $4.02 for the quarter versus income per share of $3.21 a year ago. Now, turning to the consolidated company balance sheet; consolidated cash at the end of the quarter was $964 million, including $539 million at STG and $408 million at Diamond. Neither credit silos revolver was drawn during the quarter and as of the quarter end, the balance barred under our accounts receivables facility was a $183 million. Total debt at the end of the second quarter was $12.539 billion. And the net leverage ratio for consolidated Sinclair quarter end was 6.4 times. Sinclair Television Group’s first lien indebtedness ratio on a trailing eight quarters was 2.7 times on a covenant of 4.5 and 3.9 times on a net leverage basis through the bonds, which is in our target leverage range. Diamonds first lien indebtedness ratio on a trailing four quarters was 6.9 times on a covenant of 6.25, which only springs if the revolver is drawn over 35%. Diamonds net leverage was nine times. During the quarter we paid down $14 million of debt and paid $15 million in common stock dividends. Turning to our third quarter and full year guidance for our Broadcast and other segments, were our guidance reflects third quarter media revenue down approximately 1% to 3% to $792 to $806 million versus third quarter of last year. This is driven primarily by the absence of political revenues in a non-election year. If you compare to pro forma third quarter of 2019 media revenues would be up 9% to 11%. Excluding the impact of political ad revenue, third quarter core advertising is expected to be up approximately high teen percent versus third quarter of last year and flat to up low single-digit percent versus third quarter of 2019. Third quarter adjusted EBITDA is expected to be between $167 million to $179 million compared to $271 million last year, primarily on the absence of political revenue. To the Local Sports segment third quarter media revenue is expected to be up to 6% to 13% the $769 million to $824 million versus Q3 of 2020. As a reminder, last year’s third quarter included a distribution revenue rebate accrual of $128 million. For the full year media revenues are expected to be up 15% to 20%. Third quarter adjusted EBITDA is expected to be $255 million to $308 million and full year adjusted EBITDA is expected to be $512 million to $652 million, which is higher than our prior guidance. And that’s primarily on more favorable ad revenues and lower sports rights payments. For the consolidated company, third quarter media revenues are expected to be up 1% to 5% to $1.5 billion to $1.6 billion. Third quarter adjusted EBITDA expected to be $422 million to $488 million and third quarter adjusted free cash flow of $221 million to $282 million. So with that operator, I’d like to open it up to questions.

Thank you. [Operator Instructions]. Our first question comes from Dan Kurnos with the Benchmark Company. Please proceed with your question.

Great, thanks. Good morning, and nice EBITDA in quarter guys. Lucy, just a quick housekeeping question, because I think I missed it. What did you say political was in the quarter?

Political in second quarter was about $5 million.

Okay, perfect. Thanks, Chris. Just high level, obviously, there’s a ton of conversation around, the RSNs no surprise in the DTC push. We talked about sort of the pivot a little bit from a narrative perspective last quarter, as we think about sort of the balance of the year. We just had, the NHL couldn’t come to terms of the IOC for the 2022 Olympics, I think you guys are still working through with the leads here, you’ve been, subject to many, many rumors, including expanding the RSN footprint, just how do we think about, how comprehensive the strategy or footprint you’d like to have going into next year? How much would that impact? The conversation you’re having with the leads? And is there any way that you can accelerate the timing of the DTC offering, understanding that standing something up like this is not an overnight proposition?

