The E.W. Scripps Company (SSP) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. And welcome to the Scripps' Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. Your host and speaker, Head of Investor Relations for Scripps, Carolyn Micheli. Please go ahead.

Thanks Kevin. Good morning everyone. Thanks for joining us for a discussion of The E.W. Scripps Company's third quarter 2017 results. A reminder that our conference call and webcast include forward-looking statements and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. You can visit scripps.com for more information, such as today's release and financial tables. You also can sign up to receive e-mails anytime we disclose financial information and you can listen to an audio replay of this call. The link to the replay will be up there this afternoon and available for a week. We'll hear first this morning from Scripps' President and CEO, Adam Symson; then Interim Chief Financial Officer, Lisa Knutson; and Local Media President, Brian Lawlor. Also in the room are Radio Division Head, Steve Wexler; and Controller and Treasurer, Doug Lyons. Now, here's Adam.

Good morning everybody. This morning we're reporting financial results that mostly met our expectations. We do have some noise in the numbers, however. Thanks for joining us as we parse through them with you and explain this short-term issues and the positive longer term outlook. In a moment, I'll talk you through the factors affecting our Digital division and then discuss the company -- the start of a companywide comprehensive restructuring effort that ultimately will best align our company costs with our business goals. This is consistent with what we shared with you back at our most recent Investor's Day, our commitment to put equal energy and focus on short-term results, while creating long-term shareholder value. Let's start this morning with broadcast television where we realized the expected upturn in core advertising once you factor out the incremental upside from last summer's Olympics. Brian will give you more color in a few moments. So, I'll just say we were pleased with the health of the quarter and especially, the growth in our key categories in September giving us good momentum going into fourth quarter. Local media is the anchor of our company. Every day across this country, we serve large and engaged local audiences on multiple platforms with the news and information they need to make decisions for their lives. And it is our advertising solutions that power the local economy. Based on the evolving FCC ownership regulations, we're looking forward to the opportunity to refine our TV portfolio through our M&A strategy. We believe this opportunity to improve the profitability of the local media business will be good for Scripps and allow us to continue investment in the journalism that defines our stations. Turning to our Digital businesses. We saw a third quarter slowdown in national advertising that impacted all three of our national content businesses, Newsy, Midroll, and Cracked. The dynamics for all three are very different however. Midroll saw strong ad inventory growth in the third quarter as the company continues to lead the fast-developing podcasting marketplace. Midroll added some very significant shows to the portfolio including the hit podcast; My Favorite Murderer; and we launched our own Docu series on the cult responsible for America's largest mass suicide; Heaven's Gate. During the quarter, we also announced that Midroll will be the official podcasting partner of the NFL and will soon bring a daily news podcast to the market in partnership with Vox Media. Advertiser demand in July and August was softer than expected in part as a result of broader national advertising trends we saw over the summer. Midroll did see sales rebound in September and we're looking forward to a strong end of the year. Midroll advertising impressions hit 1.3 billion in the quarter, up from 1 billion in second quarter. Midroll and Newsy combined are on pace to grow revenue about 60% this year over 2016. That reflects the kind of audience and advertising growth we're seeking as part of that strategy for long-term value creation. Newsy too felt the impact of weaker demand in the national digital advertising marketplace during the summer. As we've told you over the last year, we've been pivoting away from the legacy web and mobile syndication revenue streams. During the third quarter, more than 90% of Newsy's revenue came from the business we've moved into advertising and it's over-the-top television product. With Newsy nearly fully deployed on the big over-the-top platforms and virtual MVPDs, it's now full steam ahead as we move into cable. As a reminder, in third quarter we kicked-off that move with the acquisition of carriage contracts from RLTV and are now working with the MVPDs to transition programming to Newsy. As we head into next year, we anticipate strong audience and revenue growth at Newsy from the development of the OTT market and now the addition of the dual cable revenue streams of advertising and carriage fees. We expect Newsy will end 2018 with about 40 million pay-television subscribers, alongside its distribution in the quickly developing OTT marketplace. Our strategy for Newsy is also consistent with that of our acquisition of the Katz broadcast networks. We know consumers are no longer bound by certain media platforms and instead are seeking out the content they love across cable, over-the-top and over-the-air. As a content company, we're developing brands and programming that our audiences will seek out and spend time with. Both of these businesses; Katz and Newsy are fast-growing with strong upward trajectories for a long time to come. Now, I'd like to talk about Cracked, which has clearly not lived up to our expectations. We've often told you that we would throttle back the expense lever if one of our national content businesses weren't performing to the levels we expect. That's where we are today with Cracked. The business has not been able to scale and execute to our expectations and the impairment and write-down signals that change. We're working with the business' management team on a plan that will bring the business to profitability in 2018. Finally, I'd like to discuss our large scale corporate restructuring plans and where we expect that to take us. We foreshadow this activity during our Investor Day discussion. As you saw, we incurred more than $2 million of one-time restructuring costs in the third quarter and this work is just beginning. We're acting with great urgency as we move through the next several quarters to take a disciplined and comprehensive look at our cost structure, our non-core assets, and our operating performance. We are strongly committed to improving performance and positioning ourselves for continued growth. Among this restructuring work is our move to fold together our local broadcast and digital operations. We've seen terrific growth in our local digital businesses in recent years as we have put resources to work to capture more than our fair share of digital ad dollars in our markets [ph]. That success gives us a firm foundation as we reunite these operations and create new efficiencies. As I said earlier, all of this work is aimed at putting equal energy around delivering short-term results, while creating long-term value. Through our M&A strategy and expense management, our goal is to improve margins and cash flow. Balancing that activity is equally firm commitment to our growth strategies with Katz, Midroll, and Newsy. Our goal there is to build towards significant meaningful returns for shareholders and approach that like our commitment to journalism is foundational to the Scripps' scripts strategy and unwavering. And now here's Lisa.

