Ladies and gentlemen, thank you for standing by, and welcome to the Scripps' First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. The instructions will be provided at that time. [Operator Instructions] And as a reminder, the call is being recorded. I'd now like to turn the call over to our host, Ms. Carolyn Micheli. Please go ahead.

Thanks, Brad. 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 in 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 company's 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; and then, Scripps' Chief Operating Officer, Lisa Knutson. Here is Adam.

Thanks, Carolyn. Good morning, everybody. I'll start this morning with some of the news we've broken over the last few weeks in sports. Less than six months ago, we launched Scripps Sports, because we saw the opportunity to leverage our unparalleled national reach and local market depth, free over-the-air broadcast and all that comes with it is the most ubiquitous and fan-friendly of distribution platforms. Since then, we've been exceptionally busy. Two of the deals we've been working on are now public. The announcement we made yesterday with the Vegas Golden Knights, a thriving National Hockey League franchise, and of course, our partnership with the WNBA. We're very pleased to be launching our first Scripps Sports programming this month. The WNBA Friday Night Spotlight on ION begins on May 26. What the WNBA gets from us is full nationwide reach through free over-the-air connected TV services and cable and satellites. Next week we expect to announce a high-profile title sponsor for our WNBA Friday Night franchise, a blue chip advertiser that believes as we do, it's high time women's sports like the WNBA are given the same visibility as men's sports, which these athletes, teams, and the fans deserve, the broadest of reach and appointment viewing consistency. We're thrilled to be providing these benefits to the WNBA at a time of burgeoning appreciation for and interest in women's sports. And why wouldn't there be great interest? WNBA games are a display of intense competition, while the players' athleticism and personalities make for the very best television. It's no wonder that last season WNBA viewership was up 22% and even with limited reach. Now, the vast distribution on ION will give the league maximum visibility, so fans everywhere on any television platform will gather together every Friday night for this franchise…

Good morning, everyone. We're pleased to be reporting Q1 results that met or outperformed the guidance we gave back in February, despite the challenging economic climate. In our Local Media division, revenue was down 4.5% and core advertising revenue was down 10% as local and national businesses continued to deal with ongoing inflationary pressures on consumer spending. However, excluding the impact of the Olympics and the Super Bowl in Q1 of last year, core revenue was down only 6%. Distribution revenue was up 2.4% to $163 million, fueled by growth in virtual pay-TV households and contractual step-ups. As of April, we've renewed a third of the pay-TV households we are resetting this year. Local Media expenses declined by about 2%, aided by moderated network programming cost by our move to Comscore and by tight expense management in this economic environment. Local Media segment profit was $46 million. Turning to the Scripps Networks division, revenue for the first quarter was $216 million, down 9.5% from the prior-year quarter when we reported industry-leading revenue growth. Networks segment expenses were $165 million, a 7% increase, tied to higher costs for distributing the networks. Segment profit for the networks was $52 million. In Other, we reported a loss of $1.5 million. Shared services and corporate expenses were $23.4 million. The loss attributable to shareholders of Scripps was $31 million or $0.37 per share. Restructuring costs for the quarter increased that loss by $0.15 per share. We announced in January that we are undergoing a companywide reorganization and the restructuring costs are related to that work. It also includes a write-down of some programming we were using for our former network TrueReal. We are now leasing the spectrum to Jewelry Television. As of quarter end, cash and cash equivalents totaled $16.5 million. Our net debt…

Thanks, Jason, and good morning, everyone. Work at Scripps continued diligently through the first quarter on the company's restructuring plan. As Jason said, we are on track to realize the $40 million plus in savings we previously outlined. We are focused on both aggressively tackling the near-term challenges in the media marketplace and creating a more efficient, cost-effective, and high-performing business, one that is well-positioned for long-term value creation. While this has been a time of uncertainty for our employees, we are very proud that our teams have remained focused on the work at hand to serve our audiences and communities and to deliver strong financial results. The country's economic malaise continues to put pressure on our businesses. Local advertising remains relatively stronger than national, largely due to the return of automotive spending, but we do feel pressure across the whole advertising marketplace. In Local Media, we continue to see softness in our largest core advertising category, services. Services was down 14% in the quarter with banks and the insurance companies showing the largest declines. Our two strongest performing categories were home improvement and automotive. Auto hit its third consecutive quarter of year-over-year growth, driven by local dealers and domestic dealer groups who finally need to move inventory off their lots. We see local dealers as the best opportunity for continued growth in auto this year. In addition, the chip shortage is about half of what it was at this time last year, which is another good sign of spending to come. Another highlight of the quarter was the NCAA basketball tournament which brought in nearly $2 million for local core, up 13% from 2022. Now we are looking ahead enthusiastically to the NBA finals in June and the promotional dollars we expect ahead of that big linear television event.…

Thank you. [Operator Instructions] We can first go to Steven Cahall with Wells Fargo. Please go ahead.

