Get started. Very happy to have E.W. Scripps back with us this year. On the dais with me is CFO Jason Combs and Treasurer and SVP of Tax, Rebecca Riegelsberger. Guys, thank you very much for being here. So it has certainly been a topical year in the space. This is a timely sit-down to discuss not only Scripps, but also industry themes as a whole. Scripps has a unique setup versus some of your peers, reaching viewers on a national and local level via a variety of distribution methods. Jason, perhaps kick us off with a quick overview of those different dynamics, how you think that sets you up for success in today's evolving media landscape.
Yeah. So thanks for having us. Glad to be out here. Always nice to come out to the warm, sunny weather out in Scottsdale. I'll first start by reminding everybody about sort of the makeup of our company. So, we have two primary operating segments. We have our local media segment, which consists of 63 different channels in 41 different markets. And then we have our Scripps Networks division, which consists of a large portfolio of national brands that kinda span coast to coast. You recognize a lot of the names: ION, Court TV, Scripps News, Bounce, amongst others.
And so, you know, to your point, Aaron, you know, when you think of the brands we have, the mix of both local versus national, we approach our brands with what we call our all-of-the-above strategy, which is to ensure that wherever the consumer is looking to consume their media, that those brands are available there. So we focus on ensuring ubiquitous carriage and pay TV in the over-the-air space and in connected TV space. And so when you think about the kind of the mix we have of local versus national assets, I think it is a little bit unique for our industry. Probably sets us apart a little bit and from some of our other competitors, who, frankly, are probably a little bit more tied to the pay TV ecosystem than we are.
Yeah. Okay. So we're gonna dive into all of that throughout this discussion. I wanted to start with an area that I think a lot of hand-wringing went on among investors recently around the Disney Charter dispute that ultimately got settled a couple weeks ago. As we've now had time for the dust to settle, would be great to hear your thoughts on the new template set by the two companies. Obviously includes both DTC and linear, and seems to preserve the cable bundle for now.
What does it mean for local TV broadcasters broadly and for Scripps specifically?
Yeah, so first and foremost, we're glad that there was a resolution there. Obviously, that created a lot of turmoil in our industry, and frankly, what I viewed as some knee-jerk reaction to the dispute. So we're glad that it's concluded. We do think that the resolution they came to, you know, helps solidify up what we view as the value that broadcasters bring to the overall pay TV ecosystem and the pay TV bundle. You know, I think there's a expectation or a hope that that provides a little bit of a stickier bundle, and certainly keeps the Charter pay TV ecosystem whole longer. And so we're, you know, we're hopeful for that.
I think time will tell. You know, I think the other thing that I kinda took out of it was, you know, one of the things that broadcasters have been saying for a while, is that in order to support the ongoing growth for for the broadcasters and some of the larger cable players, the overall bundle was gonna have to get a little skinnier, and some of the lower-performing, lower-watch channels were gonna need to get dropped. And you certainly saw Charter push on that, and that was one of the things that they really pushed Disney on, are certain networks that they no longer wanted to carry.
We think, you know, from our perspective, that is a positive because it kind of hones in that bundle more on the brands, including our brands, that we believe bring the most value to that bundle.
So it sounds like you do believe that this setup can perhaps slow the rate of churn among the subscriber base, or at least maybe stabilize it. Is that-
Yeah, I think that's certainly our hope. It will take a little while to see how that plays out, and even-
Yeah
even the, my understanding, is the work that they're doing to include some of the streaming services into that broader bundle now will actually take a while for them to operationalize.
Yeah.
So I think it'll be a little while before we actually can see that play out. And then I think everybody in the room knows, we also get information on a lag, too, in terms of subscriber churn, but that, that is certainly our hope.
Do you feel the outcome of this dispute tilted negotiating leverage in any way, either more towards distributors, in discussions going forward, whether from a pricing standpoint or otherwise? Do discussions get tougher from here on out?
