Greetings, and welcome to the Sinclair Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Chris King, Vice President of Investor Relations at Sinclair. You may begin.

Good afternoon, everyone, and thank you for joining Sinclair's second quarter 2023 earnings conference call. Joining me on the call today are Chris Ripley, our President and Chief Executive Officer; Lucy Rutishauser, our Executive Vice President and Chief Financial Officer; and Rob Weisbord, our Chief Operating Officer and President of Local Media. Before we begin, I want to remind everyone that slides and supplemental information for today's earnings call are available on our website, sbgi.net, on the Investor Information page and on the earnings webcast page. Following shareholder approval and closing of our holding company reorganization, we recasted our financial results on a quarterly basis for 2022 in the first quarter of 2023 to conform with the new organization structure and reporting. Those updates are available on our website for the revised segment reporting. For questions about our recasted financial statements, please reach out to our Investor Relations team sometime after this call. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports as filed with the SEC and included in our second quarter earnings release. The company undertakes no obligation to update these forward-looking statements. The company uses its website as a key source of company information, which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website and will remain available until our next quarterly earnings release. Included on the call will be a discussion of non-GAAP financial measures…

Good morning - sorry, good afternoon, everyone, and thank you for joining us. I'll start on Slide 4, as I would like to begin by discussing the holding company reorganization that was approved by our shareholders in late May and which closed on June 1.\ Under the new structure, Sinclair Inc. has become the publicly traded parent of Sinclair Broadcast Group and Sinclair Ventures. SBG holds the pure-play local media assets, while a newly formed subsidiary, Syncline Ventures holds the company's nonlocal media assets. The intent is to provide the investor community with greater transparency of financial results and disclosures on the value drivers of the business, while increasing both operational and financial flexibility for creating value within the company. In addition, we are now disclosing more financial detail about the operating results at Tennis Channel, which is now a separate reporting segment as well as more information regarding management's estimates of fair market value for our non-media assets, including our investment portfolio. The reorganization will allow more transactional flexibility and transparency around the sum of the parts valuation analysis, which I will discuss in more detail shortly. Additionally, Ventures will now have more flexibility to potentially access additional financing, whether debt or equity to further grow or invest in these assets. While our pure-play focused Local Media division will continue to transform and unlock overall value for the organization. Turning to Slide 5. We remain firmly committed to the local media industry, which is our legacy and core business. However, increased competition from technology companies, streaming content providers and the networks as well as continued regulatory constraints, means that we must transform to remain relevant and to grow impressions and revenue share. We must also embrace technology, which is why we're earmarking 75 million this year for cloud technologies,…

Thanks, Chris, and good afternoon, everyone. Our commitment to our local media platform remains strong. Sinclair reaches 1 in 3 Americans on a daily basis, more than 100 million people plus. We are launching 25 local fast channels in addition to expanding Tennis Channel into new international markets as well as expanding the network's T2 fast channel. We continue to invest in our social media and digital content, including hiring Nicolas James, a veteran of HBO Max, Conde NAS and to head our social and digital content initiatives that drive our growth and engagement strategy. This joins Richard Cook, Vice President of Audio Programming; who was brought in to create compelling local content delivered to audio deciders. We are a premier cross-platform producer and distributor of local media on every platform, wherever, whenever and however our viewers, listeners want to consume it. Nick and Richard will create the digital bolted that links our 2,500 hours plus of weekly local news and the national desk content for our compelling and distinctive digital content. Before coming to Sinclair, Richard oversaw the launch and growth of a dozen of podcast at Cadence13 and has worked as a producer across ESPN radio, TV and digital assets. Turning to Slide 13. I wanted to take a minute to provide some color around our distribution revenues. Several weeks ago, we announced a distribution agreement with Hulu 0they have carriage of Tennis Channel, T2, Common and charge to Hulu Plus Live TV beginning in January of 2024. During the second quarter, we began our new carriage agreement with YouTube TV which now has access to Tennis Channel, P2, Chart and TBD as of June 1. In addition, as a reminder, with respect to our upcoming retrans renew cycles, we have material renewals coming up during the second…

