The E.W. Scripps Company (SSP) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Scripps Second Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Head of Investor Relations, Carolyn Micheli. Please go ahead.

Thank you, Lewis. Good morning, everyone and thank you for joining us for a discussion of the E.W. Scripps Company’s financial results and business strategies. 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 include forward-looking statements and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. We do not intend to update any forward-looking statements we make today. Included on this call will be a discussion of certain non-GAAP financial measures that are provided as supplements to assist management and the public in their analysis and valuation 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 will hear first this morning from Scripps’ President and CEO, Adam Symson; Chief Financial Officer, Jason Combs; Local Media President, Brian Lawlor; and Scripps Networks’ President, Lisa Knutson. Also on the call is Controller, Dan Perschke. Here is Adam.

Good morning, everybody and thanks for joining us. Today, Scripps is reporting a quarter of beats across the board as we continue to deliver stellar operating results, driven by strong sales execution in both our Local Media and Scripps Networks businesses, in fact, what appears to be industry leading results in local. Both divisions turned in higher than expected revenue and profitability aided by the return of the U.S. economy and the ad marketplace as well as excellent work from our sales teams. Because of this strong performance and with a clear view into the back half of the year, I am very pleased to share that we have raised our free cash flow guide for this year from a range of $210 million to $240 million to a new range, starting at $240 million and moving up to $260 million. Investors who have been with us and our sector for a while will recognize this as a remarkable achievement in a non-election year. Today, we are in the early stages of an economic recovery, still very much navigating a global pandemic and seven months into the successful integration of the company’s largest acquisition in its history. This level of execution, the second quarter results and today’s free cash flow guide would not have been possible without the transformation of this company over the last several years. We have assembled a large portfolio of high-performing local television stations to serve local audiences and an expanding list of advertisers, a platform of scale that captures the full retrans revenue opportunity and is exceptionally well-designed for political advertising. We have better aligned our company’s expense structure with our current operating structure, tightened our focus and unlocked shareholder value when we grew and then exited our podcasting and digital audio businesses for very nice cash-on-cash returns and through M&A, innovation and organic growth, emerged with a full-scale national television networks business, the largest portfolio of national broadcast networks, reaching more than 90% of U.S. TV households with exceptional margins and an attractive organic growth profile in an expanding television marketplace. I hope you will agree that Scripps today is a high-performing company at every level, an enterprise that, once again, has proven its ability to manage through change. Actually, I should say, take advantage of change as an opportunity and execute at the highest level for the benefit of our shareholders. The second straight quarter of exceeding expectations after the company’s transformation is merely the beginning of the near-term benefit of our work. We are realizing these short-term gains, while we are also positioned exceptionally well for the longer-term value creation ahead. And we see no reason to sacrifice one over the other. We know that investors want us to achieve both at the same time. We aren’t sacrificing our mission focus either. And I would like to end with a few words about meaningful recognition we’ve recently received. A few weeks ago, the NAB leadership foundation recognized Scripps with its prestigious 2021 Service to America Award. This award honors one company for its outstanding community service, and we were honored for our local station project, the Rebound, which helps our viewers navigate the road back to economic recovery. We are incredibly proud of our local teams all across the country who executed this important and ongoing initiative. In addition, Scripps received three top Women in Media awards from Synopsys Media. Scripps Networks President, Lisa Knutson, was honored as a corporate visionary. Chief Diversity Officer and Employment Attorney, Danyelle Wright was recognized as an industry innovator and disruptor for her work to bring Scripps’ equity diversity and inclusion strategies to life. And Scripps itself was selected as a 2021 distinguished company because of its work to support and promote women leaders. These awards recognize some of our most closely held company values, serving our audiences through objective news and information, leading the way towards the future of our industry and maintaining a respectful, inclusive workplace. We very much appreciate this independent acknowledgment of our employees’ hard work. Now, here is Jason.