Thanks, Dan. Look, I think, hopefully, you can tell from our comments, we are there’s a lot of things going on simultaneously. We are building the DTC product as we speak, that will build upon the app that we’ve already launched. And so, it does take a while to build to put out a best-in-class product, which is what we intend to do. And I don’t necessarily think we can accelerate timing of launch, ahead of first half of 2022, as I mentioned. But we have, we’re putting all the pieces in place, to hit that timing. And in terms of the leagues and consolidation like it all, it’s all connected, as you’ve noted. And anything that we have put out probably like that 8-K is very conservative, and that all it assumes is that we move the existing rights that we have over the top, and we create, what really is a sort of rudimentary Metaverse around that we actually think the concept of a Metaverse around sports is a massive opportunity. And, really isn’t fully appreciated in any of the projections that we have talked about or released. But, there is, and as I’ve said this before, and I’ll say it again, but we believe that the consolidation of the RSN space of the other complementary rights is inevitable. And you’re, of course, probably reading about various rumors about that. And we intend on being a part of that consolidation. And we think it has just massive industrial logic, not only from a linear perspective, but even more, so on a direct consumer perspective. And we think there’s a chance to be a leader in direct-to-consumer sports here in the U.S., and whoever is that leader in the U.S. will have a great position to be a leader globally as well, just with different rights. So, there’s a lot of moving pieces, but the picture is becoming much more clear.

Got it. Super helpful. And then, you spent a lot of time on value and value unlock, you’ve kind of dangled a few things out there, not really sure how we should be thinking about either timing, willingness, to kind of pursue some of those actions in the near term, given all of the underlying that you just talked about, or maybe that helps facilitate some of the things you’ve talked about. And then alternatively, you’ve historically said, after you guys purchased a just absolute massive amount of your shares previously, that you were trying to be mindful of the float. I mean, has that thought process changed at this point at current levels?

But we – all the things that we’ve talked about in the past are still relevant, our flows are –where our net debt targets are? What are other opportunities and investment requirements are? And so that’s all that goes into the funnel, sort to speak in terms of our decision making. hopefully you can tell from my prepared remarks that it’s becoming painfully obvious that, the market doesn’t understand the value of Sinclair. And typically, we – when that type of situation happens is when we’d like to add.

All right. Great. Thanks. Thanks for color in the next quarter.

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

Thanks, Chris. Yes, you mentioned the 8-K and the presentation to bondholders, maybe around fresh capital for the DTC initiative. I was just wondering if you had any commentary around the cost of the DTC launch, and if you’ve been able to size that yet? And do you think that you could do this based on the current balance sheet and cash flows? Or is it kind of a precedent condition to have fresh capital in order to launch it? And as you structure that business, do you intend to put the DTC platform within the Diamond legal structure? Or is the intention to keep it outside like you’ve done with the Bally’s shares?

So there’s a lot of questions in there that I can’t answer due to confidentiality agreements that have been signed and things still in flux in terms of what the final structure and funding outcomes will be. But what I can say is that, when you take a look at any direct-to-consumer strategy, the number one cost that you have is content. The second cost in a direct-to-consumer strategy is subscriber acquisition costs. And those are your two big expenses. And what’s so unique about the situation we have is that we’re loaded with premium sports rights more than, anyone else in the country. And essentially, the content costs are already there. And in terms of subscriber acquisition costs, we also have a tremendous footprint of sports across our broadcast stations, RSNs, Tennis Channel, Stadium and of it just the best sports there are and it’s a great place to seek subscribers. And so we have huge advantages in launching a direct-to-consumer strategy, because of those two structural features within this Sinclair complex. So, the costs are – we have a significant cost advantage from anyone who would be thinking about doing this on a de novo basis. In fact, you probably just couldn’t do it, because you wouldn’t be able to get your hands on these rights. And that the funding, there will be a funding requirement; it’s still being worked on the details, which we will be happy to explain, once it has been finalized. But there are a number of different ways to do it. And it’s not as because of our advantages. It’s not as significant as one may assume.

Great. And then Lucy, I know that you’re not yet guiding to next year, I think one question folks will have is whether or not we’ll see a snapback in the net retrans. I think this year is kind of thought of as more of a timing issue. So is it right for us to think about the negative growth this year as a timing issue, and that we should at least see something pretty healthily positive for next year?

