The E.W. Scripps Company (NASDAQ:SSP) Q4 2023 Earnings Call Transcript

The E.W. Scripps Company (NASDAQ:SSP) Q4 2023 Earnings Call Transcript February 23, 2024

The E.W. Scripps Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. Welcome to the Scripps Fourth Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Executive Vice President of Investor Relations, Carolyn Micheli. Please go ahead.

Carolyn Micheli: Thanks, Rich. Good morning, everyone, and thank you for joining us for a discussion of the E.W. Scripps Company’s financial results and business strategies. You can visit scripps.com for more information and a link to the replay of this call. A reminder that our conference call and webcast include forward-looking statements, and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. We do not intend to update any forward-looking statements we make today. Included on this call will be a discussion of certain non-GAAP financial measures that are provided as supplements to assist management and the public in their analysis and valuation of the company. These metrics are not formulated in accordance with GAAP and are not meant to replace GAAP financial measures and may differ from other companies’ uses or formulations.

Included in our earnings release are the reconciliations of non-GAAP financial measures to the GAAP measures reported in our financial statements. We’ll hear first this morning from Scripps’ Chief Financial Officer, Jason Combs; then from Scripps’ Chief Operating Officer, Lisa Knutson; and finally, from President and CEO, Adam Symson. Here’s Jason.

Jason Combs: Thanks, Carolyn. Good morning, everyone, and thank you for joining us. Let’s start today with a look at our strong finish to 2023. I want to review a few fourth quarter and year-end highlights. Then I’ll give guidance for the first quarter and several full year items, and I’ll conclude with capital allocation and our debt picture. We were very pleased to end 2023 by significantly exceeding our free cash flow expectations. On our last earnings call in November, we set a range of $50 million to $60 million in full year free cash flow, and we ended at about $77 million. The over performance was driven by our highest political advertising revenue for an off-cycle election year as well as stronger-than-expected ad revenue results in Scripps Networks.

Also in 2023, we achieved $752 million in distribution revenue as we renewed 75% of our pay-TV households. That was up 15% over 2022, and those results drove net distribution dollars up more than 40%. We are pleased we were able to successfully avoid any blackouts with the cable and satellite providers throughout all of those negotiations. For the fourth quarter of 2023, we reported finance results that nearly all met or exceeded the expectations we set in November. We executed tight expense management, and our Scripps Networks revenue came in better than expected at down only 7%, driving Networks segment profit performance. Scripps Networks revenue for the fourth quarter was $230 million, exceeding our guidance because of better-than-expected revenue from all three key areas: general market, connected TV and direct response.

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Q&A Session

Scripps Networks Q4 segment expenses were $166 million, down 1.2% from the prior year quarter. Segment profit in Networks was $64 million. In our Local Media division, total revenue was down 12% from the prior year quarter due to the absence of election year political advertising revenue. Political ad revenue in Q4 2023 did exceed our expectations at $16 million, driven by spending in Montana and Ohio. Total political ad revenue for 2023 was $33 million. As I mentioned before, the highest for an off-cycle election. Fourth quarter local core advertising revenue was up 1% from the prior year period, and local distribution revenue was up 22%, fueled by renewals of our cable and satellite agreements. Local Media expenses were up less than 5% from the prior year quarter.

This increase reflects higher programming fees and the cost of sports rights agreements with two National Hockey League teams. Local Media segment profit was nearly $86 million. In the segment labeled other, we reported a fourth quarter loss of $12 million. The segment includes spend on promoting our Tablo over-the-air viewing device. Shared services and corporate expenses were $24 million, up a bit from our November guidance as better-than-expected quarterly results drove our variable compensation higher. The loss attributable to shareholders of Scripps was $268 million or $3.17 per share. Pretax cost for the quarter included a non-cash goodwill impairment charge for Scripps Networks of $266 million. In addition, we recorded $9.4 million in restructuring charges.