Thanks Adam, and good morning, everyone. All of the details of our third quarter performance are in this morning's press release and we would be filing our 10-Q later today. Right now, I would like to go through some details of the quarter; our cash position as well as capital allocation, fourth quarter guidance including the Katz network. We were reporting third quarter consolidated results that were mostly in line with our expectations. In our television division, total third quarter revenue was down about 9% compared to the prior year and in line with our guidance. Retransmissions revenue was up about 20%, but was offset by $25 million less of political revenue. Television expenses were up about 6% as we guided, driven by an increase in network programming fee. Radio revenue with down about 7% and expenses down almost 3%. In the third quarter, digital revenue was nearly $18 million, digital division expenses were up about 10% beating our guidance of up high-teen. We took a $36 million non-cash impairment charge for Cracked. We also incurred $2.4 million of costs related to the start of our company restructuring effort. You can expect restructuring charges to continue for several quarters. These charges increased our net loss by $24 million or $0.29 per share. Without the charges we would have recorded a net loss of $2.4 million or $0.03 a share. On September 30, our cash totaled $127 million. Our total debt was $396 million. We closed our acquisition of the fast growing audience targeted Katz broadcast networks on October 2. Brian will give you more color on Katz in a moment. A reminder that our net $292 million financed with a new $300 million floating rate term loan. Year-to-date through October 31, we purchased about 725 thousand shares of stock for almost $14 million. Last November the board authorized a two year $100 million buyback program. We provided detailed fourth quarter revenue and expense guidance in our earnings release. I do want to touch on our fourth quarter guidance for the digital division which includes the Katz network. We told you when we acquired Katz that we expected it to have $38 million of revenue and $33 million of expense in the fourth quarter. So those numbers are factored into our fourth quarter guidance for digital. Finally, I want to talk about our retransmission revenue outlook. While we've experienced some subscriber decline since the first quarter, we expect rate growth will more than offset this decline. We expect our full year retransmission revenues to be up about 15% in 2018. Now, here is Brian.

Thanks. So good morning, everybody. I'd like to begin with our local TV station group where we reported results that were in line with expectations and ended the quarter on an encouraging note with core advertising. Core for third quarter was up slightly over the prior year, factoring out the incremental spend in the 2016 Summer Olympics. We saw especially positive core trends in September even despite the loss of nearly $0.5 million dollars of advertising from hurricane Irma on our three Florida operations right at the end of the quarter. Five of our seven top categories were up for the month including auto which was up 5% and services which were up 9% in September. Home improvement had a very strong summer, up more than 15% for the full quarter and communications rebounded with a strong quarter growing more than 50% from last third quarter. While still early in the fourth quarter we're feeling very positive about this upturn as we end the year. On the over the top front, we've now launched our local brands on YouTube TV in Hulu in addition to DirecTV Now, Sony Vue and several other new OTT services. We're pleased that we're beginning to monetize the so-called cord cutters which are really just households finding new ways to watch television. And at the same, net economics for us as cable and satellite subscribers. We have always been confident about our value of local brands and these partnerships validate the important role we play in our audiences lives. During the third quarter we launched our new original program Pickler and Ben to strong ratings and audience and advertiser enthusiasm. The show is airing of 38 markets many owned by Scripps as well as a range of other local broadcast companies. Each episode also airs the next day on the cable network CMT. Kellie Pickler and Ben Aaron are an entertaining duo and we've been pleased by their warm reception with the time audiences. In our radio Group we continue to face secular headwinds amplified by shortfalls in our largest market Milwaukie. Results across our Group are mixed with year-to-year growth in several of our markets but these were not enough to make up for the weakness in Milwaukee. We did bring in expenses below our guidance at down 3%. And finally, we're pleased to have brought into the fold the four fast growing Katz broadcast networks, Bounce, Grit, Escape and Laff. Each have their own unique personality, content focus and targeted audience demographic. And advertisers have responded enthusiastically to the Katz's programming strategy. Their growth so far has been impressive. They each reach well over 80%of the U.S. and are four of only six multicast networks that command an audience large enough to be Nielsen rated. We have great distribution partners including Next and Univision with both just signed a new long-term agreements to distribute the Katz's networks in their markets across the United States. The expanded distribution we just announced from the recent agreement with Nexstar brings the Katz network's reach to nearly 90%of U.S. TV households. And we believe we have the opportunity to further scale these networks and give more general market national advertisers a mix of well-known and original programming to reach their desired audiences. Katz will contribute a full quarter of results as we end this year and is on track to meet our expectations. And now, operator we're ready for questions.