So, Steve I’m not going to, at this point, this early date get into the 2022 guide on net retrans. But what I will say is, you are correct this year we had, as we’ve talked about on multiple earnings calls. The mismatch between the network renewals, the distributor renewals and the fact that we really only had the one renewal coming up here in the third quarter and that was all. Next year, what I will point you to is the mismatches are, you really don’t have those kinds of mismatches for next year. So, we do have some network renewals to come up at the end of this year. But we also have a major distributor that comes up at the beginning of 2022. So again, you don’t have the same kind of timing and mismatches that we had in 2021.

Thank you.

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

Hi, thanks. I hope you would oblige me with a few questions. If not just tell me and I can follow up later. I guess, I’d like to ask, can you confirm that the STG retransmission agreement expires here on August 15? And if so, I know you did give any commentary or comments about, any update on the negotiations? You’ve mentioned the past how you will approach it. But I’m wondering, given that it’s pretty imminent here, if you could give us any update on where that might stand?

Thanks, David. So, you are correct in terms of timing, related to Dish, and it is, watch our policy not to comment publicly on ongoing negotiations. So, can’t really give you more color than that.

Okay, thanks. I guess a follow up-on Steve Cahall’s question. You did recently offer some funding proposals to existing Diamond for creditors, maybe just kind of even bigger picture. Can you kind of tell us what were your goals you’re trying to achieve with those proposals? I mean, there certainly was new money presented there, there was potentially capturing discounts. Can you talk a little bit about why an agreement was elusive? And why you had to cease those negotiations with creditors themselves understanding that, you still have an open channel with advisors. And since it proved unsuccessful, how do you hope or whether next steps you think you’ll need to do to achieve those goals now?

So, I think it would be wrong to say that they have been unsuccessful. It’s been more of a series of moving towards a deal that is amenable to both sides. And as we’ve said before, and I’ll say, again, we’re not interested in just doing any deal. We’re interested in doing the right deal. And I think we’ve made progress in that regard. And there in terms of objectives, you really hit the nail on the head, it’s raising new money, capturing discount. And those are probably the number one and number two objectives and so we continue to work it and I think I would not characterize it as unsuccessful.

Okay. I mean, it looked like we were about $300 million to $500 million of new money that you were looking for, is that a fair assessment?

At this point we haven’t really commented on those private negotiations, David.

Okay. One other question if you’ll allow me so, we noticed that the adjustment to the D Sport attributable EBITDA for non-wholly owned joint ventures is now up to over $100 million for the trailing four quarters. That’s the highest it has ever been. Someone can you confirm that the increase is due to accounting for the recent sports rights renewals with three MLB teams over the last 12 months where you gave equity in the stations to the teams? And if that is correct, how would that adjustment look if you were to annualize those contracts, given a couple of them were recent and then let me just piggyback on that? That we believe you have as many as Ten Sports rights contracts to renew over the next 12 months, including those NBA and NHL contracts that just expired post the conclusion of those seasons this year. It looks like the all but one of those appear to be NBA or NHL teams? And are you going to take the same approach offering equity in the station’s to better variablize those contracts like you did with the MLB teams? Is that also what’s driving your expected 2% to 3% increase in sports rights payments in 2022 that you had in the cleansing materials? That’s a little bit less than historical trends? And those little bit of – curious you give.