These charges increased the loss attributable to shareholders by $3.15 per share. The restructuring costs are related to our company-wide reorganization. We are on track to realize annualized savings of more than $40 million by the middle of this year. As of quarter end, cash and cash equivalents totaled $35 million. Our net debt at quarter end was $2.9 billion. We ended the year with net leverage of 5.7 times per the calculations in our credit agreements. And now I’d like to discuss a few key guidance items for the first quarter and full year 2024. For the first quarter, in the Scripps Networks division, we expect revenue to be flat to down low single digits. We expect first quarter Networks segment expenses to be down low single digits. We expect total Local Media revenue to be up in the low teens percent range.

We expect local core ad revenue to be flat to up low single digits. Lisa will give more color in a moment about our strong start to the quarter with key categories, including auto. We expect Q1 Local Media expenses to be up about 10%. If you back out the costs associated with our new sports deals, network fee step-ups and onetime facility work, Local Media expenses would be up in the low to mid-single digits. First quarter shared services costs are expected to be about $24 million. We expect the segment labeled other to generate a loss of about $7 million in Q1 as we continue to educate consumers about free over-the-air viewing and to promote our Tablo device. Now I’d like to touch on several full year items. We expect our local political advertising revenue to come in between $210 million and $250 million in this presidential election year.

We expect connected TV revenue for the Networks to increase by more than 40%, excluding the impact of our low-margin programmatic product that we’re sun setting. We expect our distribution revenue growth to be modest this year because we’re renewing only 5% of our pay-TV households. We expect capital expenditures of $70 million to $80 million. That includes onetime cost to build out a new station facility and to reconfigure office spaces where we’re consolidating our footprint to lower operating expenses. We expect cash interest this year of between $200 million to $210 million, cash taxes of $50 million to $60 million and depreciation and amortization of $150 million to $160 million. We do not have any required pension contributions this year.

I’d like to end by discussing capital allocation and debt paydown. As you know, Scripps took on significant debt in early 2021 to acquire ION [ph.] Media. The strategic purchase of ION formed the foundation of our Scripps Networks segment, which has helped Scripps to diversify its revenue base and to build strong nationwide over-the-air audience reach. The new segment has increased the durability and profitability of our enterprise. The ION television stations and the spectrum have opened up significant growth opportunity for the company in local and national media through Scripps Sports. Remarkably, in the three years since acquiring that debt, Scripps has already paid down 22%, significantly outpacing our peer group. We brought our total debt down by nearly $1 billion from about $4 billion to about $3 billion today.

That represents 98% of our discretionary capital applied toward debt reduction. Focusing on debt paydown, we have elected to defer the payment of our preferred equity dividend to Berkshire Hathaway this quarter. This deferral was permitted under the terms of our agreement with Berkshire. A deferral will allow us to maximize the paydown of our traditional bank debt and provide us with more flexibility in refinancing our upcoming maturities. This will change our rate on the preferred dividend from 8% to 9%. This year, it is our intention to delever it by cash from our political advertising revenue, incremental cash flow that may come from other top line revenue, operating expense levers and financing levers. So when you hear us say every quarter that our top capital allocation priority is paying down debt, we are backing that up with our actions.

Now here’s Lisa to share highlights for both the Local Media and Scripps Networks operations.

Lisa Knutson: Thanks, Jason, and good morning, everyone. I’m pleased to start by sharing that the advertising momentum we saw begin to build in the fourth quarter has continued as we move through the first quarter. That’s true across both our operating segments from Local Media core advertising to several of our national network revenue streams. This morning, I will give you color on our local core advertising categories for Q4 and Q1 and then discuss the trends we are seeing in the in national advertising with Scripps Networks. Then I’d like to look ahead to this season’s upfront, which will be upon us very quickly, and we’ll wrap up with our political outlook. In Local Media for fourth quarter, we saw our top five categories end up higher year-over-year.

The top performer was automotive, up 9%; followed by home improvement, up 8%; and the media and communications category, up 6%. Also notable with services, our largest category, which was up 3%. That is the first quarter services has finished up year-over-year in five quarters. Moving into the first quarter. The services category is up quarter-to-date as our automotive, home improvement and retail. We see continued momentum as we move through this quarter and are optimistic about a solid finish. Turning to Scripps Networks. The fourth quarter saw us begin to build back of some of the direct response advertising dollars that had declined as inflation spiked in recent quarters, and easing of inflation has brought back DR advertisers who are reliant on tapping consumers’ discretionary income.