Thanks, Adam and good morning. I’d like to start our discussion of Scripps’ second quarter 2021 results with a reminder that our earnings tables from February 26 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 had not owned WPIX in New York. The tables also for present illustrative Scripps Networks result as though the division had informed on January 1, 2019. The sale of WPIX closed on December 30, and our acquisition of ION closed on January 7. 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 second quarter. Total division revenue was up 22% or $58 million from the second quarter of 2020. The strong performance was driven by core advertising revenue, which was up 48% as we see the ongoing return of the local and national advertising marketplace and continue to develop significant new to TV business. Our 48% increase nicely outperformed our guidance of up mid-40% as well as the performance of our peers who have reported this week. Political ad revenue for Q2 was $3.2 million. Local Media retransmission revenue was up 11% in Q2. That number also was above our expectations, driven by smaller than expected declines in our subscriber counts from the fourth quarter of 2020 to Q1, our latest reporting period. Local Media expenses increased 13% over the year ago quarter. In addition to contractual programming expense increases, we have added back some of the COVID-related cost cuts from Q2 of 2020, but we’ve done so conservatively with consideration for the pace of our revenue rebound. Local Media segment profit was $65 million. Turning to the Scripps Networks division, revenue for the second quarter of 2021 was $239 million, up an impressive 23% above the prior year quarter adjusted combined results and above our guidance of up about 20%. The outperformance was driven largely by strong direct response business. Segment expenses rose 7% over the Q2 2020 adjusted combined results. Segment profit for the networks was $107 million, delivering a margin of 45%. Turning to shared services and corporate expenses, they were $19 million in the second quarter, a bit less than our guidance of about $20 million. The company’s Q2 loss from continuing operations was $0.14 per share. Several Q2 transactional items decreased income from continuing operations by $0.58 per share. Among them was a non-cash charge totaling $31.9 million related to the Berkshire outstanding common stock warrant. Just a reminder, we brought in Berkshire Hathaway to help us fund the ION acquisition, and as part of that arrangement, issued them a warrant for 23.1 million Class A common shares at a price of $13 per share. Our stock price gains in the second quarter increased the fair value of the warrant. However, we have now amended the Berkshire warrant, and we will not record changes in fair value in future quarters. And keep in mind, this charge is not directly related to our strong second quarter operating performance. The quarter also included $7 million in acquisition and related integration costs and about $0.5 million in restructuring costs. On June 30, cash and cash equivalents totaled $86 million and net debt was $3.2 billion. On May 15, Scripps redeemed $400 million in 2025 senior notes for redemption price equal to 102.563% of the aggregate principal amount. We also made an additional principal payment on our 2028 term loan totaling $50 million. Our net leverage at the end of the second quarter remained at 4.7x per the calculations in our credit agreements. With our new cash flow profile and our 2022 political ad revenue outlook, we expect to move our leverage into the low 4x range next year. We will continue to pay down debt, consistent with our commitment to move back into our historically lower leverage range. Looking ahead, I’d like to give guidance for a few key areas. We expect total Local Media revenue for the third quarter to be down in the mid-teens percent range. That includes core ad revenue up in the mid-teens percent range. We expect Q3 Local Media expenses to be up in the low double-digit percent range. In the Scripps Networks division, we expect Q3 revenue to be up in the mid-teens percent range in comparison to adjusted combined results for Q3 of 2020. We will be launching Newsy over-the-air on October 1 and we expect to see that new revenue stream begin to build in Q4. The networks expenses are expected to increase in the low to mid-teens percent range. This Q3 expense guide includes the cost of launching the three new networks over the air. Think of it as a quarter or two of network startup investments in advance of the revenue build. While we expect the Networks division margin to contract a bit in the third quarter and begin growing back by the end of the year, we still expect to deliver a full year margin of at least 40%. We expect Q3 shared services cost of about $19 million. And finally, as Adam explained, we now expect to deliver 2021 free cash flow of between $240 million and $260 million. We raised that range because of our strong revenue performance across the company from local core advertising to stabilizing subscriber counts to direct response and general market ad strength at the networks. A free cash flow number in that range for 2021 will far exceed what we would have generated in a non-election year prior to the ION acquisition and our remaking of the company. And now, here is Brian to talk about local TV.