Yes, there’s a lot in there, David. So, we’ll try to unpack it a bit. Maybe Lucy can try to answer the question about the amortization change. But undoubtedly, I’m sure it did have something to do with the fact that ownership was granted to our most recent renewals with the last three MLB teams. And that is a strategy, which we’ve been very open about in terms of substituting cash payments for equity distributions, which certainly variablizes our cost structure. So, we’d like that it aligns interests as well. And we don’t get into, how many teams, which teams are coming up in the future, as a matter of policy, but we tend to have teams coming up every year. And equity will be part of the mix. I can project, whether that will be the ultimate outcome for each other. There’s other ways to verbalize the cost structure. There’s other ways to sort of bifurcate the cost as well. And I think, just to get to your sort of, I think comment about our projection on costs going forward in 2022. I do want to make sure that it’s understood that’s in 2021, if you were to exclude rebates, sports rights payments would have been up less than 5% over 2020. So I just want to make sure that, that trend is understood, because I think on the as reported, it was around 7%. And when you move into 2022, we expect that to go down, as you noted, to around 2%. And that’s really just rolling our contracts forward. What you know, the in terms of renewals, renewals can sometimes spike up. The annual growth rate, as we saw in 2021. But there’s really two factors that go into the renewal discussion. One is what is the market competition for those rights? And then the second factor is, what are the team comparables for that individual team? And how do they compare to the rest of the league, in terms of what they’re getting paid and how big they’re marked relative to the size of their market things. So things like that, that you would imagine sort of like the valuation that would be done on a company. And so, in the case of our deals that were recently done, I would say that we had a favorable position as a related to market competition. But unfavorable is related to team comparable situation. And so going forward on the renewals that I see in the pipeline, both of those factors are favorable as far as market competition, and team comparable, the team comparable situation. So, I think we’ll be those renewals that come up will not have the type of impact that we saw on 2021.

Okay. And I mean, do you have any color on the $100 million plus of adjustments, or is that someone should follow-up later about?

Yes, David, if you can follow-up with us later on that level of detail. But I do want to go back and answer the prior question on the new money financing. And the amount that was cleansed in the term sheets with $500 million to $600 million.

Okay, $500 million to $600 million. Okay. And then just a couple quick more housekeeping, I think, Chris, you mentioned the last earnings call that the streaming rights for the NBA and NHL were up to be renewed at the end of the seasons. Can you kind of tell us where you are on those?

We’re having productive conversations and negotiations with [indiscernible] at this point and the existence of a deadline being the next season that comes up, we think will be helpful, a helpful forcing factor to finish those drive them to the finish line?

And are you expecting an increase in the cost associated with those? Or is that something…

Yes. We don’t we don’t like to talk about terms on live negotiations. But I would point back to my comments around what goes into the dynamics of a negotiation around market competition and team comparables. And as it relates to the digital rights, we are the only buyer for those. There is no one else they can be sold to. So, we have relatively good position.

And one last just quick one, Lucy, you’d normally give a churn number in your prepared remarks. We’ve seen better video results from most of the distributors this quarter. I was wondering if you could tell us what your assumptions are for churn both at STG and D Sport.

Sure, sure. So, you’re correct in that the public disclosures that the distributors shared, slightly better churn. But at this point, we’ve left our guidance intact for what we were assuming before, which is mid single-digit percent churn for Broadcast, and high single-digit percent churn for Diamond.

So just to add to that, David, like, you guys follow us, I’m sure, just as close as we do, but the quarter-over-quarter trends of the recent big MVPDs are very, very encouraging. They don’t necessarily, immediately help you in a big way in year-over-year comparisons for Q3 or Q4, but they really point to much better outcomes in Q1 of 2022, and Q2 of 2022. So, we haven’t changed our math or our guidance as Lucy said, to be conservative, but I will say we were very, very encouraged by what we saw – what we’re seeing so far.

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

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

Hi, everyone. Thanks for having me on. Appreciate all the details. Let me start with one on the station side, Lucy, I know you touched on auto. But how much was auto down in 2Q? How’s it looking in 3Q? And how much of a drag do you think auto currently is on core add pacing, I think you had mentioned up high teens for 3Q, I mean as auto low single-digit basis point drag, mid single-digit percent drag just trying to get my answers around that.