Yeah. Thanks. Good morning. Maybe first, Jason, so it sounds like net retrans is going to be better for the year and then definitely an improvement I think in your free cash flow expectations. And it sounds like maybe a little bit of an improvement in your EBITDA expectations in the first half of the year. So I can't do all the math this quickly, do you expect to get any net deleveraging by the end of the year or as you swap out those stronger '21 quarters for '23, is it still like it will sort of stay in this low 5s? And then secondly for Adam. So you've got a couple of those sports deals now done, which look really solid. We've seen one of your peers do a deal with the team that was on Diamond Sports Group and they've also said that there could be some litigation associated with that. How do you look at the Diamond Sports portfolio? Do you think it creates opportunities or are you going to kind of wait and see how some of those things play out since those situations seem a little more complicated? Thank you.

Thanks, Stephen. So, on the leverage question, so the headwinds we're facing in FX rates are certainly putting pressure on our leverage. You saw that with the move from 4.7 at the end of last year to 5.1 at the end of this year. And as you referenced, that's going to create some challenges on our rolling two-year EBITDA. So given those headwinds, I would expect to see leverage move up a bit more in the back half of this year. But as you kind of fast forward to next year, you look towards at the end of 2024 we will have the benefit of a really strong and robust political cycle. The full-year impact of all the distribution step-ups that we have cycling in this year and a rebounding economy, we'd expect to be at a much better leverage point next year in 2024 than we are right now.

Thanks for the question, Steve. Yes, I think we are off to a fast start. I think we've told investors from the beginning, we expect to do deals that are accretive for Scripps and that create additional profit for the company and thus far, all things look exactly as we promised. I don't want to comment on anybody else's deal. I would say, Diamond Sports in general and the collapse of the RSN model does open up significant opportunity for us and broadcasters. And I think there are a number of opportunities continuing to present themselves, whether they be because the RSN is not going to be in a position to continue to carry a team's sports or because a league is looking for an alternative vehicle to reach more Americans. You saw that with the WNBA. The WNBA was looking to expand reach. I would tell you that, certainly, the Golden Knights wanted to talk to us about the breadth of our reach, because they recognized that engaging more fans both in their core market as well as in their sphere of influence is essential for the growth of their sport. So we bring that beyond just the collapse of the RSN. If you continue on with an RSN or with cable, you're essentially looking at a declining audience on that platform regardless, because of cord-cutting. We would continue to look at opportunities to expand Scripps Sports locally and nationally. And I expect we'll have more to say about that to come.

Thanks. If I could just follow up with one for Lisa. Lisa, on the connected TV revenue growth and the guidance for the year, as you then think about what the company is doing in sports, it seems like the sports audience is a very kind of connected TV first type of audience. So is there anything that you are doing to have that content sort of front and center for the connected TV world, whether it's app launches or branding or marketing on connected TV platforms?

Hey, Steve. It's Adam. I'll take it.

Sure.

First of all, I think you're spot on. I mean, the opportunity for us to bring sports to ION or to any of our local stations is not just about bolstering OTA, it's about bolstering linear television. And we see our distribution in the connected TV marketplace as linear television. It's not on-demand, it's live, it's linear, it's just being delivered over a digital platform versus OTA versus pay-TV. And you know we execute that all of the above strategy. We are definitely working with our CTV partners to ensure that they recognize the opportunity we bring to the table when we're bringing this live sports, because, as you know, live sports is not something that has historically been available on the fast platforms. Well, now it will be on ION and now it will be with any local sports deals that we do. So we're really ambitious and really excited about the opportunity. We'll certainly be doing some marketing of the WNBA on all of the platforms where the WNBA's existing fan base, as well as the ION and WNBA fan bases that we want to expand into are, whether it'd be on social, on linear television, in the connected TV marketplace.

Thank you.

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

Awesome. Thanks. Good morning, everybody. Have a bunch, but I will try to limit myself to a handful. Adam, just around sports, can you talk about your ability to potentially increase programming around some of these marquee wins that are brought to you to fill in some other hours with original sports betting, other stuff that we've seen in the past? And is there any way -- I know the leagues generally take on the DTC responsibilities. Is there any way that if you market any of the DT stuff that you're able to participate in some of the rev share if they do launch those initiatives?