Thank you, Rob, and good afternoon, everyone. Hitting on Slide 19. On a consolidated basis, we delivered media revenues during the second quarter at the high end of guidance as distribution revenue was modestly higher than expectations and core advertising revenue met our internal forecast. As compared to last year, consolidated media revenues decreased to $761 million during the quarter primarily on the absence of political revenues and to a lesser extent, the impact of year-over-year subscriber churn and softer national core advertising. On a pro forma basis, media revenue was $762 million in the quarter, which excludes divested assets and is comparable to the $828 million in the second quarter of 2022 and as seen on the right-hand side of the slide. On Slide 20, consolidated adjusted EBITDA and exceeded the high end of guidance for the quarter on revenue performance and lower-than-expected expenses, driven by a focus on cost controls and timing. As compared to last year, on a pro forma basis, consolidated adjusted EBITDA in the quarter decreased from the year ago period, with media revenues contributing most of the decline as a result of the absence of political revenues which is not an apples-to-apples comparison as this year is not a major election year. Media expenses were up modestly in the quarter year-over-year due to annual compensation increases production expenses as well as our investments in technology and other growth initiatives. Corporate overhead, non-media EBITDA and other costs increased slightly year-over-year and were partially offset by lower film payments. On Slide 21, shows our consolidated adjusted free cash flow results, which also exceeded our guidance for the quarter due to the revenue and adjusted EBITDA favorable results as well as lower-than-expected capital expenditures with other cash items being in line with our forecast. Adjusted free cash…

Thank you, Lucy. Turning to our key takeaways on Slide 26, Sinclair wrapped up a busy first half of 2023 with a -- on a solid note as we met and exceeded our guidance expectations for the second quarter. While we continue to deal with increased linear subscriber churn levels, Sinclair is well positioned for the future with continued progress being made on our NextGen broadcast network and business strategies which we believe will begin to transform the industry in 2024 and beyond as well as our ongoing investments in technology, cloud transformation and our industry-leading sales platforms. In addition, we also completed the reorganization of our business units with the separation of SPG and Ventures providing improved transparency for our investors while providing us with much greater transactional and financial flexibility going forward. We believe the current enterprise value of the company falls well short of the true value of the assets that we possess. In addition, I wanted to reiterate my earlier comments regarding our commitment to reduce debt levels over the coming quarters. We are also looking ahead to significant retransmission agreements that are coming up for renewal over the next 6 to 12 months, while preparing for what we believe will be a record year for political advertising in 2024. In the meantime, we continue to see increasing demand, both domestically and internationally for our tennis channel-related assets and programming, and we are proud to be recognized as one of the news journalism leaders in the local media industry. Sinclair is well positioned for the future, and we remain excited about the opportunities that lie ahead of us as we enter into the second half of the year. Lucy, Rob and I will now open the call to questions. Thank you for joining us today.

[Operator Instructions] And the first question today is coming from Dan Kurnos from the Benchmark Company. Dan, your line is live.

Great, thanks. Really appreciate all the incremental disclosure guys super helpful in kind of framing the argument Chris, I'll give you the floor just to kind of go back on a question that I know you get a lot just in terms of the sum of the parts argument and getting investors for people to recognize that value you've laid out kind of a comprehensive strategy now for how the company is going to evolve going forward? And obviously, execution matters to some extent. But if the discount remains knowing that you guys are addressing the debt side, which you've done pretty well so far here. Just how do you think about your willingness to unlock incremental value or do additional things to unlock value the way that you think it should be perceived ?

Yes, that's a great question, Dan. Thanks for asking. We -- I think what you can take away from what just happened back in June that we're very focused on unlocking this in value within the company. We backed that up with significant share repurchases now with more debt purchases. And we are very open to any and all strategies to maximize value at the end of the day. That is our number one goal here. So -- we think this new structure will help tremendously. And -- but we're open to these suggestions and new ideas and always looking to get better.

And in terms of adding to the portfolio, obviously, there's a lot of rumors out there in terms of stuff that could potentially come for sale. I know you guys have to take that into consideration, which you created a vehicle for incremental financial flexibility. Is there any kind of target leverage or thoughts on size of what could be added in the majority stake components of what you talked about today?

Sure. Well, as you can see in the investment portfolio, -- it now has over $300 million of cash. And so we do recognize that in terms of getting value credit, it would be much easier and better from a Wall Street perspective, if we had consolidated financials on that -- on those investments. So that's the big reason why we're going to move away from minority investments, which has done incredibly well over the last 10 years, and we're very happy. We did that, yielding over 19% IRR. But we also recognize that having underlying financial performance in our disclosure of our various divisions would be better. And so we're looking at that $300 million of cash and thinking about how we can deploy that into a new investment or division, if you will, because it would be consolidated sometime in the back half of this year or early next year.

Got it. And that's helpful. And just maybe one for Rob. Just in terms of your commentary, we've heard -- we've seen the upfront coming a little bit better than feared, I guess, I would say, National obviously has some really comps in the back half of the year. It sounds like insurance, in particular, is getting a little bit better. But is there anything that you can tell us in terms of conversations with advertisers just given all the noise out there between the strikes and everything else, just sort of what the underlying view is and how fluid the environment is right now?