I don't think so. You know, I think from our perspective, we believe we still have the same leverage we did before that dispute. We have a really good retrans story, which I'm sure we'll touch on-
Yeah
a little bit later. But, you know, what we've seen during our negotiations is the continued value that we bring and the leverage that that provides us in those negotiations. So, you know, I don't necessarily think that that's an outcome where the leverage tilts away from us.
Okay. There have been recent headlines suggesting Disney may be willing to sell all or parts of its linear TV business. A couple broadcasters have put themselves in the mix as potential suitors. Is there any interest level from Scripps around that? And how high a hurdle would there be from a regulatory standpoint, from a financing standpoint?
I guess first thing I would say is we don't comment on speculation, so, you know, nor on kind of any potential M&A pursuits. I will also reiterate what we say all the time, our number one capital allocation priority is debt paydown and de-leveraging, and I think that's where you'll see us continue to focus. Kind of for your sort of macro level question here... I think anybody who pursues that deal, there probably is gonna be some level of sort of escalated scrutiny there, because of the pure size of the transaction. But again, our, our focus is on debt paydown and delever.
Okay. One last question around this topic that's come up a lot in my discussions was whether the new template now makes it possible or easier for distributors and their subscribers to access network content, including nationally televised sports, even if there's a dispute with a local affiliate. The obvious implication of this would be distributor not feeling as much pressure to meet an asking price from the local affiliate or settle a blackout dispute expeditiously if they can access that content, like Monday Night Football, via the direct-to-consumer apps that would be a part of the bundle. What's your thoughts around that? Maybe you can touch on some of your protections or if anything has changed now versus what it's been for years.
Yeah. So I guess first thing I would say there is that our network and our cable agreements prohibit the duplication of a channel on platforms. From that standpoint, we have protection built into our contracts that protect us against something like that. I would also say that from our perspective, the economics of sports on big four networks don't work without the component that is the affiliate fees. And so even if there was a workaround, I think they, you know, there would be a kind of potentially eating into part of the overall revenue stream that supports those economics and making them worse in the big picture. So we continue to see the value we bring. We believe we have protections in place.
I don't have any concern coming out of the Disney-Charter dispute specific to that.
Okay. So, let's shift gears to retransmission fees, 'cause as you pointed out, it's been a big year for you.
You had 75% of your traditional Pay TV subs up for renewal.
As we now sit in October, I believe you're through most of that. Can you give us a sense for how those discussions went versus your expectations? And remind us what your outlook is for net retransmission fees over the near medium-term horizon?
Yeah. So, from a retransmission perspective, we do have 75% that were up for renewal, and those were all up for renewal in the first three quarters of the year. And so, we're really pleased to have gotten through that. You know, the net result of that is gonna be significant growth on the top line and the bottom line. Our net distribution revenue is gonna grow by more than... Or I'm sorry, mid-teens, I should say, year-over-year, and net distribution dollars are gonna grow by more than 40%. So really strong story for us. You know, we're pleased with the way those negotiations went, and you know, they were really, from our perspective, no surprises.
If you're talking a little bit longer term, you know, we've our cadence of renewals is 75% this year, really nothing next year, and then 25% in 2025. And so that kinda sets you up for kind of the, you know, growth in, you know, that will restart as we get into our next renewal cycle starting in 2025, and then 2026 will be another 75%.
Got it. Okay. On the network affiliation renewal side, can you remind me what you've completed recently, if there's anything major upcoming, and what are your expectations in terms of network comp growth rates?
Yeah, so we're kinda right in the middle of all of our network affiliation agreements. We don't have anything coming due this year or next. You know, what we've talked about has been the fact that during our negotiations, you know, a year or two ago, we were able to really push back on the historic, you know, kind of really big first-year increases you would see in affiliation expense. And a lot of that tied to the loss of some exclusivity as our partners have moved some of their content to their streaming apps. You know, we were successful in that, and we've talked quite a bit about that. You can see it really flow through on our P&L.