Yeah, absolutely. I'll start with the second question. And every deal is different. And so, for example, yesterday with the Golden Knights announcement, we also shared that we would be partnering together on the D2C opportunity with the Golden Knights. So it's going to be a nuance from market-to-market or from league-to-league. But I would expect -- you should continue to see us work to continue to participate in one way or another in D2C. The premise of our partnership with these leagues and teams is that over-the-air broadcast and everything that it brings with it is the top of the funnel. It brings the greatest reach. And so we recognized the opportunity for both the leagues and teams to create additional value further down that marketing funnel, whether it be through sports betting, through D2C, through ticketing and merch. And on some of those elements, we expect to participate going forward.

And your thoughts, Adam, around incremental programming around those?

Yeah. Did you mean adjacent programming or did you mean...?

Yeah, exactly. So like pre-game policies, but like even beyond like additional half hours or something just dedicated to that stuff that might replace ION program. Is that a thought or are you just not yet?

Well, no, I mean, we are definitely looking at working with the leagues on adjacent programming. They've been very, very open to recognizing the value that that adjacent programming can have with respect to promoting the products, promoting the live games, and their brands in Las Vegas. We will be producing several different additional shows both with the Golden Knights and through our news operation in order to support the Golden Knights brand and the ratings of the games. We expect to use our ABC Station as a massive promotional platform as we stand up that new independent in Las Vegas. The work we've done with the WNBA and the NBA also recognizes that there is an opportunity for additional partnership around other programming, but keep this in mind, we have a really good business in ION. And so when we model these deals, we model them understanding that we expect to beat our hurdle rate. And so likewise with adjacent programming, we have to make sure that the economics make sense to us. This is not a passion play for us. This is a business opportunity and we're always looking to identify programming that will draw in a bigger audience, a better audience, more valuable audience, not just put sports programming for the sake of sports programming. So we really want to make sure that anytime we transition from, for example, a very popular procedural to sports programming that it's going to benefit our platform.

Got it. No, that's fair and that's very helpful. Adam, thank you. Jason, just on the distribution side. Well, actually first housekeeping. What's kind of your thoughts on the pace of political after you reported Q1. We've seen a little bit of downside from some of the peer group. Is there -- can you give some color on 2Q political assumptions?

Q2 political assumptions.

Hey, Dan. It's Lisa. So I would say, our political forecast for '23 is on par with the last two years of off-cycle election years. So we expect to be in the $23 million to $25 million range for the year.

And 2Q is kind of similar to Q1 the, Lisa?

First quarter activity was a little bit ahead, I would say, and I would say, Q2, certainly there is some races in Kentucky and Colorado Springs that are helping us to potentially maybe continue to be a little bit ahead of Q1 '21, but the quarter is still building. And I think Kentucky's primary is next week. So that money is being billed as we speak.

Okay. No. That's helpful.

If you're referring kind of Q1 of this year versus kind of Q2, I would say, generally, we would expect in the same ballpark.

Okay, perfect. Because, I mean, look, with all the pieces, obviously, a response (ph) guidance was very strong for 2Q and for the full year. And we know -- I mean, I think you said in the script -- in the prepared remarks or at least in the release some rough like a percent. So we know there has been mix of virtual. Virtual has been outperforming in Q1 and you're raising your guidance after what I think people generally view as a little bit of softness in linear reporting from the big MVPDs. So just help us think through kind of the rate versus the sub-balance, maybe your sort of your sub-expectations embedded in the balance of this year given the dynamics in Q1.

Yeah. So we -- I think, we referenced earlier, we actually had our most recent reporting and obviously, we do receive information on a bit of a lag was really positive and it was actually up when you netted in the virtual growth against these sub-churn on traditionals. That being said, we've -- over a longer period of time -- we don't take one quarter as our new number that we base our models off of. We, in general, believe that net sub-churn will continue in that down mid-single digit range on a trailing 12-month basis and that is consistent with what we have baked into our outlook. And so that is kind of baked into the up mid-teens on the gross distribution side.

And next we'll go to Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you. Just a couple of quick questions here. In terms of your guidance for your national media going into the Q2, I was wondering if Katz and ION performing equally or is one performing better than the -- or less than the guidance?

We definitely look at this as a portfolio and we sell as a portfolio. So I would say the malaise in the economy is certainly across all of our networks. I would tell you, because ION has more exposure to general market than scatter, I think in my prepared remarks I mentioned that scatter has improved from -- sequentially from Q4 to Q1 and we're seeing that same trend in Q2. And those networks that are more dependent on the general -- on DR advertising are probably a little bit more exposed than certainly ION is.

