The E.W. Scripps Company (SSP) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Scripps First Quarter 2021 Earnings Call. At this point all the participant lines are in a listen-only mode. However, there will be an opportunity for your questions. [Operator Instructions]. As a reminder, today’s call is being recorded. I will turn the call now over to Carolyn Micheli, Head of Investor Relations. Please go ahead.

Thank you, John. Good morning, everyone and thank you for joining us for a discussion of The E.W. Scripps Company’s financial results and business strategy. You can visit scripps.com for more information and a link to the replay of this call. A reminder that our conference call and webcast includes forward-looking statements and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. The COVID-19 pandemic enhances the uncertainty of forward-looking statements we make about our operations and financial conditions. We do not intend to update any forward-looking statements we make today. Included on this call is a discussion of certain non-GAAP financial measures that are provided as supplements to assist management and the public and they are now in evaluation of the company. These metrics are not formulated in accordance with GAAP and are not meant to replace GAAP financial measures and may differ from other companies uses or formulations. Included in our earnings release are the reconciliations of non-GAAP financial measures to the GAAP measures reported in our financial statements. We’ll hear this morning from Scripps’ President and CEO, Adam Symson; Chief Financial Officer, Jason Combs; Local Media President, Brian Lawlor; Scripps Networks President, Lisa Knutson. Also on the call is Controller, Dan Perschke. Now here is Adam.

Thanks Carolyn and good morning everybody and thank you for joining us. We are very pleased today to be presenting first quarter results that met or exceeded expectations by every measure. One year after the COVID-19 pandemic began to ravage the world economies and the U.S. advertising market, we are clearly on a rebound and moving into second quarter with significant and sustained momentum. During this call last year we suspended our financial guidance due to the great uncertainty about what the global pandemic would bring. But we also promised that we would do our best to use that uncertainty and the pandemic's chaos to our advantage to play offense and to continue our quest to remake this company. Today we are reinstating our guidance out of confidence that the recovery is here and we are doing so as a very different E.W. Scripps Company stronger, more durable, even more focused, and very well positioned for the future of television. Since election day we have benefited from a resurgence in the local and national television advertising market places. Businesses have reopened, mask mandates are loosening, and vaccine rates are rising. Americans are coming out of their homes, their wallets a little fatter with federal stimulus dollars and advertisers are competing to capture them. Scripps is ready. Over a year when the nation was hunkered down, Scripps was positioning ourselves to lead and thrive. In local media we've focused on core ad sales execution, the development of new TV ad dollars, the political spending climate, and our retransmission revenue opportunity. The results we are reporting today illustrate our success in the execution of our plan in encapturing the benefits of our portfolio’s scale and reach, a benefit we expect to continue to pay off handsomely for Scripps in the form of retrenched step ups for years to come. On the national front we completed acquisitions and divestitures that were designed to maximize shareholder value and set up even greater profitability. We capitalized on our podcasting and digital audio investments with high returns sales of Stitcher and Triton. We acquired the ION Network significantly improving our cash flow profile and we combined ION with our five fast growing Katz networks and Newsy to create a new powerhouse portfolio of national television networks, the Scripps Networks. What we are today is a fully scaled television company that reaches audiences broadly across the United States and deeply in the nation's best local regions. Scripps’ media businesses reached nearly every American through cable and satellite, over the top platforms and free TV over the air. Let's talk for a moment about why free TV is so important. Free over the air television solves a few big problems in the TV ecosystem both for audiences and for advertisers. There's growing evidence that consumers are beginning to feel the pressure from the fragmentation of the streaming services. A recent analysis by Bloomberg News found that putting together the most popular streaming services now costs about $92 a month, about the same as in average cable package of $93 a month and that's before factoring in that a household still has to pay for internet. A recent Deloitte survey found that the average American subscribes to 12 paid media and entertainment services. Millennials average 17 paid subscriptions. And not surprisingly, the survey finds they're overwhelmed by managing all of those services and by all of their entertainment options, what to binge watch next, where to watch it, how to keep up with all of those monthly fees. In contrast to streaming and over the air digital in kind of these days is cheap, a one-time purchase and from there free to use. The Scripps Networks are providing popular crime and justice dramas and documentaries, classic movies, hit syndicated sitcoms and dramas, and objective national journalism and compelling courtroom coverage, and our local stations carry news and the big 4's wide sports and programming all over the air. While the subscription services themselves are investing in high priced originals to attract new subs, the fact remains that the top stream shows are the same premium off network programs that consumers lean back and watch for free on our networks. Easy to find, easy to watch, easy to enjoy. For advertisers our delivery of this desirable audience solves the problem of viewers disappearing into streaming services that don't take advertising. The OTA audiences continue to get bigger too. According to Nielsen over the air viewing grew 10% from 2019 to 2020. Court Research forecast 65 million households will be watching OTA in 2025 either by itself or coupled with the streaming, cable, or satellite service. As the leader in over the air network television and one of the nation's largest and strongest portfolios of local stations we will benefit from this growth. Growth that we think we can even accelerate to our advantage because a significant percentage of streamers aren't yet using a digital antenna. We're talking about a segment of the 40 million Americans who don't subscribe to cable or satellite. We see this group of court nevers and court cutters as a big opportunity reaching them and bringing them into OTA marketplace is our first priority. This over the air marketplace serves as the underpinning of our company's growth strategy. It's not a bet on the future, it's a play to consumer behavior today. With excellent execution in local media and marketplace leadership at Scripps Networks, Scripps is creating new shareholder value. In fact, we project the recent strategic moves of this company to result this year in $210 million to $240 million of free cash flow, a level we would have only reached in the past during a big election year. That's meaningful transformation of our cash flow profile and we're immediately putting that higher cash flow to work as we begin to pay down debt. This month, we'll redeem $400 million in bonds, our first step on the path towards Scripps’ customary levels of leverage and continuing our track record of delivering on our promises. Now, here's Jason.