It's still month-to-month basis, but we're encouraged. We're not seeing any significant cancellations and autos made its full cycle. So now it's returning their inventory on the Tier 3 logs. We're seeing Tier 2 money regional spending as well. dollars committed for the upcoming college and NFL pool seasons are being committed to now. So it leads us to believe that we're robust on the return of ad revenue and also encouraged by the amount of issue and political dollars being spent right now. We have money being spent in Ohio, Pennsylvania Rhode Island, Iowa markets right now, and we expect further markets. But we're pacing ahead of our second quarter performance right now for third quarter, which bodes well where Lucy gave the guidance earlier of $25 million for the fourth quarter. And we firmly believe going into 24 that Sinclair will have another record presidential year. And so -- and with our expansion of 25 fast channels that will be news focused, local news focused. -- as inventory gets tight as an alternative source for the political dollars to be spent in the same genre that they buy through the broadcast wires. So it's long-winded, but the key cater that we manage services is getting stronger even though still facing negative the legal category, which drives local business and automotive has been positive for the last couple of quarters. So I see the strength coming back, and I anticipate somebody asking me about the right of strikes. So all networks have contingency plans. -- and dollars had been shifted from prime over the last several years into sports. So we're fully loaded with sports and fourth quarter on all networks.

Got it. That's really comprehensive. Appreciate it.

Thanks, Dan.

The next question is coming from Aaron Watts from Deutsche Bank. Aaron, your line is live.

A couple of questions for me. I'll start with this one, and I apologize if I missed it, but could you comment on the pace of erosion in your underlying sub base for your station group? And whether recent trends have caused you to reconsider your 3-year outlook for net retrans, which I think Lucy was low single-digit growth?

Right. So the trend, by and large, it's a little bit worse, but we're still in mid-single digits in terms of churn. and we are not changing our guidance in terms of the 3-year CAGR, 22% to 25% in low single digits. So we still had -- we can absorb that small degradation that we've seen.

Okay. And Chris, I've asked you this before, but figured I'd try again today. Any greater clarity on whether the upcoming distribution discussions you mentioned will be representing your station group solely or if the RSNs will still be a part of that? And if it is a return just at the stations, do you see some potential upside from prior terms when the RSNs were in the mix?

Right. Well, we -- yes, we will be negotiating for -- or we're not -- we will not be negotiating for Diamond in these upcoming renewals. So that's the answer to that question. And I do think that we are very bullish on what the outcomes will be for what is almost 90% of all of our subs coming up in the next 12 months.

The next question is coming from Steven Cahall from Wells Fargo. Steven, your line is live.

Yes. First, maybe to just pick up on the sub comment you just made, Chris. So it looks like that the retrans guidance for Q3 is about a 2% sequential move quarter-to-quarter. -- which I guess we would then annualize to about an 8% rate of churn. So just first question, is that kind of the right way to think about churn at this point? And I think also I heard in the prepared comments that you're seeing some improvement in reverse comp. Should we think of that to mean that the rate of increase in those prices are lower than what they used to be. I think that's kind of what we've heard. And a last retransmit sneak in here is we've heard the 3 out of the 4 national networks are now doing a reverse comp is just a programming fee not per sub. So wondering if you could confirm that.

So I'll handle the questions about reverse comp. It's -- most of our deals are fixed programming fees. That's not new -- that is -- that's been that way for well, it really has been that way almost from the start of reverse retrans. And then in terms of increases, we're definitely seeing reduction in the escalation of those fees as they've become quite significant in terms of the aggregate size -- and as the attention and focus of the network, the big media companies have turned towards more SVOD and other properties. So as we've spoken about in the past, we do think the dynamic -- the negotiating dynamic between us of the networks has balanced out and enabled us to manage our programming costs in a much more reasonable way. So that's what you're seeing there.

Yes, Stephen. So on the revenue side, as Chris mentioned, we're seeing mid-single-digit churn on broadcast. And that's what we've modeled into the guidance. From a revenue standpoint, don't forget there will be YouTube TV, which just launched Tennis in June 1. So you'll have a full quarter of that in there for third quarter, adding to some of the increase as well as just some escalators year-over-year.

Great. And then maybe just a couple on the ventures portfolio. So I was wondering how we think about what the balance sheet entry currently is for some of the assets that you reflect on that Slide 9. The cash and the valley stakes are easy, but just wondering how you currently carry those investments on the balance sheet. And you mentioned that you might want to deploy some of that cash. And with that, could we expect any major exits ahead? And also related on this one, would you ever consider spinning out this business because I wonder if some of the challenges just that as media investors we're a little out of our element, trying to put all this together sometimes.