Aaron first is the 2019 for second quarter, it was low teens down. We have a strategy that we’ve been working with the Tier 3 auto dealers to promote services, used cars as well as drilling into what available inventories they have a more segmenting where the buyers are through our omni-channel solutions that we provide to the dealers. And it’s obviously been in the news with the semiconductor chip shortage that the dealers are having a tough time getting vehicle, but that being said, the grosses are at an all time high. So, we’re working through it. Again, as a reminder, our service category is our largest category, and it’s been led by a financial insurance and the new category that has broken. I was asked about for a couple of years as a sports betting company, which were 3x up versus 20 where we first started seeing the money. So we’re in a healthy position from a core advertising position.

Okay, good. That’s helpful. And then just one more for me, Chris, wanted to follow-up on the DTC platform as you work for it to be ready for the start of MLB next year? Just for the sake of clarity, what hurdles remain in terms of right to launch across your whole portfolio, for example, have all your team and lead partners agree to the plan, appreciating you just made some comments on the NBA and NHL. And then on the other side of the coin, do you have clearance from your distribution partners to go forward with an unauthenticated DTC launch?

So on the ladder, we do. We have clearance. We have the right to do that from the distributors. And then in terms of the teams we do have to renew, complete our renewals for the NHL and NBA, and there are a few – there are several teams that on the MLB side, which we have to secure the DTC rights for.

Okay, great. Thank you very much for the time.

Thank you.

Our next question is from David Kornacki with JPMorgan. Please proceed with your question.

Hi, thank you, Chris. The DTC slide decks in the monthly kind of $19 to $20 ARPU for the service, would you expect to charge that amount? Or is the price higher and you’re assuming some level of seasonal churn and then the guide to the steady state margins of 40% in five years? Can you clarify is that only with distribution revenue? Or does it also assume a material contribution from the advertising and other features you mentioned?

So, to your later question, that is all in we know, we do think the beyond subscription revenue, there’s significant opportunities, not just an advertising, but in e-commerce and watch and play and fandom based community features. And so that margin is based on the total revenue. And what was your first question again?

Just on the ARPU for the service, it looks like, just within 12 months, around $19 million to $20 million. I didn’t know if that was the right way to look at it, are you assuming the average customer would have some churn and would be signed up for less than a year?

Yes, no, no, there is churn built into the model. Absolutely. And their annual and monthly plans built into the model. So, it’s not necessarily going to give you the exact price point. And I will say that this cleansing deck is a moment in time everything is still subject to change. And final pricing plans and packaging is still something that has yet to be finalized.

Okay. And in your prepared remarks, you highlighted non-core assets worth $200 million in book. I was hoping you could walk through with the more material assets are, what your long-term plan for some of those investments are? And how should investors think about applying the right market?

Yes. We’re going try over the – in the months to come here to try to get more detail on that to you all, as an investor community, because we do think it’s really underappreciated, something like Playfly, which we own 42% of – has just been killing it, their college NMR, and expanding into pro-NMR and also have the preeminent sports ad agency in New York. So, they’re really interesting, and they have undoubtedly accreted in value substantially. And that’s more – that’s something that they’re very well could be an exit on just sort of think of it like it has a tie in to our core business, but it’s more of a financial investment. And we have a private equity partner, well, that will drive the ultimate outcome there. And then you’ve got things like Dielectric and ONE Media, which are wholly owned and chock full of IP assets and in hard assets that really don’t get recognized. And then beyond that, we’ve got things like Saankhya Labs in India, which has increased in value significantly because they are investing in ATSC 3.0, but also in 5G, low energy efficient radio heads switch a lot of the global network operators are very interested in as 5G is an energy hog. And having radio heads that are more efficient than anyone else in the marketplace, which is what Saankhya Labs has. And also an open ran is a unique competitive advantage. So, that these are things that we don’t really talk about, because we own a minority position in Saankhya. It doesn’t – it’s not consolidated in our books, but we’ll yield significant value in the future. And so it’s $200 million of book value today, but we’re quite confident it multiples above that when exits come on is non-core portfolio. So, we will endeavor to get you more details on that in the future.

Very helpful. Thank you.

Our next question is from Lance Vitanza with Cowen and Company. Please proceed with your question.