Thank you. [Operator Instructions] And first question is from the line of Marci Rvyvicker, Wells Fargo. Please go ahead.

Thanks. Adam, can you just talk a little bit about Cracked and what happened and how likely it is to happen other parts of the digital segment. How long until you shut it down? And then also just clarify the comment on 2018. You talk about something being capital and digital that the whole digital segment or just a part of it? And then one is for Brian, we noticed sequential step down in retran in the run rate and just that shoot up or either lower side and up -- those are the questions. Thanks.

Good morning, Marci. Thanks for joining us. In short, you know we've often said Cracked that -- he we've often said that we would pull back on investment any of these national businesses and run them for profit if we felt like they weren't meeting our expectations. And that's essentially what's happened in Cracked. You know the humor category in our brand still resonate with younger audiences. Direct Sales has just been very soft. And we certainly monetize that audience in the programmatic marketplace without seeing a successful and growing direct sales effort materialize. We just felt it was really important to dial back the investment. I would say relative to the overall strategy in digital, I think it's very different circumstance than we see with our other businesses. Right now Newsy is on a fast growth trajectory as it's moved into the over the television over-the-top television business. And now we're moving it fully into cable which is a much more lucrative marketplace even yet with dual revenue streams. Cracked, as I said we really felt like you know dialing back the expense was the right move. With respect to Newsy, Midroll and Katz you know we're focused on high growth with those businesses. They operate with -- in a marketplace with scale. They continue to be brands for platforms with large general market advertisers because of that national reach and broad distribution. We -- you know we're very committed to creating shareholder value over the long-term with these businesses. And I think as demonstrated today with Cracked, we're quick to pull back any time or anywhere we think it's necessary if that view of these businesses changes. With respect to profitability in the segment, as I said you know we're --we do believe we're creating really real shareholder value. But I think the most important thing is to talk about the components. Midroll and Newsy right now are on track to put up significant top line growth this year combined about 60%. And our decision to reinvest the profits back into that business is actually a sign that we see much greater opportunity ahead to contribute to the company's overall bottom line. You know obviously otherwise we wouldn't be doing this. We're adding Katz into the digital segment in the fourth quarter. Obviously Katz is profitable today and we expect that company's revenue will grow in the mid-teens and that profit will continue to be healthy. So overall with any of these businesses obviously it's not our goal to lose money in this segment. We know our responsibility is to build value here. And you know with the move today with Cracked, I think we're proving that we're quick to pull back when we don't see that opportunity ahead. Brian.

Hey, Marci, it's Brian. Regarding our retrans numbers as we said in the past we haven't seen any meaningful decline in subscribers but we did start to see for the first time some declines since first quarter. So you know there's a lag time in the data we receive from cable and satellite companies. And so what you saw this report today is sort of a true up to the second quarter as well as you know what our run rate was for third quarter. So I think overall what we're seeing is about a 2% to 3%decline in our overall subcounts. You know what we don't yet see is the households that are moving to the virtual MVPD which again have similar net economics for us. So you know many of those services just launched over the summer. We're starting to see some early numbers but we haven't yet begun to be paid for those. So, we're optimistic that you know some portion of decline on MVPDs is moving over to these new virtual MVPD services. And, again, just to reiterate what we said. Looking ahead to 2018, we do have 36% of our cable and satellite households that are going to step-up to new rates in 2018. And I think with the guidance we gave, we should grow about 15% in revenue here. So, obviously, the rate step-ups will significantly outpace any decline of subs that we expect to have.