Thanks, Jason. Good morning, everybody. For the second quarter, we are reporting local core advertising results where our outstanding sales execution put us in a position to outperform our peers. With a rise in consumer confidence and discretionary spending, we saw year-to-year growth in our ten largest advertising categories. Our largest category services saw a 35% jump in year-to-year spending. Our automotive category was up 64% compared to a big drop in Q2 of 2020, but also despite the chip shortages that are causing inventory issues. Our retail category was up 66% in Q2 and our fourth largest category, travel and leisure, aided by both sports betting and American’s return to travel and entertainment, was up more than 600%. In addition to a strong ad market, our core ad revenue is being bolstered by our success capturing new to TV advertisers. Last quarter, I told you we brought in over 800 new advertisers. While in this quarter, we had over 1,000 new businesses advertising on our local stations. Across our footprint, we are focused on maintaining a strong and consistent effort to bring new business to local television; an effort we expect to continue to pay off. Turning to political advertising, we now believe that we will outpace our original 2021 expectations of low $20 million range and are on track to deliver in the high $20 million for this year as we ramp to the 2022 midterm elections. Our retransmission revenue also has outpaced our expectations for the second quarter as we gained more virtual MVPD subs than we had expected. Virtual subs now account for 13% of our total pay TV households. On the network side, we were pleased to have completed negotiations this summer for new affiliate contracts with CBS for 6 of our stations, consisting of our top-rated stations in Montana and Nashville. Additionally, we have new contracts with The CW network for our 12 affiliates. Looking ahead, we will have all of our network negotiations behind us by 2023 when we reset 75% of our pay TV subscriber base. The timing of our network and MVPD renewals positions us well to maximize our retransmission revenue opportunity in less than 18 months. I’d like to end by calling out a content revenue initiative we have launched in Florida. Florida is a very important state for Scripps. We own six stations there. It’s a place with a lot of breaking news, extreme weather and very active political climate. Scripps has doubled down on its commitment to our Florida audiences and advertisers with Florida 24, a statewide news network available on over-the-top platforms across Florida’s largest markets. In addition to the added service to our communities, Florida 24 positions Scripps well to capitalize more broadly on business opportunities across the entire state. And now here is Lisa.

Thanks, Brian and good morning everyone. The Scripps Networks division has had a terrific start to the year and its first 7 lens of business. After delivering strong results in the first quarter, we beat our second quarter guidance on revenue and margins. In addition, we continue to capture our one-year deal synergies. We launched two new over-the-air networks into 92% of the country, and we prepared for the launch of our 9th OTA network in October. We are also fully transitioned ION to our direct response agency and we have smoothly integrated our new divisional employees into the organization. The pace of our work has not slowed down, and our achievements continue to stack up. Over the course of the second quarter, we also conducted our upfront presentation, and the results have been beyond our expectations, tremendous year-over-year growth, dollar growth, compared to past ION and Case upfronts, substantial increases in CPM’s and significant expansion of our advertiser accounts. All of our networks are benefiting from our portfolio strategy and the reputation Scripps Networks is building as a leader in free TV with high-quality programming, vast distribution and strong audience delivery. I am happy to share a few highlights. Overall upfront total dollars committed to Scripps were up more than 20% from the separate upfronts of ION and the Case Networks last year, and new to Scripps Networks advertisers represent about 25% of our upfront dollars this year. The balance upfront dollars rose more than 50% from their 2020 upfront and CPM’s at Bounce increased by high teens to low 20s-percentage outpacing the reported upfront performance of nearly all cable networks. National advertisers are increasingly eager to reach black audiences, and Bounce is the number two watched national network for those audiences. At ION, we saw solid double-digit growth in dollars in mid- to high-teens growth in CPM’s. In addition, about 20% of its upfront dollars are coming from advertisers who are new to ION. So we’re pleased to be winning that new business. Finally, our brand-new reality focused networks, True Real and Defy TV received nearly $10 million in commitments. We were extremely pleased that these two networks are attracting general market advertisers so early in their life state, and that has us very optimistic about their future. Keep in mind that no revenue from upfront is reflected in our Q2 results or Q3 expectations. You’ll start seeing that revenue flowing in during the fourth quarter of this year and through third quarter of 2022. Our successful upfronts and the commitments that big brands and general market advertisers are making to our networks are now driving us forward into the scatter market with confidence. The strong upfront season is also a testament to the ongoing importance of linear TV in the national advertising marketplace. Turning to programming, we launched True Real and Defy on July 1 and it reaches nearly 20 – or 92% of the U.S., primarily through our own station spectrum. Once again, we’re realizing that owning our own distribution is quite a competitive advantage given the national reach we can attain. On October 1, we will launch Newsy with the same 92% reach, and I’d like to spend a moment talking about Newsy’s strategic evolution. The new leader of our news networks, Kate O’Brian, came out of ABC News and other news organizations with tremendous vision and depth of experience. She is preparing Newsy this broader national stage in a new way with seasoned reporters, more presence in Middle America and a new level of collaboration with our 40 local news teams in our Scripps Washington Bureau. At the same time, she is deepening Newsy’s commitment to objectivity, fact-based reporting and great storytelling, a well-rounded approach to journalism that research shows national news audiences are craving. Newsy has had tremendous success on over-the-top platforms, and we look forward to bringing it into nearly every American household. Regarding our entertainment programming, we launched Chicago Fire on ION in mid-June, and that show is literally on fire for us with double-digit gains in viewership over the prior show in this time slot. Also during the second quarter, Bounce grew its share of the 18 to 49-year-old audience in prime time on both a year-over-year and a quarterly basis. Last Sunday night, we launched a new original program at Bounce that we’re very excited about called Johnson. Cederic the Entertainer is the executive producer of the dramedy and it’s about 4 black men who are close friends that all happen to have the last name Johnson. More than 2 million viewers watch the premier episodes that’s the most watched half hour series launched in Bounce history. And we were able to run the show afterward on ION, increasing its visibility and maximizing its impact; a clear benefit of our network portfolio strategy. All 9 of our Scripps Networks are bringing their high-quality program into at least 90% of the U.S. TV households over-the-air as we capitalized on that growth marketplace. Over the top, of course, also a fast-growing marketplace and the Scripps Networks are available there as well. Both Newsy and Court TV are fully distributed on OTT platforms, and all of our networks will eventually be available across the big OTT services, capitalizing on the migration of national ad dollars to connected TV and increasing OTT viewership is also a key pillar of our national growth strategy. I would like to end by reminding you that we expect our strategy of creating a national news powerhouse to deliver a solid double-digit revenue growth over the next few years on a highly efficient expense structure to result in division margins of more than 40%. And now, operator, we’re ready for questions.