Got you. And then given your expansion into sports programming, I was just wondering, would the company consider owning or taking investments in sport teams?

Look, right now, our top priority is delevering. So as we've said before, were an opportunity to come up that made sense for us, we would look at it, but that's not really part of our strategy. We are a media company. We'd certainly look at the opportunity. We do have a very modest investment in an e-sports team. That team is or that series of teams is almost more like a media company itself, but I would say the most important thing to signal would be, look, we're really focused on paying down debt.

Got you. And I know that other broadcasters have made a big deal about starting to build out their core, but I know that you have already built your core in several of your markets, potentially offering datacasting. How much is left to be done on that? And I assume that your plan is to phase this in. So can you give us a thought about annualized CapEx that you plan to allocate to building out your core? And then, Adam, it sounded like you are pretty optimistic about getting some revenues from datacasting. Are you kind of factoring that in as a 2024 prospect? And if that's right, can you -- when do you think that you might start to see some meaningful revenue from datacasting?

Thanks, Mike. Yeah, we are live with our core network in four markets. But you're pointing to exactly why we want to really get right the marketplaces development before we do signal any additional significant capital investment. I think we're really along with Nexstar taking a prudent approach to building this out. We have -- the most important thing we have is the spectrum to reach 90% unduplicated population. And as I said, a lot of that spectrum lined up on transportation corridors. Check, we have that in hand. I think the next thing we're thinking about is, what's the marketplace look like for this, how do we work in collaboration with private 5G networks to create a more efficient data platform for industry looking to push a lot of data through in a secure way. As we develop that marketplace, we will definitely be sure to be reaching back out with -- to investors and sharing more details on how that's going. I think it's probably early to tell you that this is something we're modeling into '24. I do think we're going to see revenue in '24, but do I think it's going to be the kind of material revenue that investors are going to get super excited about? Not quite yet. I think I would rather under-promise and over-deliver. So let us work on the marketplace, and then we'll definitely be back to investors with a high level of transparency as the business comes together.

Thanks, Adam. I appreciate it. That's all I have.

Thanks, Mike.

Next we can go to Nick Zangler with Stephens Please go ahead.

Hey, this is Dean (ph) on for Nick. We were just wondering if you could peel back the onion on the go-to-market for the Golden Knights and WNBA broadcast because we're under the impression that the shoulder programming is the most lucrative aspect of those partnerships and just maybe if you could level set us there?

Sure, Dean. Look, we really are working off of a different playbook. So whatever you sort of know about the sports business model from the past, it's very different today with us. So, for example, we put together a deal with the Golden Knights that allows us to acquire the rights to the Golden Knights, bring to them full distribution, both in-market and beyond and monetize the Golden Knights live games. So for us, that means essentially a minimum of 69 regular season games and the potential for even first round playoff games. And we expect that to be an accretive opportunity for us. Whether they are shoulder programming around it, this is not a deal done on what I would refer to as halo economics. Let's overpay for sports and then try to make up some sort of cost around the sport. We're really looking at deals that are accretive to us with the P&L within the live sports window. And the same is true with the WNBA. Our deal with the WNBA brings them full distribution on multiple platforms through our over-the-air platform so that every Friday night we're able to deliver all of the WNBA games to fans across the country in the local markets, as well as nationally. And our deal has us creating profit for our company, thinking about the beginning of the game and the end of the game. Obviously, we expect to be able to retain a lot of the new audience we're bringing, but the economics that we've built these plans off of do not count on a, quote, halo effect from overpaying for live sports.

Okay. That's helpful. Thank you. And just a follow-up, if I can. We saw the CBS affiliate Fubo in past come to a resolution and we were just wondering if you could add any color on how that resolved and maybe does this uphold the sort of status quo for networks as intermediaries or you think the affiliates have gained some additional leverage in these VMVPD negotiations?

Well, look, I think there's no question that what you saw happened there was the affiliates body step up and require fair compensation for the distribution of our signals. And I think what's clear is the virtual MVPDs recognized the value of the live feeds coming in from our local stations as a result of everything from the local news to now the local sports we're talking about. So that value should be fairly compensating for us. I don't think it changed anything structurally or legally. I do think there are occasions where companies like Scripps, companies with other assets, not just local broadcast stations, are able to also do direct deals with virtual MVPDs. You're starting to see that as well in the marketplace. But at the end of the day, I think this is an affirmation of what we said to investors. There is tremendous value in the local distribution of these feeds. And the virtual MVPDs, they want that local feed, because otherwise they lose that which makes television inherently geographically local. Sitting in Cincinnati and watching WCBS is not a good experience for that virtual MVPD. And so there was a lot of pressure from across the industry to ensure that we were structured appropriately and that the local affiliates were fairly compensated by the networks.