Thanks, Adam and good morning. Before we start our discussion of Scripps first quarter 2021 results, I want to point out that our earnings tables from February 26th provide an illustrative look at both local media and the new Scripps Networks divisions for the full year of 2019 and quarterly periods of 2020. Those tables provide a view of results as though we have not owned WPIX New York. They also present illustrative Scripps Networks results as though the division have been formed on January 1, 2019. Just a reminder, the sale of WPIX closed on December 30th and the acquisition of ION closed on January 7th. So my comparisons today will be on that adjusted combined basis. You can find our as reported results in today's press release. Let's begin with the local media results for the first quarter. Total division revenue was up 2.2% from the first quarter of 2020. We were pleased to deliver results above the prior year first quarter, which included $18 million of political advertising. The strong performance was driven by core advertising revenue, which was up 2.3% as we saw momentum and advertising continue from the fourth quarter. We had guided to core advertising being about flat in the first quarter. So we were very pleased by these results. I'd also like to point out that in the first quarter of 2020, we had 8 million of lost local media revenue from cancellations due to the start of the pandemic in mid-March. So we were largely working with pre-pandemic comps. Political ad revenue for Q1 was $1.3 million. Local media retransmission revenue was up 15% in Q1 as we annualized the reset of about half of our Pay TV households during 2020. We also saw stabilization in our fourth quarter subscriber counts, they were about flat from Q3 to Q4, our latest reporting period. Local media expenses increased by just 3% over the air ago quarter and expenses were actually down 2% if you exclude our fixed programming costs. Local media segment profit was $56 million. Now let's turn to our first quarterly report for the new Scripps Networks division. This division includes ION, the Katz Networks and Newsy. Advertising for these networks will be sold together and their support functions have been centralized to create efficiency so our financial reporting on that division will reflect the way we are operating now. Scripps Networks revenue for the first quarter of 2021 was $220 million, down just a bit from the prior year quarter adjusted combined results and in line with our guidance. Excluding from both periods the two ION multicast networks that we shut down in February, networks revenue was flat to the prior year. Lisa will provide more color on the network's revenue performance in just a moment. Segment expenses declined 3.3% over the Q1 2020 adjusted combined results. Segment profit for the quarter -- segment profit for the networks was $95 million, delivering a margin of 43%. Also, a reminder that Stitcher was sold on October 16th and the sale of Triton just closed on March 31st. Triton's results for the first quarter are now included in the other segment. Turning to shared services and corporate expenses, they were $19 million in the first quarter, right in line with our guidance. The company's Q1 loss from continuing operations was $8 million or $0.10 per share. We made a $67 million non-cash adjustment due to the increase in the fair value of the outstanding common stock warrants during the first quarter. As a reminder, we brought in Berkshire Hathaway to help us fund the ION acquisition and as part of that arrangement issued them 23.1 million warrants at a price of $13 per share. So our stock price gains in the first quarter increased the fair value of those warrants. We realized this non-cash charge creates some noise in our reported EPS but keep in mind, this charge is completely unrelated to our strong first quarter operating performance. The quarter also included an $82 million gain from the sale Triton, $29 million in acquisition and related integration costs, and $7 million in restructuring costs. These items decreased income from continuing operations by $29 million or $0.36 per share. On March 31st, cash and cash equivalents totaled $538 million and net debt was 3.3 billion. On January 7th, the company issued an $800 million term loan and received $600 million of financing from Berkshire Hathaway in exchange for Series A preferred shares. The proceeds from these transactions, in combination with the $1.05 billion of bonds issued on December 30th and other cash on hand provided the financing for the ION acquisition. On May 15th, we will redeem $400 million in senior notes that were due in 2025. The redemption price of the notes is equal to 102.563% of the aggregate principal amount plus accrued and unpaid interest on that date. We will use cash on hand to redeem the notes so it will not impact our leverage ratio. This is a significant first step towards reducing our debt and as we move forward, we anticipate continued strong results will allow us to pay down additional debt this year. Our net leverage ratio at the end of the first quarter was 4.7 times per the calculations in our credit agreements. That's lower than the five times we projected at the close of the ION deal. Our strong fourth quarter results and ongoing momentum in local core advertising raised EBITDA more than expected. As Adam said, we are reinstating our guidance so I'd like to take a moment to look ahead at a few key items. We expect total local media revenue for the second quarter to be up in the high teens percent range, that includes core ad revenue up in the mid 40% range. We expect you to local media expenses to be up in the low to mid-teens percent range as we come up against some significant expense cuts in Q2 of 2020. In the Scripps Networks Division, we expect Q2 revenue to be up about 20% compared to adjusted combined results for Q2 of 2020. Expenses are expected to increase around 10%. We expect shared services costs of about $20 million in the second quarter as we fully integrate ION and restore some COVID related cost cuts. And for the following below the line items I have a few full year updates from our February call. We now expect cash interest outlay of 120 million to 125 million, pension contributions of about 25 million, cash taxes of 85 million to 90 million, and CAPEX of 65 million to 70 million. We expect to deliver 2021 free cash flow of between $210 million to $240 million, far exceeding what we would have generated in a non-election year prior to our recent transformation. And now here's Brian to talk about local media.