Thank you. [Operator Instructions] And that question will come from the line of Steven Cahall with Wells Fargo. Please go ahead.

Hi. First, Adam, Lisa, can you talk about the Newsy launch and what sort of advertising commitments you have there? How much in Newsy do you think about selling out ahead of time versus maybe what you might want to hold back in scatter or programmatic? And Lisa, as you put all the networks portfolio together, can you just talk about in the upfront? Are you selling on a combined basis? Are you still kind of selling on an individual channel basis? So, a little bit of color there. And then just lastly, maybe for Jason, the free cash flow guidance, is that increase all from advertising? I know sub-declines have also been going a bit better and maybe cost synergies. So if you could just frame that up for us, that would be great? Thank you.

Steven, I will take a few of those and Jason can follow-up and I may need you to repeat a couple of them. That was…

Yes, sorry, there is a lot in there.

Quite a few. No problem. So in terms of Newsy remember, Newsy’s growth over the last several years has come from OTT. So we are building on that base. And when we launch networks, like we have done with True Real and Defy TV as well as the other Case networks, we really start layering in DR advertising early in the process. So that will begin to build in fourth quarter. So, we don’t expect to really be selling Newsy in the – certainly not in the upfront and not in the general market until we build audience over time on OTA. So we are continuing to maximize our OTT revenue. And over time, as audience continues to build, we will start to layer in general market advertising, but DR, as we have talked about, is a lucrative, certainly a lucrative marketplace. We – especially in fourth quarter, there is a lot of healthcare dollars that are in the system, and it’s just perfect timing for Newsy’s launch and to be able to begin to capitalize some of those healthcare dollars. I think your second question about the upfront maybe or – Yes, portfolio strategy. So the answer is yes. We – that’s part of our – certainly our strategy in every one of our networks that we sold in the upfront, benefited from that strategy. So we do sell both individually, certainly, ION being the largest network that we have. And you heard in my comments, Bounce, we just saw such tremendous demand for Bounce in the upfront and 50% increase over last year. But every single one of our networks, it’s sort of all those are as a result of the portfolio sales approach.

Thanks, Steven. In regards to the question of free cash flow move, it was a variety of factors. Certainly, the biggest of those is our outperformance in terms of advertising revenue. Retrans is pacing a little bit ahead as well, which is helping. And we did have a small move as well in terms of cash tax expectations for the years, but again, predominantly driven by the advertising revenue.

Great. Thanks.

Thank you. And our next question is from John Janedis, Wolfe Research. Please go ahead.