Demand is up, and therefore, so our ad rates. As you know, the entire national advertising marketplace was challenged by last year’s weak upfront, which was down 10%. For Scripps, the upfront typically lays in a nice foundation, 30% or so of first quarter dollars. We’re making up ground with our aggressive tactics to drive rate in DR and scatter, and that accounts for the momentum you see in our first quarter guide. In fact, scatter pricing is up more than 35% over upfront pricing. Connected TV revenue has continued to be strong for Scripps Networks. 2023 saw a year-over-year increase of nearly 70% after backing out the impact of the low-margin programmatic products we are discontinuing. Looking ahead, we’re expecting more than 45% growth in our connected TV revenue for first quarter.

And for the full year, we are guiding to more than 40% increase in CTV, again, after removing the programmatic product to show the extent of organic growth. We’re benefiting from continued audience growth as Americans seek out new options for ad-supported free TV, and we continue to expand our distribution within the marketplace. In fourth quarter, we launched ION on Pluto, and it quickly grew to be the number one network on its entertainment tier. Likewise, ION was named by Google TV as one of the most watched live channels of 2023. ION is the only broadcast network available in the fast marketplace, which is a premium programming lineup that includes top-rated procedurals and live sports. If the analysts are correct in describing fast as the new cable, then ION and the Scripps Networks are exceptionally positioned for more CTV revenue growth.

I want to talk now about our aggressive approach to selling the upfront this coming season and why we expect significant — significantly improve our outcome. This year, under the direction of our new Chief Revenue Officer, who came to us from NBCU, we are taking a much more aggressive stance. We’ve scheduled our upfront for April 9, a month ahead of the large conglomerates’ in-person events. We are expecting several hundred buyers to attend. The new approach is commensurate with the stronger position we hold as a result of our expansion into live sports, the most valuable content genre for linear TV. Scripps Sports and our partnership with the WNBA and the National Women’s Soccer League are the foundation for recasting ION into an entertainment destination for younger and more diverse audiences of scale, which is more attractive than ever to advertisers.

Our national sports sales efforts are drawing new premium advertisers to ION and other Scripps Networks brands across all time periods. Sports advertising is serving as the tip of the spear for scatter market advertising in general. To that end, we are focused on growing our base of regular advertisers drawn by our sports programming and expanding into CTV into our — and into our popular entertainment brands, with a specific focus on multicultural. In addition to the lift from sports, we are seeing rating successes that also position us well to benefit as the ad market recovers. In fact, the Scripps Networks are the only national entertainment portfolio showing year-over-year growth in the first quarter, both in prime and total day. We are delivering 7% more households and 5% more total viewers than at the same time last year.

This growth is separate and in addition to the audience growth and momentum we see — we are experiencing on CTV. I’d like to conclude by giving you color on our political ad revenue opportunity for 2024. As you know, each race, each market and each election year are different. Spending is determined by where the toss-ups are taking place and where the national parties and packs put their ad dollars to work. What we know for sure is that the ecosystem of spending will be larger than ever. And we know that local broadcasters will continue to take the lion’s share of that spending. Ad Impact puts the total election spend at $10.2 billion compared to $9 billion in 2020. And the firm says 52% of the advertising spend will go to local broadcasters compared to 48% last time.

For Scripps, Jason mentioned, our clearest line of sight now is a range of $210 million to $250 million. Presumably, we’re going to see the same two candidates running as in 2020, but there are a couple of new factors to think about here. One, Biden support is not what it was in 2020; and two, much of the money Trump has raised is going to his legal defense, not to its campaign. So while experts say there will be a greater level of fundraising for this cycle, it won’t necessarily be spent on the presidential race. The states where Scripps does expect to benefit from presidential election spending are Arizona, Nevada, Wisconsin and Michigan. Turning to the U.S. Senate races. Scripps has local stations in seven competitive states, all of which have Democrats defending their current seats.