Thanks, Jason. Good morning, everybody. We've been very pleased by the continued strong performance of local core advertising since the end of last year. We entered the first quarter with uncertainty about the economy and the timing of the vaccination rollout. But January broke much earlier than usual, and each month grew throughout the quarter as the economy began to rebound. The first quarter brought together the benefits of our new business development efforts over the last year with the return of some advertisers who sat dormant for several months of the pandemic. In the first quarter, we had more than 800 new TV advertisers across our 41 markets. These new clients are providing added lift to our performance as we welcome back our longstanding clients. While these new business dollars spanned many categories, no category benefited more from our efforts than services, our largest category, which represented about a third of our total ad dollars in the quarter. Insurance, medical, legal, financial and home services all showed year-to-year growth inside of the services category. Looking beyond services, our other top five ad categories all showed year-over-year growth in March. Auto reached positive territory in March for the first time in more than a year. Looking ahead, we expect auto to stay positive through the second quarter, despite the industry's well-documented supply chain issues. I'd also like to call out the first quarter performance of our travel and leisure category, which was up nearly 100% and keep in mind, that compares to a pretty normal quarter last year before the pandemic. Although Travel and Leisure has been one of the worst hit categories due the lockdowns and COVID restrictions, it has come back thanks to the addition of sports betting. Sports betting is a lot like capturing political dollars, it's geographically based. More and more states have been legalizing sports betting this year and Scripps is well positioned with markets in seven of them already. Many sports betting companies are working to establish their customer base as the state opens up and we expect the industry spending to grow into a meaningful new core category. Also in the first quarter, we were pleased to see the NFL continue to rely on the networks and their local affiliates as a primary distributor of NFL games for the next decade. As we have expected, the NFL expanded its distribution to include all of the big four networks, adding ABC into the regular season. This move will have a positive impact on our large ABC footprint in stations and with the addition of ABC into the Super Bowl rotation we have the Super Bowl every year in the Scripps portfolio. In addition to the NFL, Scripps received good news on two other important sports rights. Late last year, the SCC [ph] conference continued its -- announced it would make a move with its football and basketball rights to ABC starting in 2024 in a new 10-year deal. Then last month, the National Hockey League announced a new agreement with ABC and ESPN that would bring NHL regular season games and the Stanley Cup to ABC in a new seven-year contract. This is a big opportunity for Scripps, which has ABC stations and some of the NHLs most important cities, including Tampa, Las Vegas, Detroit, and Buffalo. And keep in mind that NBC's agreement with the IOC for the Olympics continues until 2032. Bottom line, major sports organizations will continue to use broadcast as their primary source of distribution for a long time. I'd like to end with political advertising, although this is not a major election year, we do have a competitive Governor's race in Virginia this fall, as well as a California Gubernatorial recall election where we're beginning to see some spending. And we do expect some early spending for a few key Senate and Gubernatorial races as we work through the back half of 2021. We expect to deliver political in the low $20 million range this year. For 2022, our recent station acquisitions have put us in a strong position to outpace 2020 as I had said previously. We have 18 Senate races, 19 Governor's races, and about the same number of competitive House races that we saw in 2020. So we expect another stellar political spending year right around the corner. Now, here's Lisa.