You know, our programming expense line in our local media division, which is made up of both affiliate fees but also acquired programming, you know, has been virtually flat year-to-date this year when you look through our P&L. So, we were pleased with the outcome of that, and we have a little bit of a runway before we enter into those discussions again.
Okay. Let's talk about the advertising environment. It has been a sluggish year plus for advertising, most notably on the national side. On your earnings call, there was cautious optimism around the outlook for 3Q and 4Q. Does that optimism still exist as you sit here today? And are there any finer points you can highlight that give you confidence in that assessment?
Yeah, so I mean, you referenced our Q2 earnings call. We did talk about how pleased we were with Q2 and how things shook out specific to the national ad space. You know, we saw a stabilization in the decline we had seen in direct response, which is a really big component of our overall revenue profile in the networks business. We also saw probably the strongest scatter market quarter of scatter that we've seen in a couple of years. And in addition to that, connected TV, which is another key growth area for us, we had a really strong growth quarter in connected TV. So, you know, all of those things certainly gave us, and continue to give us, optimism as we move into the back half of the year.
Okay. So one worry that I hear from investors is just the fear that the other shoe is gonna drop. In past slowdowns, we've seen national dip and then local eventually follow lower, albeit less pronounced. While local hasn't exactly been exuding strength, it has certainly held in better than feared this year. What gives you confidence that the local ad market is set up for continued stability, if not growth from here?
Can we avoid that pull down that we've seen in the past, past slowdowns?
Yeah, so from a local perspective, it has certainly been much more resilient, you know, during this economic downturn than the national side. You know, end of the day, local businesses need to get feet in their door, and we continue to be, as a local TV broadcaster, you know, really the best way for them to meet to find a large audience. So from that perspective, we continue to be optimistic. There are certainly, when you look category by category, certain categories that are being more impacted by the current state of the macroeconomic conditions. You know, services, as an example, which is our largest category, has been down, you know, for the last several quarters. You know, that's heavily tied to the current state of inflation and interest rates.
You know, with that includes things like mortgage rate services, other things like that. But we've had other upside in categories like automotive. You know, in Q2, we were up for the fourth consecutive quarter year-over-year in automotive, and we got off to a strong start again in Q3. And home improvement's been really strong for the better part of a year. So we've been able to kind of see a little bit of that portfolio effect, certain categories that have are exuding some strength, that have helped to offset the areas that are probably more impacted by the current state of the economy.
One question on auto: Are you seeing any impact of the strikes on spend or commitments? Have you seen any pullback, whether it's from tier three, tier two?
You know, I think it's too early for most people to be seeing any impact yet.
Yeah.
I think the real question is how long that drags on, because certainly if that drags on for an extended period, you know, I do think you'll see some impact, as we move forward. But I, I think there was enough inventory generally on the lots, where it'll take a little while for that to start,
Okay. On the national network side of the house, you called out continued softness in direct response due to inflationary pressures on consumer spending. Remind us what % of ad sales for networks is derived from DR, and are you seeing any green shoots there yet that you would mention?
Yeah. Direct response is about 40% of the overall Scripps Networks portfolio. We were pleased with the stabilization we saw in Q2, and that does give us some hope as we move into the back half of the year. Also, as we look forward into Q4, historically, Q4 is a really strong direct response quarter for us, heavily tied to the healthcare industry, things like open enrollment, all of those sorts of things. And so we're looking forward as we transition into Q4 to see that benefit as well.
Okay. You know, within the networks, the national side, CTV, that ad environment has gotten a lot more competitive. How should we think about the trajectory of growth there, as the marketplace evolves and matures?
Yeah. So CTV has been a really big focal area for us. You know, we have all our local brands available on CTV, but the real effort last year has been to ensure that all of our national networks are available in the CTV space. And we've deployed across virtually every sort of major FAST streaming platform, you know, and we've seen the benefit. So in Q2, we have one sort of legacy, low-margin product that we're sunsetting. If you back out the impact of that product, we were up by 80% year-over-year in Q2. And in the upfront for the most recent upfront, you know, our connected TV business was up about 60% year-over-year.