Montana is a big one with Senator Jon Tester. We’re already seeing significant orders coming into Montana, where Scripps commands strong market share across the state. We’re also well positioned in Ohio with two big ABC stations, and in Wisconsin, Maryland, Michigan and Arizona, which also are projected to have tight Senate races with national money pouring into support parties’ candidates. In Nevada, our Las Vegas stations will benefit from both a contested Senate race and being in a presidential swing state. We have no contested governors’ races this cycle and fewer competitive house races because of gerrymandering and redistricting efforts nationwide. However, another area of opportunity that could be beneficial is the ballot referendums in some of our bigger states, including Florida.

It’s estimated that up to seven states could have controversial ballot issues. One such measure in Ohio last fall helped to drive our over performance with political for the year. So we’ll be watching to see whether those issues make it on to the ballot in key states this summer. Before I turn it over to Adam, I’d like to thank Scripps employees for their hard work and perseverance during an especially demanding time. A year ago, the company began a significant reorganization. In addition to realizing meaningful cost savings, we have made many changes to the way that we do business. We have acted with urgency and rethinking the best ways to serve our audiences and our advertisers and to create new value for the enterprise. While necessary, the changes haven’t been easy, and I credit our resilient employees for making it work.

And now here’s Adam.

Adam Symson: Thanks, Lisa, and good morning, everyone. It’s been a tumultuous several months in the U.S. media landscape. Last September, after a 10-day impasse, during which you would have thought we were witnessing the end of pay TV, Disney and Charter announced the landmark distribution agreement that reinforced the power of the cable bundle. Then just a few weeks ago, Disney, Fox and Warner Bros. Discovery announced the sports streaming partnership. And again, from the market’s reaction, you would have thought it was literally the end of television. I completely understand why even the most seasoned media investors are struggling to sort through the chaos. I’ve been a part of this business for a while. And while it feels — and it feels like the market is always ready to believe the worst about broadcast.

As a journalist myself, leading a company with a journalism mission, I prefer to deal in facts and steer clear of rumor, innuendo and speculation. So I thought I’d start this morning with what we actually know about these changes to the marketplace and how they impact Scripps. To start, the yet-to-be-named sports-focused streaming joint venture will be yet another virtual MVPD in an already crowded and somewhat established marketplace. It will also be competing with and likely cannibalizing other streaming products from the very same companies that make up the partnership. At somewhere between $40 and $50 a month, it will be less expensive than most of its virtual MVPD competitors. And it will also be much less of a complete consumer proposition than the existing pay-TV bundles.

If this is all about attracting the sports fanatic, it’s hard to say it’s a slam dunk. March Madness will be incomplete. The Olympics will be missing outright, and subscribers will get only half of the NFL, the very sport that makes up the top 200 programs on TV. It’s the introduction of yet another service into a fragmented landscape that will likely confuse and confound an already frustrated consumer. This is not to say that the new offering won’t get subscribers. If, as the partners say, it will target cord cutters, we at Scripps will very much benefit from increased distribution fees and strength and reach. Executives have confirmed over and over that affiliates like Scripps will be carried along and compensated just as we are with the other virtual MVPDs. I can’t see why analysts nor investors would see this as some sort of killer out.

But hey, if it adds new value to linear television, I’ll be happy to root for its success and take advantage of its reach because we’ll get paid for our ABC and Fox affiliates. To be clear, fragmentation and disruption were here well before the JV announcement. And Scripps has already been driving growth in this chaos, even if Wall Street has yet to recognize it. We continue to reap the benefits of retransmission revenue and expect to do so for years to come. Last year, we renewed 75% of our subs, drove net distribution margin expansion and created new incremental value through agreements driven by our sports strategy. There should be more growth here to come from the productive relationships we have with both traditional and virtual pay-TV platforms.

Pay television is still a solid business that will support Scripps as we transition to our next growth phase. Because of our platform diversification strategy, distribution revenue accounts for less than one third of Scripps’ total company revenue, so we are much less reliant on it than others. Our reach in revenue are buoyed by the growing over-the-air audience and our aggressive moves in connected TV, strategies that are paying off and powering real financial growth. Aggressively tackling future opportunities even when they are disruptive has been a consistent thread in the Scripps story. And thanks to our foresight, connected TV revenues for the enterprise should be well past the $140 million this year. As Lisa pointed out, our Networks portfolio stands alone growing ratings.