Thanks Brian and good morning, everyone. In the new Scripps Networks Division, we have been working diligently over the last few months to launch our new business and begin capturing our year one deal synergies. We approached the first quarter with these objectives in mind to create the most efficient and effective organization that captures the synergies we promised at the ION acquisition, drive strong operating results, and lay the foundation for long-term value creation. I'm happy to report we're off to a fast start. We have been integrating our new employees from ION and elsewhere as we're building the right organizational structure, presenting our new networks up front advertising story, transitioning our direct response sales to our proven DR agency, and shuttering the low performing ION multicast networks in order to replace them with our own. We also are in the midst of planning for the launch of our new networks, True Real and Defy TV in July and the launch of Newsy over the air this fall. We expect these networks to reach more than 80% of the country by year's end. A launch so strong is only possible because we own so much of our own broadcast distribution. Our end goal for this work is to make the most of the leadership opportunity we've created for ourselves in the growing over the air marketplace so we can capture the benefits of scale, growing our audience, and advertiser base. Five years ago, Katz and ION, were each taking just 7% share of national network viewing over the air. Today we've taken share from the national broadcast networks and in 2020 garnered 26% of that viewing and that's before we launched two new networks and took Newsy over the air. And as we're growing the number of people -- and as we're growing, the number of people watching OTA is growing too, projected to go from 50 million homes today to 65 million in the next five years. OTA is a massive marketplace and Scripps owns that space. In addition to leveraging the growth in the Over the Air marketplace, the Networks Group has three other key drivers for future growth. We will expand the distribution of our networks across all TV viewing platforms, not just OTA, but OTT and Pay TV. We will continue to expand our portfolio of networks as we increase our ownership in the space and will optimize our advertising rate yield by carefully managing our mix of general market and direct response advertising for the best possible outcome. These four drivers are helping us to create a national networks powerhouse that we expect to deliver double-digit revenue growth over the next few years, as well as a highly efficient expense structure to result in division margins of more than 40%. In addition, in our first quarter reporting as a division, we were very pleased to have met expectations for financial results. As our networks portfolio moves through the upfront season, we are getting good traction from advertisers regarding the massive unduplicated national audience we can deliver to them. These advertisers see us as the solution for reaching Court cutters who would subscribe to non-advertising streaming services, but self-bundle with free TV over the air. And we're seeing building momentum in the scatter market as we offer advertisers portfolio sales, where we combine networks with similar demos to expand an advertiser's participation with us and cater to a very specific need for ad buyers. We are on track to realize the synergies we expect of the ION acquisition. In addition to the corporate cost synergies as I mentioned, we've begun to move our networks on to ION spectrum. During the first quarter we transitioned more than 200 channels from other broadcasters over to ION. This was a major move towards more fully serving the over the air viewer. I'd like to end with a few programming notes. It's been a big few months for Court TV, which provided video for its viewers and other news outlets in the courtroom for the Derek Chauvin trial in Minneapolis as well as live gavel to gavel coverage with expert legal commentary and on the ground reporting. Court TV has received high international visibility and viewership from the trial. It's full day audience on linear TV was up 119% across the three weeks of the trial, and its average weekly streaming audience was 105 million viewing minutes, compared to 20 million pre-trial. Advertisers have followed this audience growth and we expect the network's progress to continue with several high profile trials ahead this year. During the quarter we hired veteran journalist and TV network executive Kate O'Brian to lead our Newsy Court TV news vertical. Kate will lead the way in planning Newsy’s news programming lineup and news coverage strategies as it launches over the air in October. We'll be filling the day with original news gathered by reporters and 12 bureaus across the country. While we plan a number of changes to bolster Newsy’s national visibility and impact, we will not change its straightforward facts based approach to covering the news. In addition, Newsy’s distribution over the air will make it the only American television news network with ubiquitous OTT and OTA reach. Newsy is already carried on nearly every major streaming service, and the OTA launch will build on the success with audiences and advertisers. At ION we're adding more than 600 hours of new content to its crime and justice lineup this year, including offering Chicago Fire for the first time and new seasons of Law and Order SVU in Chicago PD. These networks together deliver a collection of audience demographics that are attracting premium advertisers and driving strong ad rates both immediately and over the long-term. We will harness the scale of our business to continue growing audience and national advertising share. And now operator, we're ready for questions.

[Operator Instructions]. And our first question is from John Janedis with Wolfe Research. Please go ahead.

Thanks. Good morning. Maybe one for Brian and then one for Lisa. Brian first, just on the 800 new to TV advertisers, can you tell more about meaning what was the contribution, a needle mover on segment ad revenue, is it new businesses opening up post pandemic and if not, where is that money coming from and you seem more bullish on auto versus your peers, what do you think differentiates Scripps portfolio from others? And then for Lisa, with the national networks coming together, as they get integrated into the upfront and you touched on this a little bit, but can you talk more about any incremental pricing power you're seeing given the reach with conversations ongoing, are there any anecdotal comments you can share from advertisers? Thank you both.

Hey, I will kick it off. Hey John, good to hear from you, it's Brian. As I touched on, more than 800 new business advertisers were on our air across our markets in Q1. We put a lot of focus on new business during the pandemic, as our sales reps were working from home, we put a lot of systems in place to be able to develop virtual presentations, we changed our incentive plans to really focus our business. On new business, we shared a lot of learnings across our division as we saw specific categories that were benefiting and spending more during the pandemic. And I think we took advantage of all those things. I mean, it was truly the focus, the energy, the hard work of our local sellers. As I mentioned in my prepared remarks, services really benefited from that. A real focus on people were spending money on their homes, people were taking care of themselves, insurance, medical, but a lot of money in H back [ph] home renovation pools, spas, windows, contractors, and we took advantage of all of that while people were home able to receive those service reps. So it was just a real focused effort and a real great execution by our team to a plan that we put in place early in the pandemic. As for automotive, we mentioned that it grew sequentially each month of Q1. It was positive by the end of the quarter. We're seeing, obviously the comps are relatively favorable in the second quarter, but we had a really good April and still look good in May. We believe that Q2 will continue, rolled up it'll be positive. I think, like everyone else, we're watching what the long tail of the supply chain issues will be relative to the chips, I think it'll probably impact our business to some degree over three to six months. But the foundation is already laid and I think, second quarter will wind up being a pretty good quarter for automotive.