Nice. Close enough. Lisa, maybe one for you and one for Brian, I wanted to follow-up on your comments on the direct response advertising because it sounds like it’s not clearing as much on other networks and you might be uniquely positioned to benefit from that. So can you talk about how the tightness on network impacts pricing and demand, and to what extent you think that could be a, call it, multi-quarter tailwind just based on tightness of supply? And then, Brian, on the new to TV advertisers, do you track how sticky they are, meaning of, call it, that 800 or so from 1Q, how do those typically retain, call it in 2Q? And I guess expectation for subsequent quarters on retention and how does the spend of those new to TV advertisers typically trend over time?

So John, I’ll take the first question. So we believe we’re really uniquely positioned. Our strategy from the beginning that we talked about as the ION acquisition closed was really to maximize revenue between DR and general markets. So as demand certainly tightens in – or on the general market side, we are able to shift dollars to our DR advertising firm, and we’ve seen great success there. Primarily, ION and Bounce, you think of those as big general market networks. And then the remaining – each network has its own mix of revenue. Just to give you some sense of it, about for 2021 year-to-date, it’s about a little bit about 50-50. So, general market and DR and again, we’re maximizing to the highest rate possible as we continue to really work through the life stages of each of these businesses.

Hey, John, it’s Brian. Following up on your question about the new to TV advertisers, so the way we look at that, when we develop a new piece of business that’s never been on TV before, we consider it a new advertiser for 12 months. And so that 800 advertisers that we referenced in the second quarter, some of those – in first quarter, some of those would still be considered a new advertiser in second quarter. But then obviously, some probably churned off. Maybe they have now lapsed their 12 months and they are considered a regular advertiser and several hundred new ones were added into the quarter. Typically, they are pretty sticky. These are local accounts that we develop local relationships with. We sit in their car dealerships and their furniture stores and talk with them about their strategies and achieving their goals. So historically, we would have over 75% retention rate from when they expire from the 12 months of being a – considered a new business client until they would roll over to just be a regular advertiser. So, none of those thousand advertisers would be reported a year ago – a year from now as a new advertiser. That help?

Thanks a lot. Yes.

Good.

The next question is from the line of Dan Kurnos with Benchmark. Please go ahead.

Great, thanks. Adam, obviously, I don’t think it’s directionally relevant to the national business, but maybe could you just spend a second discussing Jonathan’s departure from the networks?

Yes, sure. I mean, Jonathan did a tremendous job as an entrepreneur and as a leader launching the Case Networks, first Bounce and then the others and then continuing on through the ION acquisition under Lisa’s leadership, really helping to set the networks up for success. Totally understandable that an entrepreneur of his caliber would want to go on and do something different, particularly after the acquisition. And we wish him the best. We have a great relationship with him and expect that we will continue to do so.

Thanks for that. Lisa, did I hear you that there is another network coming or am I misinterpreting those remarks?

When I refer to the third network, it’s new the OTA. So when we launched Newsy in October, that’s the third network. We will launch OTA this year.

Got it. And just maybe – I think you gave really helpful color. Can you talk just a little bit more about the performance of the recently birthed networks that you’re seeing in the marketplace right now?

Yes. It’s week 6. So it’s early days, but we are really heartened by our ability to attract DR dollars. As I said earlier, each of these networks starts in the DR marketplace and builds over time. And so we’re seeing, honestly, one of the fastest growth in one of the two networks that we’ve seen in the launch of our TV networks over the years. So we’re really pleased. I think attracting the – about $10 million in the upfronts, it’s really a testament to, one, our portfolio sales approach, but also, I think the – our ability to – I think we got this right with these two new networks. So we’re attracting general market advertisers earlier in the process than any other network we’ve launched over the years.

Great, thanks And then for Brian, just on core, obviously, a strong guide. We’ve been hearing consistently Q3 kind of in line with the better than 2019 levels, just categorically, what you’re seeing auto, obviously, still a challenged category, but maybe just help us get some more updated granular thoughts there would be great?