Okay. Thank you.

And next we can go to Craig Huber with Huber Research Partners. Please go ahead.

Great. Thank you. I've got few questions. First, on the new sports program that you guys are talking about, how would you model this in terms of how long do you think it might take to get the margins for those hours that you are programming on your networks and local TV stations to be at accretive or in line with margins where they are at right now? Is it after the first season? Do you think almost right away? How long you could -- what are you modeling? I'm curious.

Yeah. Hey, Craig, it's Jason. Yeah, we model these deals to be gross profit positive year one. And so take the WNBA deal, for example, we have a profitable programming lineup today on Friday nights. So we modeled the WNBA opportunity to clear our internal hurdle rates on the existing program profitability in that time slot. And we're taking that same approach on all the deals. Each deal needs to make sense from a financial perspective and be viewed as something that can be accretive to the enterprise. And I can tell you that, we've already walked away from an opportunity where we were pretty far down the path on it because, at the end of the day, we could make the deal economics get to a place that made sense for us.

So just to reiterate what we've always said, we are focused on improving the near-term operating profile and economics of the company and long-term value creation. So we are not feeling like we need to sacrifice one for the other. We bring something very significant to these sports deals and that's the reach that these leagues and teams really want.

Okay. Great. And then the big picture I asked you guys this question on the last call two, three months ago. On the economic front, given all the markets doing all -- obviously, you have a national -- big national platform here, too. How are you guys feeling about the US economy? Do you feel about the same as you felt two or three months ago when you last had this public call, worse or better about the economic backdrop here that you are operating in?

Hey, Craig. It's Lisa. Certainly, this downturn looks a little bit different than previous cycles. We've been getting some mixed signals. I think GDP is growing, albeit slowly, and the job market is resilient, but there's volatility in the financial markets, which is also, I think, putting pressure in the advertising marketplace. Thankfully, CTV continues to grow and as a growth driver certainly for us. And I think the growth in automotive that we've seen in that category, especially on the local side over the last few quarters is also pointing to some resiliency, I think, in the advertising marketplace. However, inflation and worries about looming recession, I think will continue to put some pressure on our advertising revenue.

Okay. And then you mentioned auto over the last three quarters, it's up, obviously off of a low base given the macro environment the last few years and stuff, et cetera. Can you give us some numbers around that? How much it was up year-over-year in the quarter? I think you said auto, you expected it to be up as a category for TV stations in the rest of the year. I just want to confirm that.

Yeah. The first quarter auto was up 4% over Q1 of '22. It was a little bit lumpy through the quarter. I think, January, it was up significantly. Looking at Q2, auto is continuing to improve. In fact, in April, it was up 16%. So I think we're still obviously booking the quarter and I would say, in some cases, bookings are coming in later. But we really see that as continuing to improve. Domestic dealer groups are up 12% year-over-year. Foreign dealer groups were up 1%. Local dealer groups, which is the largest dollars, were up 8%. And we see that as the best opportunity to grow auto in the coming months.

I think you guys said your core advertising outlook where things are pacing out so far this core for the TV stations are tracking down low single digits. Is that similar for all three months of the second quarter here?

I think there are some one-time anomalies certainly looking at Q2 in terms of the -- where things play out with the NBA finals and things like that. So as I think we had a relatively strong April because of the auto category and certainly some rebounds in home improvement. So a little early to tell. I think what we're finding is that advertisers are buying closer and closer to air dates. And so that's causing us to have a little bit of a lack of visibility. And certainly, advertisers are looking for flexibility with their spend.

Hey, Craig, just one clarification. I think you said down low single digits. Our guide was down mid-single digit.

Mid-single digit. Yes. Sorry if I misspoke then. That's all I had. Great. Thanks, guys.

And currently no further questions in queue at this time.

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

And ladies and gentlemen, that does conclude the call for today. This call will be available for replay after 11:30 AM today and running through June 5 at midnight. You can access the AT&T playback system at any time by dialing 1-866-207-1041 and entering the access code 8752910. International parties may dial 402-970-0847. Those numbers again, 866-207-1041, international parties 402-970-0847 with the access code 8752910. That does conclude the call for today. You may now disconnect.