Hey John, across our portfolio we're really experiencing the resurgence of advertisers coming back in. We as we've guided, we'll be up 20% in the second quarter. We're seeing a lot of strengthening in the scatter market, increased buying activity from advertisers. We also think our portfolio sales approach is really taking hold. We're seeing a number of cross network buys and really great rates. And so that bodes well for the upfront. We think advertisers and sellers are eager to make up for a rough 2020 and by the time the new TV season starts, we think CPMs will increase substantially, as key categories return.

Thank you very much.

Our next question is from Kyle Evans, with Stephens. Please go ahead.

Hi, thanks. Lisa, there's a lot of moving parts in networks right now, you sound like you're very, very busy. What are the limitations to adding new stations or networks, what are the timelines typically to getting Nielsen ratings on those launches? And then you mentioned kind of long-term, double-digit top line growth and 40% margins, it seems like you have a lot of tailwinds, what do you think the biggest contributor to growth will be over the next couple of years? And then I've got some follow-ons for Brian.

Yeah, so Kyle, thanks for the question. And we do have a lot going on. It's a pretty exciting business that we're building. And obviously the results, I think, speak for themselves. A couple of things, we just announced this year three, really taking three networks over the air. So we've got really to execute on those strategies. We would see -- your question on Nielsen, certainly, it takes time to build audience and as audience builds, we would add Nielsen ratings. Remember the former kids networks, were really each of them with the exception of Court TV was Nielsen rated which is very different. Which means you've got demand, you've got eyeballs watching those networks. And so we would carefully manage as we build audience, we will then move toward adding Nielsen ratings. But that will certainly come over time. And I think you have one other question, Kyle.

The limitations of adding new stations, I mean, it just -- it seems like if you can come up with a great name and find a category that's maybe under penetrated, and find content that fits it, you could add, I just wonder, what are the brackets around…?

Yeah, it is a good question because I think it's a complimentary question to our strategy on OTT. You heard me say in my prepared remarks, part of our distribution strategy is not only OTA growth, but OTT growth. And I think exactly what you're saying. We are poised to take nearly all of our brands to OTT and to find categories where we can continue to expand other content categories potentially, based on content that we already own or have access to, through licensed agreements. So I think from an OTA perspective, we feel good about where we are with the brands that we're launching this year. We will always be opportunistic and continue to watch the marketplace to make sure that if there's an opportunity, we would certainly take advantage of that. But I think my answer is both OTA and OTT certainly are where we see the opportunities.

And then I think I snuck another one in there. And that was like you have a number of tailwinds behind you right now in its platform selling, its new platforms for existing channels, its new networks coming online. Which of those do you think is the most powerful growth driver and then I'll…?

I would say that most powerful growth driver is maximizing our advertising yield, right. It is really about, we're in the early stages of bringing these businesses together. I'm really, really pleased where the quarter ended and you can see the guide that we've gave on revenue growth for the quarter. We also think that we've created a very efficient expense structure. We're very mindful of delivering on the promises that we made at the ION acquisition to investors and we're set about to do that and to really pull those levers from a growth driver perspective, certainly revenue being the biggest driver there.

Great. Thanks. And Brian, I'll just keep it to one question, help us think about puts and takes on retrans as we move across the quarters of 2021 and then the major drivers for 2022? Thanks.

Hey Kyle, look, I think as we think about retrans, we still believe that we've got a couple of cycles of growth ahead of us. And so, as we've now got new scale, we look forward to taking advantage of that just to kind of bring the whole picture back together. As you know, we completed renewals last year for about half of our subs and we're really happy with the outcome of those, and that even included Comcast rates renewing at the end of last year. If you remember those renewals drove, I think more than 30% gross retrans growth from 2020 over 2019 on a same station basis. And obviously, that resulted in pretty good margin expansion there. This year, we had no network renewals to this point, we don't have any up through the end of the year. And so the cadence of the step ups and the expenses, had been in our favor. I don't think we've given our 2021 guidance yet on retrans but I think, I can say that the timing of margin growth is entirely tied to the timing of contract renewals. And so we've got about 4% of our households renewing in 2021, we've got about 20% in 2022, and then 75% just two years from now. So hopefully that answered the question you were looking for Kyle

Yep. Without giving guidance I think it does.

Okay, thanks.

And next we'll go to Dan Kurnos with Benchmark. Please go ahead.

Thanks. Good morning. Maybe just to Brian to follow up on John's earlier question. I know you don't have a crystal ball. And we did actually hear from Expedia last night, they were going to start leaning into marketing and especially top of the funnel. So it sounds like travel is coming back maybe a little earlier than anticipated, just how are you thinking about the year relative to say 2019 and I know there's a lot of puts and takes and we'll have to see how political shakes out in the back half of the year, maybe we could start there?