Yes, sure. Hey, Dan. Look, I think auto was probably the one category in our top ten that’s got some headwinds. We did share that we had a great performance in Q2 with auto. I think we also reported that July was up year-to-year in auto. I think the lack of inventory is finally catching up with these dealers. I was on a local lot this weekend. I said it probably normally would have 400 cars, and I’m not sure I saw 40 there. So they are all stacked up, ready to go. They just need chips, and they are parked all over the country. But I do think that we’re going to have a couple of months still of challenges in auto. Beyond that, we’ve talked about service category, just – that’s been such a growth driver for us over the last several years, medical, legal, financial, bank, home services, everything HVAC, pest control, all that, really significant growth as people are investing in their homes. Travel and leisure, obviously, finally, the return to more normalcy, at least there has been sports are – sport franchisor advertising, concerts are back, travel, states are encouraging people to come visit them and then add to that the sports betting, which has been obviously a significant driver for us. We probably got, I don’t know, eight or nine states now that will either have already or will have legalized sports by the end of the year. We’re about to launch Arizona with our footprint in Phoenix and Tucson. And that will be a really big state for us, and that’s about to come online at the end of the quarter. So I think all of the momentum you see, the fact that we are now sniffing down and about to catch up to 2019 tells you, except for auto, everything else has got a lot of momentum to it.

Thanks, Dan.

Thank you. And our next question is from Mike Kupinski with Noble Capital Markets. Please go ahead.

Thank you. Just a couple of quick questions. I know obviously, you sold your podcast business and so forth. And this might have a reflection of maybe your digital initiatives. And I was just wondering, since you didn’t really mention much about digital and what’s going on with websites, website development and things like that. I was wondering if there is a change in thought of your direction in terms of your digital strategy and what – maybe you can explain whether or not you think there is an opportunity still there. So I was just – what are your thoughts about your digital strategies?

Hi, Mike, it’s Adam. Thanks for the question. No, there is no change in strategy. I mean, we expect that our digital presences at this point in our local media marketplaces, as well as national, are table stakes for the well-developed brands that we run. I think one area we’re definitely focused on is in the over-the-top space. And we’ve seen tremendous growth in both audience and revenue in OTT in our local markets as our local newsrooms produce more and more content that audiences are seeking at all hours on local platforms. All of our brands are launched on all of the major OTT platforms. And all of our account executives at this point are out in the marketplace selling OTT advertising as part of their television portfolio because it is television. It’s just delivered digitally. Likewise, on the national side, we are moving all of our brands into the OTT space. We’re very focused on the free ad-supported television opportunity also on OTT and connected TV, and we’ve seen strength, continued strength, with Newsy and Court TV in the sales marketplace, which gives us, I think, very – a very good signal that as we continue to move our entertainment brands into the OTT space we will be well equipped to monetize those, so to be clear, no change in strategy. Digital is incredibly important, both for our news audiences and news advertisers and local advertisers, and it will continue to be a pillar, as Lisa said, of our networks strategy for the foreseeable future.

Okay. And Brian, you talked a little bit about your Florida statewide news network. And I know that these – a lot of broadcasters have launched these networks in the past and they have had like the checkered performance. And I was just wondering, what is your strategy here? Is it more to provide news content for your stations in the market or syndicate that news out or how are you eventually thinking this could be like a cable network or what are your thoughts in terms of how you see the network develop?

Yes. Mike, look, I think our strategy is really different than all the others that have started because it’s – we’ve created an OTT network. And so with that foundation, our cost base is much different. And our ability to take content from around the state and pass it through is far more efficient. We are – we finalized some partnerships in the state with some other groups in the markets that we don’t have. But we think as people are moving toward more streaming and looking for more local news, rather than have the heavy lift of a massive studio and a big production facility and trucks all over and that kind of thing, having an OTT platform that allows any of our local markets to insert some local stuff, but being able to share that across the state is really efficient. And of course, with our platform and our footprint with five markets and six stations, with some really dominant stations, I think there is some really compelling, not just day of news, but enterprise around what’s important around the state, the sugar fields, water, oil, all those kinds of things. And I think it’s important to all Floridians. And so I think we’ve built a very cost-efficient platform that will allow us and our partners to monetize that in our local markets.

Great. And Brian, I was just wondering in terms of – you mentioned about auto industry going up and some headwinds in Q3. Are there any changes in the ad categories from Q2, Q3? I know, obviously, you’re facing more difficult comps and so forth, but changes in the composition of what you’re seeing in terms of the – your – the percentage is maybe of the contributions from Q2 to Q3?

Yes. And Mike, I assume you’re just talking broadly, not specifically in auto, am I right?

Correct, broadly.