But let me just add a little bit to Brian's comments about what we're seeing on the retran side. We've been telling you for some time that we're prepared as a company for a future where consumers are accessing TV through a variety of distribution options. And as I said in my prepared remarks, in our view, that's about cable and satellite and over-the-top and over-the-air. So, we're really positioning ourselves very well right now by securing shelf space on all of those platforms. As Brian just said our local brands are now moving into OTT. We've got carriage agreements now with these virtual MVPDs like TV and Hulu at comparable net economic rates as we have with cable and satellite. Newsy which is one of the original OTT news brands is now moving into the lucrative cable marketplace. So, again, gaining shelf space initially on OTT and now into cable because we think pay-TV operators want the kind of programming that will help them draw in and retain younger audiences. So, at the end of the day, of course, Katz is the growing leader in multicast over-the-air programming and we see multicast and over-the-air growing quickly in line with OTT. So, Brian shared with you some of the view on where we see retrans and subs, but this is -- what's happening really validates our overall strategy around the future of television.

I just had a quick follow-up. With 36%, I assumes that's in the beginning of 2018, or does it actually flow in through the year?

Yes, it flows in through the year. Probably more of it hits around the middle of the year, Marci.

Great. Thank you.

Okay. Next we have Craig Huber of Huber Research. Please go ahead.

Hi, good morning. I got several questions. Just as a follow-up to the retrans contract renewal percentages. Remind us if you could, what's that number -- the percentage for 2017 and what is it for 2019 and 2020? Just like to fill that out. Thank you for that.

So, for 2017, we've got about 5% of our subs come up. Again in 2018, 36% of our subs come up for renewals and then looking forward to 2019, about 40% of our subs are set for a rate step-ups at that point.

Do you have a 2020 number, Brian?

Yes, its 18%, Craig.

Great. Thank you. And then I think you mentioned, Brian, you expected your retrans revenues up 15% next year, what do you think the net retrans number will be?

We haven't calculated that yet.

Does -- okay. It's something like we could get later on today or something. It sounds like that -- okay, I'll wait for that. Thank you. Just a little more detail Brain on the quarter -- just in terms of the whole quarter, auto, retail, and services, just go through that for the full quarter, I know this crowding out and all that which kind of gums up the numbers.

Yes. Well, look -- really there's two things that kind of messes with the numbers. So, it makes it really difficult to form an opinion on it. So, number one, last October, we had what was it $27 million, $26 million of political, so that makes it complicated. And then again, we had the Olympics, which were a little over $10 million and so as we've netted out things, we usually account for about 40% of that being incremental. So, auto was down 4% in the quarter, services was up 3% for the full quarter, retail was down high single-digits, travel and leisure kind of in that same range. I think I spoke about home improvement being up 15%, communications up over 50%. So, it was kind of this mixed bag, but I think you almost go to where the categories that are the biggest spenders in the Olympics right. So, auto is a massive spender in the Olympics, retail was big. So, I think it's hard to go apples-to-apples and that's why we really talked about September because once you kind of clear out everything, we looked at what's the health of the business moving forward and we saw five of our top seven categories up in September. And then, of course, October is another month where last year we had $37 million of political in October. So, with all of that cleared out, as you would expect, our categories all had double-digit plus growth comparing October-to-October. So, we have really strong momentum September and October going into the rest of fourth quarter.

What would you say Brian on a year-over-year basis your TV pacings are looking like post-election year going on a year-over-year basis, second half of this quarter?

Yes, I think it's on par with where we have been the last two months and -- but we still -- it's only November something and I think we've got a lot of business to right. Auto is very -- adds a lot as you go through each month, especially into December closing out and trying to gain market share. Same thing with retail as right now getting into the holiday season. So, I think our pacing is right where we expect it to be. But we've got a lot of points still right to finish of the year.

I'm assuming just start a penny down. So, when you said how it's been the last two months, what exactly does that mean?

In terms of where we had projected our each of those two months.

Yes, I mean -- I'm sorry, if you just maybe help us can quantify, is it up 2% or 3%, down 2% or 3% as you kind of look out here?

Yes, we don't break out month-by-month, Craig.

But I mean the second half -- sorry to belabor this, for the second half of the quarter, are you thinking that your ad revenue is going to be up -- election comparison?

And again -- so total revenue is going to be down because loss of $56 million of political. But we're certainly expecting our [Indiscernible].

Okay. But the second half of the quarter versus the second half a year ago, so that's political stuff that's messing up the numbers, crowding out there?

Yes, it's pacing to positive.

Okay, that's helpful. Thank you. And then did I hear you guys say earlier on in the call that you're going to roll in your TV digital operations, how you report it into your TV segment?

That's correct. We're anticipating looking at next year with two different approaches to the segment reporting and we announced earlier I think this year that we were organizing the company by marketplace and we're going to have segments aligned with management and operating structure. So, we've said before, local digital will merge out of digital and merge back in with local TV and radio. So, you'll see that change as we head into the year.

Are you guys going to be running that operation any different or just the head person of that, Brian, now I guess?

Yes, Brian will oversee that operation and obviously as we're bringing these two things together, we think there's a lot of nice synergies, both on the topline as well as expense synergies as we merge those two businesses together.