Yeah, Dan look we're really excited about the opportunity in the back half of the year. I think as you pointed out, travel as a category we talked about sports betting, which has really been a nice driver. But when you look at that, the travel, concerts, sporting events, community events, festivals, all of that really has yet to break out. We've started to see in the last 60 days, visit Florida, visit Michigan, visit Ohio started a campaign this week. And so we're starting to see the states quickly open back up. But I think, very quickly now we're going to start to see the sports teams coming back, the concerts. And so we think that there's going to be a lot of energy around that. And of course, with the stimulus money now in people's pockets, we see the price of, of travel, the price of airlines all through the roof. So people are anxious to get out. They're anxious to be with each other and spend. And so we think that's going to be a real big catalyst of our drive in the back half of the year. On top of that, as I talked about, as we get to March, and now we're seeing in second quarter retail really strong home improvement, communication, the service categories is on fire. So, auto is relatively stable. I think it's going to stay stable. I don't think it's going to drop back, but I don't think we'll see a surge for a couple of months just due to inventory issues. But I think we have enough other stuff that's driving us to give us a lot of optimism. And then, I think we're building momentum in the back half of the year on political starting to move toward, what will be a boomer year next year, but already in Q2 or in Q1 and now into Q2, we're seeing issue spending in Arizona, Wisconsin, Michigan. As I said earlier, Virginia Governor's race is spending some money. There's some issue money that's getting spent in places, California recall. So I think we're really optimistic about what the back half of the year can look like.

Got it, that's really helpful. And you can cancel come to Florida, as we have enough people coming here already, Brian. Go to Michigan. Maybe on the retrans side, you gave a pretty good set of number, obviously, I think you still believe in general or kind of in that mid-single-digit decline range. I don't think that there's probably any change to that. But one thing that's come up in recent calls has just been the economics on the OTT soft front, a lot of those deals were probably struck prior to a pretty significant step up in subs. And I'm just curious as you think about upcoming network negotiations, or just kind of where you stand on the economics just on the linear side, in the OTT packages how you're thinking about attacking that opportunity, especially if the SEC decides not to reclassify them as MVPDs, which would be wrong, but doesn't seem like there's any traction there?

Yeah, look we agree with you, we think that's wrong. And we do think that these virtual services should be classified as MVPDs. But I guess that's for another conversation. The reality is Dan that, we negotiate these deals as an affiliate Board representing all the affiliates within networks. And these are two year deals, typically, something like that, three year deals. So while there's clearly been a great step up and the market has moved in the last couple of years, since these virtuals have launched, I can tell you that for two of the networks, I've been involved in the last 90 days that we've completed new renewals on new financial terms that I think reflect market value. So I wouldn't model that we're working off of old numbers there. I think the affiliates are having the opportunity to renegotiate that with the network's as often as they're renegotiating their deals with the virtuals on our behalf.

Okay, so we're getting progress there. That's good to hear. And then maybe, Lisa, one rational, one crazy for you. Just on the margin front, thanks for obviously reiteration of the long term target near Q1 crushed it though, on the national side. And I'm just curious how you're thinking about sort of -- we have 2Q guide, but just sort of the pace of expense controls over the balance of the year?

Yeah, we definitely, as you said, sort of crushed it in the first quarter. Obviously, we're just over 100 days operating as the new divisions that we're still parting ways with employees, also adding new employees as we build throughout the year, evaluating our program schedules and those sorts of things. So, our expenses as I reiterated are 40%, less margin in the near and longer term. We will have some lumpiness this year. We did announce a couple of new networks that are launching in July, Newsy over the air in October. So you'll see, a bit of lumpiness throughout the year, but reiterating that 40% margin for the year.

Okay, and then my tinfoil hat question, the beauty of AVOD or OTT and OTA is that it's portable beyond domestic borders, if you have content rights. Like crazy to think that there's a longer tailed opportunity to get some of this stuff, I know they have distribution agreements, probably internationally already with a lot of this content. But is that a crazy thought that you can start to push some of this a little bit beyond U.S. over time?

I'll answer in the short term and then Adam probably could chime in in terms of longer term. We, I think you know this, Dan. We do have a little bit of international distribution with Court TV in the UK and that's something we're certainly during the shopping trial, in particular, we saw really great engagement. However, for at least this year, our division is very focused on delivering domestically, the things that we need to deliver on both from an OTA perspective as well as an OTT perspective. As I mentioned, we've got a lot of things to launch here that we really believe will be needle movers in the CTV and OTT space for us, longer term, and then I'll let Adam take the longer term international question.

Hey, Dan. Well, so I mean, I think there's, you're pointing out to the scalability of the business. I mean, obviously I think particularly the OTT space with fast services, the free ad supported television services, you can easily see how you're not constrained by borders. I think we'll continue to look at the opportunity since we have the infrastructure and the wherewithal already set up, we'll look at the opportunity we have to continue to expand beyond North America as the case merits. But Lisa's point is exactly right. I think at least in the near term, our focus is going to be on making sure we do what we say we do continuing to expand upon our leadership position in the network television space in North America, both OTA and OTT, and ideally, expanding our ability to grow our audience and yield higher revenue from here.

Yeah, fair enough. Thanks for all the color everyone. Appreciate it.

Our next question is from Steven Cahall with Wells Fargo. Please go ahead.

Thanks. So maybe first, Adam if we think about monetization of a big four stations in the bundle, and we kind of compare that to monetization of a viewer in the network's division, can you kind of help us just think about out what that looks like, I mean, you've got an interesting business here, where my phrasing would be you kind of have a cash cow in local media, but there's some court pressure, and then you have is this growth in OTAs, maybe [Technical Difficulty] help us think about how maybe viewers shift the monetization track? And then Lisa, I think on networks, you mostly sell spots, not impressions. It sounds like the market is strong, can you just give us any sense of what spot pricing has done for those impressions and how your upfront deals might be impacting pricing as you go forward? Thanks.