So it will continue to be a real focal area for us and one that we think, you know, can certainly help to offset any challenges we're seeing on the linear.
Okay. What are your expectations for this election cycle? When might we start to see the dollars getting spent in a material way, and in 2024, expenditures break records again?
My thoughts are that we won't be giving a guidance at this point yet. We got ahead of ourselves a bit in 2022, and I think there's just a lot that still needs to shake out in terms of the candidates, the competitiveness of races in our markets, and so, so a lot still to kind of work its way out. Kind of big picture, there have been a bunch of reports out over the last couple of weeks that have looked at estimates for the total television or political advertising pie in television, and it's expected to grow from $9 billion back in 2020, up to $10 billion in 2024. So certainly, I would say a reason for optimism broadly across the industry.
Last election cycle, we saw some shifting of spend from traditionally competitive markets to markets that are usually more defined, you know, red or blue.
Do you expect to see that happen again this time around during a presidential election?
It certainly might. You know, I think we'll have to just kind of wait and see how things shake out. The point I would make there is, if money moves from sort of traditional market, and specifically a traditional market where Scripps has a footprint, into another market where we don't have a footprint on the local media side, we still have the ability to capture some of those political dollars. So, we both have the ability, using our ION national platform, to locally insert local political ads in markets where they're hotly contested. It's something we kind of experimented with in 2022, but frankly, I think you'll see us be a lot more aggressive about that in 2024.
Also, all of the launches we've done in Connected TV and the footprint we've grown there, we'll be able to use, you know, geotargeting through Connected TV, to grab a share of that pie that we historically have not grabbed as well.
You touched on it here, but I was going to ask you if you thought that broadcast television would at least maintain its share of the overall political spend?
It sounds like you do think that, but also, are you sensing that there's gonna be some spending going towards CTV and shifting towards those outlets more?
So, you know, the reports I referenced earlier that cited the $10 billion estimate also cite the expectation that broadcast TV will maintain its share. I do think connected TV will take a larger share, but I think that will be at the loss of other players in sort of the overall pie, not necessarily the broadcast.
Okay, I wanted to ask you a question about sports rights.
Can you talk about your strategy on the sports rights side? What you've been able to lock up, what opportunities might lie ahead, which of your platforms are being utilized, and how you plan to avoid some of the financial missteps others have made-
-in terms of guaranteed payments, et cetera?
Yeah. So, first, I guess I'll just start by saying, you know, the reason we're focused on sports, it's not like a passion play for us or something like that. It is ultimately the most resilient viewing genre right now in linear, and it's a place where there's some disruption, and we feel like we have some solutions we can bring to fill a void that's there right now. And so we're approaching it kind of with two different strategies. Our national strategy is tied to our ION distribution platform. So ION is the fifth largest broadcast network, reaches every household really across the U.S., whether, you know, through over-the-air, through Connected TV, and through Pay TV. And so we're looking for league-wide deals, to run on ION, and we've had some success there.
We won our first deal at the beginning of or at the end of spring, I guess, WNBA. For 15 weeks, we were the home of WNBA. Every Friday night, we would do a double header. And what we saw there was, we were kind of starting from scratch, right? ION is not known for sports. ION is known for turning it on and seeing Blue Bloods or Criminal Minds, or whatever else. By the middle of the season, we were consistently outdrawing ESPN from a ratings perspective. And, you know, and we can, we can now tell the WNBA that we increased their reach by 22% versus what ESPN provides to them. So I think a good story there. The other side of our strategy is really tied to local.
There's a lot of disruption. You mentioned the RSNs. A lot of disruption right now caused by the collapse of the RSN model. And you know, we see an opportunity for ourselves and other local broadcasters to help fill that void, to not only provide and fill in that distribution path they need, but also to significantly increase the team's reach versus what they were getting in the old RSN model. And so we've had some success there. We won the Las Vegas Golden Knights, and we've already aired their preseason games, and regular season starts in about two weeks. We also are the official partner of the Big Sky Conference. So we continue to believe there's opportunities out there for us, both on local and national, from a local and national perspective.