Maybe I missed it, are you guys going to provide like the pro forma numbers -- adjusted numbers there so you can go back and redo our models to the prior year?

Absolutely. Yes, absolutely, you'll have everything you need to do your models.

So, I guess, when you guys report next time, I assume.

That's correct. That's correct.

Okay. Thanks for all the questions -- answers. Thank you. Bye.

Thanks Craig.

Next question is from the line of Michael Kupinski, NOBLE Capital Markets. Please go ahead.

Great. Many of the questions been answered already, but I have a couple here. I know that in one quarter we had some changes in agencies which disrupted some national business. Is there any particular reason for the weakness other than maybe other geopolitical or economic issues that are going on with the national advertisers?

No, look I think, we did see some fundamental changes a year ago where -- or at the beginning of this year where national was especially light because some of those dollars weren’t yet placed with agencies. We do see a shift on some of those national dollars have moved to local, just their buying strategies, others have stayed national. So, it's hard to look at both local and national and read into something because there's probably been more moving around between those two this year than we've seen in the past. The one thing I can tell you is in our discussions with the largest agencies, in the business, they are very much looking forward to the advance of automation inside of the buying strategies for the local media. And we see multiple tests -- now we see four or five different new technical platforms being set up for that. We think that's a really important technology that will be critical to enhancing our ability to serve national advertisers. The national -- the buying of the local media for all over the country by these national agencies is very cumbersome, very hands on and so requires a lot of resources and time and we're excited about automation moving. We think that will bring dollars back to local. That may be going in network cable and other places are syndicated. And so you know in our conversations with the national agencies, they're all moving quickly toward that and trying to build the right platform for that. But we think that once that automated process is in place, we expect that it will be much easier to transact the local side and we think it's going to bring more dollars back to local.

Thanks Brian. And when looking at your ongoing restructuring and it seems like it's obviously focused on cost and centralization -- decentralization in some ways, but this review also include the potential for asset sales or how are you looking at. The review is just mostly focused on cost at this point?

No, as I said in my prepared remarks we're really looking at everything. You know Mike we're really focused on building both the short-term value as well as long-term growth. Examining all of our assets across the enterprise, making sure we have the right assets, making sure we've got the right and appropriate operating performance. You know I think sort of no sacred cows here you know and I think that's sort of reflected in my comments about the actions we're taking at Cracked as well. I wouldn't necessarily say it's about decentralization. I do think it's about expense and greater efficiency from an operating performance perspective.

Thanks and I was wondering if you can give us an update then on the M&A environment in your current application type [ph] acquisitions and what you're seeing out there in the marketplace?

Yes, I mean I think everybody's sort of waiting right till the things resolve themselves with respect to FCC regulations, so right now things aren't. I would say particularly burning. I do think potential changes at the FCC spell a lot of opportunity for us very much in line with that restructuring as we focus on operating performance. You know specifically within the local media business. You know we're focused on what we call a buy sell swatch strategy and the opportunity to go deeper in markets where we already operate network affiliate stations.

Great. That's all I have. Thank you.

And next question is from the line of Dan Kurnos, The Benchmark Company. Please go ahead.

Thanks. Good morning, Adam and I guess Brian to an extent. May be just asking Mike's question a little bit differently, high level hypothetically as you make this larger push in a national given the weakness we've seen just in that category and how it impacted you know some of the well currently digital businesses. Are you going to start you know does that -- do you think that once you continue to scale those that will help insulate you against further pressure in national or because of may be some of Brian's comments if you have the opportunity to push more into programmatic because it's you know more of a streaming offering that you might be able to take outsized ad dollars as that market continues to evolve.

Yes, let me let me start. You know the band -- to start you know obviously scale is critical for these businesses. And you want to control, I think as much of the inventory as you can as you're sitting down with advertisers and presenting them with the options you know with the move at Newsy into the OTT space. And you know we're really pleased to see that 90% as I said of Newsy's revenues now coming from OTT obviously now you know we're focused on moving our local brands also into the OTT space. So that we can tune [ph] audience across local broadcast cable as well as OTT and present our advertisers with the largest audience we can. I don't think that changes both Newsy and Midroll's challenges were in July and August which we saw as sort of a temporary summer slowdown .And we have begun to see that rebound in September. So you know despite what I think is a sort of seasonal slowdown may be it was even a little bit unusually strong this summer. We still expect those national businesses to grow about 60% year-over-year together. And of course Katz came in on track. As Brian said it continues to be on track in fourth quarter with respect to the work they're doing with national advertisers. We have seen sort of a trend and I think it was exacerbated in the summer time where in the digital marketplace, in the national marketplace agencies were placing their buys later and later. So early on you would have an agency placed their buys for a quarter -- ahead of the quarter then it started to creep into the quarter. And you know during the summer it seemed to have moved even further into the quarter, making it very difficult to be able to capture as much revenue as possible with our brands. As I said earlier both at Midroll and Newsy September seems a lot, it seemed a lot healthier. Midroll mineral actually had a record month in September with the most advertisers and revenue in one month. And that giving us I think really good momentum as we move into fourth quarter. Brian, anything further with respect to the local national marketplace?