Sure. So what's reflected on Page 9 are the current conservative market values of the various assets. So that does not come through on the GAAP balance sheet. On the GAAP balance sheet, it's the lower of cost or market. And so most of these are going to be listed at cost because their market value is well ahead of their costs. And so -- in terms of -- so that's why we have to give the disclosure the way it is. It does not really show up on our balance sheet, and that reflects the true value there. And so in terms of spinning this off, as I mentioned before, I think that sort of goes in the bucket of what would we do to realize value that is something that it's not currently contemplated, but it's certainly something that we've discussed. And ultimately, if we can't this valuation discrepancy and may be something that we would do in the future. I think there was one other question embedded there that I might have missed.

You covered most of the yes, you ever consider like a spin out, but I think you kind of covered that in the last business

The next question is coming from Barton Crocket from Rosenblatt.

Okay. I was interested in your thoughts about an event that's been put out there or the group, which is [indiscernible] saying that you expect at some point the ESPN will go direct to consumer, maybe in some type of partnership I'm just wondering, Chris, for your thoughts about what that means for the Pay TV ecosystem. Do you think others would respond? Do you think this accelerates subscriber erosion or not? And is there anything that Sinclair to do to prepare for that?

Well, when you take a look at what's on ESPN Plus right now, I mean, ESPN is pretty much already there. very little that is not on SAMs that is on ESPN. And when you think about what's happened over the last 5 years, to me, this is just one of the last Domino's certainly not the first is essentially exclusivity has gone away. When you're -- if you're a consumer, there may be some inconvenience to it all, but you can access any content on the pay TV bundle in a myriad of ways. And that's just really the outcropping of what's happened in the industry over the last 5 years with the advent of SVOD streaming et cetera. And so what does that mean for the industry? Well, it means that the pay TV bundle, which is discounted and a large wholesale content bundling when you break down the cost to the consumer is less on a per program per channel basis than anywhere else. And so what it's going to come down to at the end of the day since exclusivity really does not exist in the industry anymore is what's the value proposition to the consumer. And Pay TV is now competing on a value proposition basis with all the other sources, mainly the SVODs out there. And it is, I think, significant that there's a shift of major shifts going on in the industry away from subscriber growth and towards profitability for all the major SVOD players. I think Pay TV got disproportionately hurt when there was a dive for subscribers. And essentially, these other services were underpriced massively enterprise. And you're seeing now with the advent of advertising, not having the ability to share passwords, price increases, you name it, the relative pricing of…

Okay. That's great. I appreciate the insightful comment. There's one other thing I wanted to ask about, which is political. So I think many of us have been reading in the news that some of the fundraising totals for perhaps Trump and others are coming up a little shorter than it appeared earlier. Yet your commentary about political still seems very kind of optimistic. How do you kind of reconcile what we're reading about fundraising and maybe running away with the Republican nomination? -- and you're kind of constructive view of political at this early juncture.

It won't be just the individual seat raises, and we are in the majority of the contested states that were type races in 2020, but you're seeing an abundance of issue advertising as well. So it's not just a candidate but issue as well that keeps us bullish on where the political outlook will be in 2024. Speaker 2 55:15 Is, we also think there's a lot of money sitting on the sidelines as the current -- the Republican primary looks sort of uncompetitive at this point. which could be affecting fundraising. But as things change, they always do is if you get down to the stretch here, and we think you'll see fundraising start to raise later in the season.

The next question is coming from David Karnovsky from JPMorgan.

Just one for Chris or Rob. You noted the lack of programming exclusivity could cause the network in terms of reverse retransmission you could argue, however, that same lack of exclusivity, especially on the sports side, they impact stations as they go to negotiate against the MVPDs. So I'm kind of wondering how you're thinking about that as you head into your subscriber cycle.

Yes. So at the end of the day, there really isn't a service offering from the MVPDs in terms of video if they don't have key components of the programming offering, which includes our channels. So while it's true what I said that there are other ways to get this content, and it's been that way for several years now for many programming types, the MVPDs, if they want to have a video service need to have our channels. And then that's what really underlines our ability to continue to get a healthy share of what is charged to the ultimate consumer. And the exclusivity portion of the equation has really sort of left the building over the last 5 years, as I mentioned. And -- but I still -- and we still see good pricing power with the MVPDs because it is a product-based to want to offer.