Hi, Steve. Good morning. I think you're pointing to sort of an old adage that we say all the time around here, two things can be true at the same time. We think we have a lot of opportunity to continue to head in local media. The Pay TV bundle continues, I think will continue to provide strength as we renegotiate over the course of the next several years, retrans step ups. But you're right. I mean, there's some pressure on subs and this company has made a major move into the over the air space because we see a growth opportunity there. Now just be mindful, we expect that growth opportunity to pay off handsomely for both our networks division and our local media division. As consumers make decisions on their own about where they're going to consume television we have an outsized share of that marketplace. I would say I think Lisa pointed to the fact that today, Scripps Networks yields 26% of all over the air viewing. That doesn't count our local viewing, and it doesn't count our launches of three new networks this year. And so when we think about the value of a viewer, we expect the value of a viewer and local media will continue to increase as consumers as we reprice retrans and as we obviously continue to execute our content strategy and ensure that our product is very, very valuable to them. But I expect the value of a viewer for our network side will also continue to increase as we grow the share of audience we get in the OTA marketplace. One important point I'd make also, it's not a mutually exclusive proposition. OTA growth will continue to grow and a lot of consumers plug in digital antennas along with streaming services, along with participating in AVOD, SVOD and frankly, along with their use of Pay TV services. So for us, it's an all of the above proposition, and we expect to yield a higher return for each viewer as the over the air marketplace continues to grow. I mean, I think the exciting thing about our company as we've taken this position, where do you otherwise find growth businesses in this media ecosystem with a 40 plus margin, right. And I think some of you think that we're being conservative there, I expect that we'll continue to expand our leadership position, and that will in turn benefit over the coming years.

Hey Steven, thanks for the question. So a couple of things, we are seeing rates rise due to demand and obviously CPMs are also increasing. Early -- we've seen some early success on some of the programming changes that we've made on our networks and we're seeing really, really great momentum there. Also on -- and we think that bodes well for a strong upfront season. We haven't mentioned it, but the DR advertising space has continued its strong momentum from late last year into first quarter, and we're seeing demand and rate increases on the DR side. So, obviously a guide of up 20%, it's all about maximizing the mix that we have on our networks and we're really focused on maximizing those dollars, whether it's in the DR space or the general market space.

Hey Steve, one comment I'd add also is we -- Lisa did a nice job of walking through the four growth drivers that we see, for the Scripps Networks. I guess I'd add a little commentary in that, now that we've been inside the business, getting a better view of what we're acquiring in ION, they did a really nice job of building their business as a single network. But it's very clear that we will be benefited in the advertising marketplace by both bundling ION together with our other networks, and cross selling, and by better yield management, managing the interplay between direct response and general market across all of our networks in order to manage up rate. And we expect that that opportunity is probably even a little better than we had expected prior to getting inside the business and understanding the puts and takes.

Thanks Adam.

Our next question is from Craig Huber with Huber Research Partners. Please go ahead.

Thank you, a few questions. One, I'm curious how you would describe the programming market now, is it a buyer’s market or a seller's market, and I am asking that both on the Scripps Network side maybe first and then Brian, I'd love to hear your thoughts too for this syndicated program you're [indiscernible], how do you find it, you find it advantageous right now buying programming or the opposite?

Yeah, actually we are really pleased with the market at this point in time. I think many of the studios that are launching their own D-to-C products, but at the same time are licensing that content and in as many ways as they can. And whether that's through cable and in our case through OTA broadcast. I think Craig cash is king and they're looking for ways to monetize their content. And we certainly have really strong relationships with all the studios. And as I said in my prepared remarks, we are adding several 100 hours of new programming this year, and reiterating our margin of 40%. So we're really pleased with what we're seeing in terms of being able to secure really terrific programming.

Hey Greg, I am Brian, I'll pick the local side. I think right now we're on the syndicated cycle, we are between cycles, so the next season will start in September. And so most of our programming is already locked up through that point. I think, what we've learned is that when it comes to syndicated programming, scale matters. And when you represent 25% of the country with some great television stations like we have, people come to us fairly early, wanting us to be a launch partner, and trying to clear record the country with some of the country's best television stations. And so I think, we're very desirable for many syndicators, and we are a place that they start early. But there's nothing that's active right now. I would also just remind you that for more than a decade, we have balanced syndicated programming with our own programming. We have right this minute, we have the list shows that we own and produce that run across most of our markets. I think that gives us a lot of flexibility and allows us to manage our stations with either news expansion, our own product or syndicated. We get to pick what's -- because I have the best return, and the best profile for our advertisers and our audiences. So I think we're in a pretty enviable position.

And then also on the Scripps Network side, can you just name for us if you would, if you can the channels that you're going to launch this year and then what are the ones exactly that you did shut down, I am not clear on that? Thank you.