Dan, I think you know my comments to Mike earlier about just you know, we think automotive -- automation is really critical to bring back dollars we've lost from the national line and we've been talking about national declining last two or three years. And we think a lot of it has to do with you know the structure by which it takes to you know bring you know put together ad buys that are going to go 100 or more market state. You know once that that automation is in place it does open up the opportunity for advanced advertising and programmatic which we do think well you know now allow us to you know target new dollars more niche dollars. And so you know I think there's a lot of opportunity ahead as we move toward you know a more standardized and automated platform. You know at the end of the day obviously we have finite inventory. You know because you know there's automation brought to it, we still will be able to control our pricing quite frankly for the buys that we've been working on. You know we've seen the efficiency of the buying process but in some cases we've been able to increase our CPM. So I think there's a lot to be optimistic about. And you know we believe there's opportunities for new dollars in this space as we move through. We think you know expansion into space is going to be very aggressive. I mean I think 24 months from now you know the national buying process is going to look very different and a lot of the dollars are going to flow through there.

Got it. That's helpful. And then just Adam, I'm thinking about the expense side on digital, I mean you're understanding that you obviously pulled back on Cracked, your digital expenses were only up I think about 10% in the quarter. Obviously you did pacing a lot higher than that. And you have had some outsized growth at Newsy and Midroll. So just how should we think about you know digital expenses going forward. And are you going to reallocate some of the Cracked dollars over to your growth to your vehicles?

Roughly with respect to the expense dollars?

Yes.

Yes, I mean I wouldn't look at it as a reallocation. I think we're focused on dialing back the investment at Cracked and bringing that business to profitability in 2018 to make sure it contributes. I think the expense profiles for Newsy and Midroll will continue to be scaled for the opportunity ahead which is to say you know we've know we're creating real value. And I don't think we're in any unnecessarily focused rush to make those businesses profitable when we know that they're in this high growth stage. I would say with respect to expense in general across the entire enterprise. You know you should look at this restructuring as the opportunity we're taking to sort of tidy up and reset the table for the company's future, both creating greater short-term performance, better operating margins and cash flow as well as supporting that long-term view.

Great. And then just one more for me, and I apologize if this was in the release but did you -- was there any change in the economics with Nexstar on the Katz deal or in the terms?

No. Yes. Correct. All of that was modeled in our original estimates.

Okay. Got it. All right. Thank you very much.

Thanks Dan.

And next we have Kyle Evans, Stephens. Please go ahead.

Hi. Thanks. I'm curious about the rationale for putting Katz in the digital segment given the revenue streams there. And are you going to give us enough information on a quarterly basis to separate Katz from the likes of Cracked?

So I will say that we are going to give you enough information moving forward so that you can continue to model these businesses and track their growth. Were also committed to giving you information beyond just you know revenue metrics for example. So that you understand how each of these business is pacing where they are on the Newsy front that includes sub counts or with respect to Katz. It includes distribution. So we really do want to provide the transparency you need. There's no attempt here to may be the waters here. We're just really trying to make things as clear as possible for you. Why we put it in there? You know from our perspective these businesses all have the common factor that their own national businesses, they are all focused on the national marketplace. And so I think you ought to expect that as we move ahead, we're managing the business by marketplace. And we want to provide you the information that you need so that you can model the business by marketplace as well.

But just to be clear does Katz have any meaningful digital revenue inside of it?

Katz has a little bit of digital revenue but I think that's sort of beside the point. Don't forget that Katz is delivered over DigiNet and it’s a multicast platform and that's sort of the framework as we move in transition the digital segment into a national segment. So it's label digital today. Remember that as we move into next year, local digital will be coming out of that and merging in with broadcast television and radio. That combined will become a local segment and these businesses that remain won't be digital, they'll all be focused on the national marketplace.

Okay. That makes sense. It sounds like you are seeing retrans declines possibly on lagging payments as consumers transition from the cable set to the virtual and OTTs first off. Is that -- Did I characterize that correctly? And as a follow on to that are you seeing subtrans differ by market size. I know you have about a half dozen station you know top DMA, top 20 DMA and you go all the way down into the hundreds?

So it's Brian. We're not seeing, it really changes by market. We're seeing a little bit of changes by companies. So some of our MBPDs are you know the second quarter and I mentioned you know the data we get from them and the payments lag by a quarter. So you know some of them are very much in line with where their subs had been previously. And then there were a couple that you know had more dramatic changes. Craig asked the question earlier just you know we talked about the 15% increase in our retrans revenue for next year and he asked the question about net retrans for next year which we are projecting low double-digit growth next year in net retrans.