But, back to your original comment on the RSN model, we're not trying to replicate the RSN model. You know, there's a reason why the RSN model is failing. So what we're very focused on is identifying a model that works for us and works for the team, and we have a strong willingness to walk away from a deal if it only works for one side.
Okay. You mentioned you're using the ION platform to help with this-
with this, strategy. Are there any other potential ways we should think about you monetizing the spectrum that you have with those ION stations?
Yeah. So, so I guess two things. One, we can do the same play that we did with in Las Vegas, of using an ION station, potentially stand up a new independent in certain markets and find other carriage for the ION brand in the markets, maintain over-the-air carriage and pay TV carriage. So we really don't see any degradation to that brand. But beyond sort of other broadcast uses, you know, there is certainly opportunity that we are leaning into around the ATSC 3.0 standard and around datacasting.
You know, we've talked, and they've talked, Nexstar has talked about, you know, some partnership we're working through, some pilots we're doing in some of our markets right now to really kind of prove out that business case, and identify some potential end, you know, end-to-end test cases. It's a place that we continue to believe will drive significant value for the broadcast industry, you know, in the back half of this decade. It's also not one that I would say is going to drive any significant value to our P&L this year or next. But due to what we believe is the long-term upside of it, we continue to work at it and try to kind of prove out that business case.
Okay. I want to ask about your expense base. You've targeted $40 million of annual savings from cost efforts this year. How are you tracking against that? And how should we think about where the expense base is today? Is this a good level during a normalized economic environment? And if needed, do you have any further flex in the existing base to maneuver?
Yeah, we are tracking towards the $40 million that we had explained or described earlier this year, and I think you mentioned the $20 million for this year, so we're on track for that. We'll be at that level by the end of this year on an annualized basis, and then the $40 million, we'll be still on target to hit by the middle of next year, so again, on an annualized basis. And that'll be the normalized run rate. I think that's, you know, from a restructuring standpoint, that's where we targeted and where we feel like we need to be. You know, we do have additional flexibility if we needed to, but that's not really part of our restructuring. And again, we feel that that's where we're going to...
the right expense base for us from a restructuring standpoint.
If we continue to see a transition from linear TV to CTV, what impact does that have on your overall margins?
I think with CTV, I mean, we are bullish on that. We think that that's, you know, a great story for us, but it's still pretty early to say. CTV does have higher margins, but from a, we're still kind of tracking on what that growth is and what that ultimately will look like from a mix standpoint.
Okay. You ended June with net leverage of around 5.3x on a trailing two-year basis. I think you expect to generate $50 million-$100 million of free cash flow this year, and obviously, that will step up meaningfully next year. You've stated that your highest capital allocation priority is paying down debt. With that in mind, where do you see leverage trending over the next 12-18 months?
I mean, our definitely our priority is still using that free cash flow to pay down debt. We haven't really put out a target of where our leverage will be over the next 12-18 months, just given the volatility of the overall market. But our goal still remains to be the mid-threes, and so we will, that priority will remain until we get to that mid-three range, both through a debt paydown standpoint and organic deleveraging standpoint.
Okay. Your debt is trading at a discount to par value. Do you have further flexibility to buy back term loan and, or bonds in the open market? Is there a desire to do so, or will deleveraging mainly come from EBITDA growth?
So it'll be a combination of EBITDA growth, but certainly from debt paydown as well. So we do have additional flexibility. We have our board authorization to buy back bonds. You know, I think you saw us buy back over $100 million in bonds in 2022, and then even with our free cash flow generation this year, as that comes in, we'll look at a combination of term loan and bond buyback, just given that it is trading at such a discount that you mentioned, and to be the most efficient from a overall average cost of debt standpoint.