Yes. No, look, I think our ranking of our top six or seven categories hasn’t changed. Services is still number one. Auto is still second, retail, very comfortable third, travel, leisure, home improvement, bringing on our top five. Services is 35% of our business. That’s been a growing category even when auto was healthy. Services replaced auto as our top category several years ago and just continues to build. Auto right now is about 15%, 17% of our business. In the last couple of years, it’s been about 20%. And I think that’s where it settles back in when it gets momentum again. I don’t ever see an opportunity where auto has enough momentum nor enough dollars to get back to now the strength of our services category.

Got it. Thanks, Brian. Appreciate it.

Thanks Mike.

Thank you. [Operator Instructions] And we will go to the line of Craig Huber with Huber Research. Please go ahead.

Thank you. My first question, if I could ask. Last quarter, Brian, in the quarter before, I believe you said retrans subs, net of OTT, was down 5% each quarter on a year-over-year basis. What was in the quarter we just finished, place? Was it similar?

Right in that range, again, Mike, we’re down mid-single digits year-over-year. We did see a little bit of improvement in our trailing full quarter churn rate, but not overly dramatic, right in that range.

Down 5%. Okay. My next question, broadly, Brian, I guess for the Scripps Networks side as well, local and national, with this new variant here on the virus front, are you seeing any impact at all regionally on a national level in these certain categories? Is there any impact at all with ups and downs of this virus that you can see in your business?

Yes. I’ll take it first, Craig. Really minimal to this point, I mean, there is only – obviously, we got a big footprint in Florida. And so we’re watching Florida closely. And we’ve seen a couple of little things. We’ve seen a couple of legal folks push the money from Q3 to Q4 as may be some courtrooms are delaying their opening. We’ve seen a little bit of money in healthcare where hospitals are now filling up and saying, hey, we don’t need to advertise. We don’t want to cut our budget. We just want to push it back 60 days or something like that. And those two examples are specific to Florida, and they are relatively small. We have not seen any other impact as a result of the variant, Craig.

And Craig, on the national side, we’ve seen no impact.

Okay, thank you for that. My next question, ION synergies, can you maybe just update us on that, how it’s going so far, 7 or so months into this? How are you tracking towards your long-term golfer synergies here?

So Craig, we’re tracking very well. We’ve already locked in those year one synergies. I think we made some announcements probably the week after we closed the deal in terms of locking in the people synergies. So we feel very good about it. We’re right on track and feel good about the future synergies as well.

And my other bigger picture question is, I’m trying to figure out, hear your thoughts here, Brian, for your TV station margins, obviously, they are lower than some of your public peers out there. Where is the opportunity here that explain you would explain to investors, the upside of your margins help close that gap as we think out over the next 4, 5, 6 years here? Is it on the retrans side or the rate there? It’s on the ad revenue side? Is there more to do on the cost side? Where does the opportunity to help close that gap? Thank you.

Yes. Craig, look, I think you’ve been on this journey with us for a long time, and you’ve seen that we’ve significantly improved our margins over the last decade, dramatically better than they used to be, some of that through sales execution, some of that through M&A and changing our profile. We’ve got a much more balanced portfolio now of ABC NBC CBS, Fox, more number ones than we’ve had. I think as we’ve talked about, probably one of the reasons why our margins were lower was the company’s investment 15 years ago in HDTV and launching Food and all those different networks at a time when people were adding very profitable second stations. Our strategy was investing for a really good return in the networks business. So I think we’ve been aggressive in the last couple of years trying to pick up second stations. We just launched a second station in Denver. This year, we added a second station in Phoenix as part of our Tribune acquisition. We’ve also acquired a couple of others. So we’re very much focused on that. And I think that is probably a big differentiator between us and some of our peers. Beyond that, look, I think our – as we said, our commitment to new business is moving margin for us. Our political strategy is moving margin for us. Our content strategy, our improvement in ratings, especially in some of our larger markets has been significant. That’s moving margin from us. So we can’t flip it overnight. It has been a journey, and I think you’ve been following along with us, but I’m really pleased with where we’re at and recognize that we still have more growth opportunity ahead of us.

Brian, if I could just follow-up on that, do you think there is more upside in your retrans rates relative to what you understand some of your peers have out there?

Definitely.

Okay, thank you very much.

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Thank you, Louis, and thanks to everyone for joining us today. Have a great day.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference service. You may now disconnect.