Hi, thanks for taking the questions. Actually I have a couple if I can squeeze them in. The first just – so the conversation a minute ago around the direct-to-consumer ARPU, it might have given the impression that there would be like a single price point, but I’ve been thinking about this is multiple plan opportunities where there may be a lower price point plan for the casual viewer and then for someone who wants more access, because they’re routinely wagering $100 –– hundreds of dollars per month on sports, that that person might want to want to purchase as sort of a more inclusive type of a plan. How do you think about that, are there ultimately opportunities for sort of price discrimination here in the model?

Absolutely. Look, the model is exactly that a model at this point. So, it doesn’t have – it does have things like annual plans and monthly plans. But it doesn’t really go beyond that in terms of complexity. But when you think about how this will roll out there it was – I’m sorry, there is a casual fan, there is a sort of lower features only subscription in the model two. But that’s pretty small component. But I – what I – there will be the opportunity to create more skews and more price points in the future. I don’t personally believe that you should have too many choices, because it’s the consumer doesn’t like that. It’s called the tyranny of choice. And so, but I think you hit on something that I actually firmly believe in, and it’s not really modeled anywhere, but for a person who is heavily engaged in sports betting, I envision a significant amount of income coming name from watching play, which is the gamification, real time gamification of a sporting event, where they can play it like a video game, they can be having at risk at, money on the line positions that are changing, every 10 seconds to 20 seconds, based on their actions. And I think that’s going to be like in-game betting, but on steroids. And, actually the first we’re working on that experience with Bally’s first up in tennis, tennis is probably is set up very well to do that. But we’re going to move that same philosophy through MLB, NBA NHL too. And we think that ends up being a very significant revenue driver, not only for this enterprise, but we also see a world that you alluded to where people engaged in that type of activity will get subsidized or comped subscriptions from the sports books. And just as a casino would calm someone’s hotel room, or meals they will be very interested in comping people’s subscriptions, if they’re at a certain level of play. And so that’s I do think that will be part of the future.

And then my other question is, how should we think about the liquidity at Diamond? Given the $180 million or so of payments, the rebate payments coming down – coming over the next year or so, $400 million in cash there, is that enough to how much liquidity do you really need to run Diamond? And I’m talking about before, exclusive of any incremental capital that you might want to raise to watch direct-to-consumer, but what’s sort of the minimum liquidity that you would envision at Diamond? And do you feel comfortable from a liquidity standpoint?

We every quarter, we, of course, do all our outlook and our tasks. And we are comfortable that there is sufficient liquidity through the next 12 months. And I’ll let Lucy answer what we think a minimum amount, maybe…

Yes, that’s a little bit more of a complex question, Lance, because we are in this evolving period, with the RSNs. And rolling out the gamification, and rolling out the app and other things.

Well, look, I think what I would say on that is that there isn’t a lot – there’s a little bit of seasonal change. But since most of the revenue comes through subscriptions, there isn’t huge, there isn’t a need for a huge working capital cash balance at the RSNs. So, we’re not going to cite a specific number, but it’s not like other businesses where you need to create – you need to keep a big cash balance.

Okay. And then last, for me, someone earlier, it asked about where the DTC entity was going to be housed. And I think the concern is that it’s outside of the DSG box. But just to be clear, regardless of where this box is set up? You can’t run direct-to-consumer without the content from Diamond, right? I mean, am I wrong on that?

Correct. No, you’re not wrong on that. And as I mentioned, we’re still working on it, how that exactly, how the funding will work and what the final structure will be. But there is that everything will be done on an arm’s length fair basis. So any – wherever the – whatever the final structure may be, there will be a fair compensation paid for all parties involved.

Thanks, guys.

Thank you.

Thank you.

We reached the end of the question-and-answer session. At this time, I’d like to turn the call back over to Chris Ripley, President and CEO for closing comments.

Thank you all for joining us today. If you should need any 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 we thank you for your participation.