Okay. Your preferred stock, I believe, currently prohibits you from paying dividends, repurchasing common shares. Remind us the maturity date on the preferreds, and is there any other put options or liquidity events we should be mindful of there?
So, it doesn't mature, but we can call it for the first time in January of 2026. So we can call that at 105. We pay an 8% dividend. If we PIK it, then we get. It goes to 9% for the duration and the remainder until we call it. So that's why we've gotten a lot of questions about, you know, given that our bonds are trading at such a discount, would it be better for us to PIK it and then take that 9% versus those paying or buying back those bonds? That doesn't make financial sense to us at the moment, given that we don't know where those bonds are gonna be trading over the next 2 years.
We are hopeful and don't think that it will be, continue to be at that significant discount. I think one other thing of note is just the warrants associated with that. So once we do call it, they are required to exercise those warrants within a year of us calling.
Okay. Okay. Has there been any initial discussions around refinancing or extending the preferreds, or what form that might take given the current capital markets conditions? I know you have some time.
Yeah, there hasn't been any discussion of it. Just, you know, when we took it out in December of 2020, and the rate was 8%, that was hard to swallow at that time, because our average cost of debt, I believe, was 4.3%. Now that 8% actually looks like it was a great deal for us. So the thought has always been that we probably would call it at that time, but given where rates are, I would expect that they will be lower, but you never know what will happen. So, you know, we'll evaluate that at that time as to what our average cost of debt overall is when you take the preferred into consideration.
Okay. I wanted to loop back just on one topic, around subscribers and some of the themes we've been seeing, with growth in virtual MVPDs, the declines in traditional MVPD subs. How do traditional cable, satellite, bundle subscriber economics compare to virtual streaming subs for you?
If you take a sort of a macro-level view, right now, we have about 20% of our subscribers are virtual. And look at the net economics of virtual versus traditional, we'd say largely they're in line with each other. I will also say it's a very nuanced question, and when you start peeling it back and looking through MVPD by MVPD and affiliate by affiliate, you know, the answer can change. But today, with our current portfolio of subs, you know, I would say they're generally in line.
I know there's been some movement in D.C. around the local broadcasters gaining more control over negotiating with the MVPDs directly.
Any line of sight to timing on a positive outcome there?
So I don't have any sort of new news to update there, but I would just reiterate that Scripps, you know, similar to, I think, a lot of our broadcast peers, believes that we should have the ability to negotiate directly with the virtual MVPDs, no different than we do the traditional. You know, from our perspective, they're really just slightly different variations of the same business. And so we are very supportive of that moving forward.
Okay, let's, let's end with this. I think it's safe to say you don't think your securities are trading where they should be.
So what is the market, whether debt or stock, missing about the story, and what will it take to turn that sentiment around?
So yeah, I absolutely agree, where the stock is trading right now is not really reflective from our point of view of the value that Scripps brings forth. You know, I think that as you look forward, you know, we've talked a little bit about it today, to 2024, which should be a really nice year for us from a free cash flow perspective. You know, a rebounding ad marketplace, you know, a robust political, growth in connected TV, growth in the over-the-air, which we disproportionately benefit from, the restructuring being completed. All of those things that will allow us to create a significant amount of cash flow, which Becky said we intend to use to pay down debt and delever.
I think that our leverage point and our balance sheet, frankly, is a big overhang right now on our stock price. And so I think the progress we can make there will certainly benefit our stock price. You know, when you think of Scripps, sort of in general, you know, it—we're a company that's been around a long time, and has had a long history of growth and innovation. And so, you know, as we move forward, sort of those, the all of the above strategy I talked about, you know, we're gonna continue to identify ways to maximize our monetization in the pay TV system, to really lean into the over-the-air growth and lean into connected TV growth, and benefit from those.
I think as we make progress on those, you'll see that reflected through our P&L and through free cash flow growth, which I think will resonate down to our stock price.
All right, great. We're about out of time. I want to thank you both for being here. This was very helpful.
Thank you.