Yeah, so Craig, ION had sort of a nascent, digital sub channels that they ran, and they also ran some shopping channels. And so that was Qubo and ION Plus, those were the two that obviously in order for us to move our channel over to the ION digital sub channels, we moved our higher performing networks there and shut those down at the beginning of March. We -- so all of -- so if you think about the former case network, those networks were migrated onto over 200 channels. I think we mentioned over 200 channels were migrated onto IONs digital spectrum, which was a big piece of our delivery of the distribution synergies that we talked a lot about at the time of the ION acquisition. That help you with that so think about balance in Court TV Grid, Court TV Mystery, those are the former case networks that are now migrated. We like to think of them as over the air networks, not networks on digital sub channels, because they're all available free over the air. The two new networks we are launching True Real and Defy TV, we will launch on July 1st, a reality based, one male skewing, one female skewing. And then certainly we talked a lot about Newsy, going over the air on October 1st.

Appreciate that. Brian or Adam, the recent Supreme Court ruling has to do with transactions in your local media space. What is your thought on the Supreme Court ruling and do you think it's going to materially change things out there from a deal flow standpoint?

Yeah. Hey, Craig. Look, I think that it provides some clarity that was much needed. I would expect that the UHF discount is something that will probably be taken up by this FCC. But what this did do was give us clarity on cross ownership and most importantly eliminating eight [ph] voices. For us that's a real opportunity. As you know, we have still some upside opportunity to add a second station on markets, markets that we have a dominant position in and we've always wanted to own a second television station, but the rules prevented us from doing that. And I think there's a real opportunity for us to acquire second stations. We've still -- I think it's a little bit of a long putt to get a second big four in those markets at this point, but it's not out of the realm of possibility by proving how the local community would benefit. But even the benefit of adding a CW or mind network and independent and being able to expand our local news and create and expand some of the local programming I talked about, I think that's where our biggest opportunity is right now. Down the road, we'll see what other decisions this FCC makes but I think the elimination of the eight voices was a big opportunity for our company.

So just be clear on my end, do you think the Supreme Court ruling will be helpful to be able to get a second big four or we're at a CW from our mind network and more coming to change much both from before the Supreme Court ruling in your mind, the opportunity there for your company and others?

Yeah, for our company it does. I think the opportunity to add duopolies in markets that we were limited from having a second station from in the past, I think that opportunity now exists.

You think it's easier now? Okay. And just nitpick question, your retrans subs, Brian, were they down about 5% year-over-year?

I think that's the right range, Craig.

Okay, great. Thank you very much guys.

And our next question is from Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you. I wanted to follow up on your comments about the better than expected free cash flow. And I was just wondering if you can just talk a little bit about your thoughts about target leverage, what your subsequent capital allocation plans might be, when you might begin repurchasing stock and so forth, what your thoughts are about that outlook?

Hey Mike, it is Jason. Yeah, so from a leverage perspective, we've said it many times before, we're committed to managing towards a cleaner, flexible balance sheet. The target -- the leverage we had at the end of Q1 was 4.7, which is better than we would have anticipated when we modeled out the ION transaction. And our goal is still to get to a target leverage in the mid 3s. I think as we start to shake out some of the most significantly impacted COVID quarters from our LQA, you'll really see our delevering accelerate with the hopes of being back in the low 4s by the back half of 2022. In terms of share buybacks, the terms of the Berkshire preferred prohibit us from buying back buying back shares or issuing dividends while those are outstanding. So our focus is really going to be on paying down debt and using our new, larger free cash flow profile to do that.

Thanks for that color, and then a question because I know that you've been updating some of your stations with the ATSC 3.0. Can you just give us about some thoughts about what you learned from that upgrade and what might be the revenue opportunity there?

Hey, Mike, it's Brian. You're right. We're pretty active in the advancement of that and a lot of the testing I think for a year or two, I've been talking to others about the fact that, the first real market to launch and test in cooperation with the other broadcasters in the network's is Phoenix. And that market has been now up and running in ATSC for over a year, and a lot of testing continues there. The expectation is that, I think the target for the industry is to get somewhere in the 50% to 60% of households served by ATSC this year. And so I think by the end of the year, we'll have maybe 15 to 16 of our markets that have launched in 3.0. But there's a lot of testing that continues to happen relative to not just what we can do in local markets, I think we're starting to get a feel for that. But, what does this mean on a grand scale as you start to put the country together. So where the lighthouse is sticking in Detroit, and one of the things that we've done is carved out part of our spectrum, and basically given it to the auto industry to use as a testbed. And so we're working very closely with auto manufacturers, as well as suppliers for auto to test the viability of the spectrum relative to updating entertainment systems in cars and knowing where their fleet is, and things like that. The other thing we're testing is in places where we have two or three or four adjacent markets testing contiguous spectrum, and seeing the flow as you bounce from market to market to market, the mobility of it and the credibility of the signal as you continue to flow. So what I can say is, there's a ton of testing going on with all the right partners. And I think that there's going to be a tremendous opportunity down the road. I still think it's several years before the full country is scaled with ATSC. And I think that's when you get to the full benefits. But I'm excited about the test, the partners that we have, the results of those tests, and there's definitely going to be new revenue streams created from this, when it's all said and done.

Brian, thanks for the color. That's all I have. Thank you.

And with no further questions, I'll turn it back to the company for any closing comments.

Thank you, John. And thanks to everybody for joining us today. Have a great day. Take care.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.