Low double-digit in net retrans?

Yes.

Got you.

Did I answer the rest of your question?

Yes, you're not seeing DMA size driven changes in your subcounts?

No. But keep in mind. So we are expecting to start to see now you know the benefits of these virtual MBPD services that are launching in the OTT space. And keep in mind they kind of started a large market and are you know launching DMA by DMA kind of scaling down to the smaller. So you know if there -- if that trend exists and we really haven't seen it but it's you know it's probably because that's where they started spending their money in their marketing and advertising first. But you know we are expecting to see in the next quarter or two. You know suddenly we'll be getting revenue from these new over-the-top services. You know we're starting to see some numbers. There is clearly you know a direct relationship between you know the cancellation of retran MBPDs and move to OTT. I'm not saying it's a one-to-one. We'll figure that out in time. And I think it's our expectation that as we move forward and this becomes a more meaningful revenue stream that -- all that we transfer will be moved back together reported consistently.

Great. Thank you.

And next question is from the line of Barry Lucas, Gabelli & Company. Please go ahead.

Thank you. Good morning. I have a couple but I just want to start off on a small area. Brian, you talked about the launching a new show and it's in 38 markets what would that reach be?

Over-the-air -- over-the-broadcast air, Barry it's about 20% of the country. And then obviously with you know its distribution on CMT that picks up another you know 50% of the country.

And how would that compare to some of the other products that you've produced in-house in terms of launches?

You know typically when we launch shows, we build shows for ourselves and make sure that they're going to be profitable on ourselves and then you know we take them out for you know national distribution. So you know I think that you know if you look at like the list and so forth you know that ran for a number of years just on our stations before we took it out to syndication. This was a little bit of a bigger swing for us, it had more international appeal. And so part of our strategy right at the beginning was to launch it in syndication. We knew that where the marketplace was, obviously, we track what shows are being canceled, where is the availability, what programming -- what time period is going to be available, not only on other -- our stations, but on others. So, this is pretty much in line with where we expected season one to be. The nice thing about having a relationship with CMT, it gave us the national scale to be able to get into the national barter space into the national sponsorship space. So, I think this is very much on line with exactly what we expected for season one.

And just shift gears here. Lisa pro forma for the Katz, where would you put debt or net debt cash, however, you want to describe that?

So, I think we talked at the end of the quarter; we had $396 million of debt. Closing the Katz deal, we added $300 million with the new term loan B.

So, were talking on a net basis somewhere around $570 million?

Yes.

And that stepped up the leveraging, it just sort of moves the topic back to M&A and TV station marketplace. The rules look like they change in potentially in less than two weeks and leverage is now appreciably higher than it was just a short time ago. So, how does that alter the strategy in an area where I think the company really needs to grow scale in the local television business?

Yes. Barry, First of all, we're, I think, very focused on this opportunity and we're focused on the opportunity in a couple of ways. First of all, we think there's a lot of opportunity for the industry to sit down and discuss station swaps, in which both parties walk away from the conversation with more profitable enterprises as a result of combining assets from different markets. And in that case, there may be situations where we would bring on a second station in the market and potentially exit in another. I do think there is going to need to be potentially some capital deployed in this space and we think we have plenty of room still to get the work done that we want as we focus on optimizing our portfolio for better performance.

Okay. Let me take it one step further here, Adam and play Devil's Advocate. And I know the discussion regarding expansion of digital over the last year has included the potential to slow expansions. I think the company has been fairly straightforward on that. But when you look at writing down the purchase price in effect of Cracked at a time when you're stepping into a $300 million acquisition calls into question capital allocation. And I think a number of us would like to know -- and you've been very articulate about this, but how do you give investors more confidence that this is the right move to make at that point in time when you just text out a smaller amount, but still meaningful?

Yes. No, I think it's a fair question. The Katz acquisition for us was very consistent with our strategy to ensure that this company is focused on long-term value creation, particularly as we see the future of television evolving. Katz, we expect, will grow both revenue and profit. Revenue I think in the mid-teens over the next couple of years and we think that the profit will be healthy, particularly as Katz delivers at the scale that we think that business can get to. And I think Brian talked about the fact that it's already reaching just about 90% of the country and has room to grow while it transitions its advertising mix from a mix of DR in general market over to general market. So, having a growth business that's adding profit to the company to me makes a lot of sense and by the way it's focused on the future. With respect to the Cracked write-down and our continued focus on growing the opportunity at Newsy and Midroll. Look, we have always felt like it's possible to both deliver terrific short-term results as well as set the table for long-term value creation. I think the company has a history of doing that over the years and we intend to continue to execute that strategy moving forward.

Okay. Thanks for that.