And I would say it's the distinctive serving our communities and our relative value to the communities when we're reporting our content, and that's why it's the state -- and that's why I started off my silico with the fact that we are going to be relevant on all platforms. But when you have relevance on the digital platforms, it drives eyeballs right back to our linear broadcast station. And so -- when you look at the award-winning journalism that we do and then other broadcasters do it as well, that's the reason why people really tune in. And when I referenced that one day, study by TBB just shows you how much local broadcast dwarfs all the other types of channels that are out there in the universe.

And then the [indiscernible] as deal, I just want to see if there's any incremental detail you could provide on that, maybe how it's structured, how you best plan to monetize it. I think Rob, maybe mentioned earlier you thought that could be something that could support you on the distribution side?

Certainly. So we're not going to get into too much detail because it is a confidential arrangement, but it will be on CaaS [ph] which is our independent station there in Salt Lake, which just happened to be the home of the Jazz before the Jazz moved their games on to then DIRECTV RSN now Discovery & Warner. And -- it is a deal where we're in true partnership with the team. That was important to us that as we do better as the games do better, everyone does better. And we're already seeing nice impact on that station. So for instance, we haven't seen the NBA season start. But because of this partnership, we -- we got the developmentally the Geli games on KAS and their ratings basically quite ruple what was -- what they were when they were on the Discovery Warner RSN and was a big lift from what previous programming we had on that station. So -- we're very pleased with the way that deal ended up working out. And we think that partnership is going to is going to deliver both for the team in terms of maximum reach and an engagement and then deliver for us financially.

And the next question is coming from Benjamin Soff from Deutsche Bank.

I guess just sort of following up on the sports topic, like would you anticipate that the volume of these deals with teams moving from the RSNs to broadcast to pick up over time and just kind of how you think about that? And then I have a follow-up after that.

Sure. So look, I don't know what will happen in the future. We're certainly seeing -- some of the teams that are without a home, like the Discovery Warner, RSNs, they are sort of that Jazz was one of them. They're looking for other options. There's a big push from owners to go for more reach -- and there's no better reach vehicle than free over-the-air broadcast. And the NFL is a great example of a league that has massively benefited from being on free over-the-air broadcast. And I think the rest of the we see that and realize that, that's been a great outcome for the NFL. And looking forward, I think the right answer is that some portion of games for every major sports should have a home on free over-the-air broadcast to keep exposure maximized and keep fan interest maximized. That doesn't mean it will all move, but it does mean that I think for any owners that want to ensure a healthy future free over-the-air broadcast should be a major component of their strategy.

Okay. Makes sense. And then just on the note of not negotiating with Diamond and the next round of renewals. Does that mean that the management fee will go away kind of as you go through those deals?

Yes. Look, I can't get into the details on something like that. We are still getting paid on a deferred basis for the services that we provide, but I can't comment beyond that.

And the next question is coming from Courtney Bahlman [Barclays]

Hi. Can you guys give a little bit of color on how we should think about the incremental economic benefit stemming from your continued deployment of ATSC 3.0 next-gen TV I know you guys have rolled it out to a meaningful part of your footprint and expect to make more progress. But how does that translate economically into results moving forward? And what -- how do we quantify that? What should we expect

Sure. So I expect some of the first non or sort of nonbroadcast services to start rolling out in 2024. -- things related to like enhanced GPS, I think are some of the first things that will start to roll out next year, and that should start to create a revenue stream for us and other broadcasters. It's too early for me to guess how quickly it ramps up. I think the directional the midpoint forecast for BIA of $10 billion of revenues for the industry, I think, is directionally correct. And depending on a bunch of different factors, like receiver receiver penetration when the deployment is finished when not gets sunsetted. Those are all things that I don't have answers on yet to really give you a more predictable ramp to that higher revenue, but things are going to start moving next year in terms of monetization opportunities beyond broadcast.

No. That's helpful. I appreciate the color. Just one more. In terms of debt repurchases moving forward, how should we think about your preference towards tranche in buying back debt? Is it going to be shifted towards the 27%? Or how are you guys thinking about that?

Yes. We don't want to tip our cards too much in terms of where we might buy. I mean the reality is we have many opportunities in front of us, including debt, equity and investments that we may make -- and we'll continue to be opportunistic as we have in the past, but we can't comment on specific tranches that we made by.

That's understood, Thanks for the time.

There are no other questions at this time. I would now like to hand the call to Chris Ripley, President and Chief Executive Officer, for closing remarks.

Great. Thank you, and thank you all for joining our call today. If you have any questions or comments, please call our IR team. Speaker 0

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.+