All right. Next question from the line of Davis Hebert, Wells Fargo Securities. Please go ahead.

Hi, good morning. Thanks for fitting me in here. Just a quick question on leverage. You mentioned adding the $300 million of term loan for the Katz acquisition. I wonder if you could give us pro forma leverage including that deal?

So, it's Lisa here. So, when we -- if we look at where we are as of September 30th adding in the Katz acquisition, we're about a little over five -- 3.5 times.

And is that on an LTM basis or an last eight quarter basis?

Its last eight quarters.

Last eight quarters. Okay. And then given some of the softness and guide here, just curious, do you feel like you're still on track to hit that two and a half times by the end of 2018, knowing that's a little bit of ways off and you still have political to come.

We're obviously looking at budget for 2018 and with political coming in, we'll certainly be delevering over the course of 2018.

Great. Thank you.

All right. Then next question is from the line of Alejandro Luciano, MFS. Please go ahead.

Hi guys. Just two quick questions. One was on the restructuring costs. So, what should we expect in terms of you mentioned margin benefit, so can you quantify that? I mean you're going to spend X amount and that's going to lead to this much of margin improvement? And then my second question is on the ability of delever, is that going to include paying down debt? Thanks.

So, -- hey, it's Lisa here. We're still working through the reorganization and the restructuring. And I really don't want to speculate really at this time on the amount, but we expect this work to continue as early into next year. As Adam said, we're strongly committed to improving our operating performance and we're taking a very comprehensive look at all of our cost.

Thanks. And then the second question?

Can you repeat the second question, I'm sorry?

Yes. Just on the guidance to get back down 2.5, does that include -- are you guys planning to do debt pay down or is it just more of a EBITDA?

It's more from EBITDA.

Okay, thanks. And then sorry -- one last question. Cash taxes for next year?

We expect to pay really just minimal taxes for next year. Obviously, pending what's happening in Washington.

And do you become a full tax payer in 2019, is it or--?

I think we would expect to become full tax payer in 2020.

Got you. All right. Thank you.

Okay. And the final question in queue is from the line of John Corrick, JK Media. Please go ahead.

Yes hi. Just to beat a dead horse on this retrans. You've consistently said -- you were the one of the first ones to say earlier in the year that if we lose here, we gain there. It's a wash. So, now you -- basically you're saying we're losing 0.5 million, 600,000 subs, but we'll get it back next year? Why wouldn't you be getting it back in 2018? I mean I assume you're monitoring this thing closely. There's going to be 4 million of these alternative distributors, 4 million subs at the end of this year. So, why would it impact 2018? Aren't you going to look at the end of the year as to where those lost 500,000 went and then get paid for them immediately?

Hey, John, it's Brian. In this last quarter, we received our true-up or our numbers and our payments from the satellite companies for second quarter. So, they pay -- and we get the numbers about a lag in date of about of course. So, that was the first time we started to see the erosion that was something meaningful. We had therefore applied it to third quarter assuming that whatever they lost wasn't going to come back. But these over-the-top services weren't even launching until -- the first of our markets launched in the summer. Some of our markets still haven't launched. Hulu is just beginning momentum. Now, we have contracts with all these guys and they're just starting and they're beginning to build and a subscriber base. But just like we went back and trued-up from the stuff we got in the second quarter where we started to see some declines. We haven't yet begun to get payments because we haven't yet begun to see the numbers. So, there will be some revenue coming in, yes, in the fourth quarter. But I think it will be noisy as subs drops and other people shift. So, do we expect a large percentage of these households to move from MVPD to virtual MVPDs? We certainly hope so and that's our expectation. But when those services actually begin? When markets launch. So, in some of our smaller markets, you could subscribe to pick a service today, but we may not have the local channels launched even though the service is launched. And so it's not to the local channels launch that we would actually begin to get--.

All right. I get that, yes. Okay. But in the long run meaning a year or so, assuming that your lost traditional subs aren't disconnecting all together, you will track it and get paid?

Of course John .But we don't think people are stopping and watching television. Television remains a really important part of their lives. I think people are just choosing to find a different way or a different provider to provide that service. And we think that's all happening in real-time right now. And I think it will flush itself out in a lot of clarity in the next couple of months.

Okay. Thanks a lot. I'll see you next week.

Thanks John.

Bye, bye.

Thank you. And there are no further questions in queue at this time.

Okay. Thank you, Kevin. And just to sum-up, in our broadcast business, nice core advertising momentum going into the fourth quarter and 15% growth ahead in 2018 for retrans revenue. And in our national businesses, the addition of the fast-growing Katz network, new podcast, and inventory for Midroll, and the launch of Newsy into the lucrative cable space. Thanks for participating today and please feel free to call me with any additional questions.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining, while using AT&T Executive TeleConference. You may now disconnect. Have a good day.