Scripps Looks To Cavs For 2Q Core Rebound

All broadcasters face tough off-election-year comps due to the loss of political advertising. For Scripps, the fate of the 2016 NBA champion Cleveland Cavaliers adds a second 2Q hurdle to clear.

On Scripps first quarter earnings call with analysts this morning, SVP/Broadcast Brian Lawlor said that its ownership of broadcast rights for the Cavaliers was a key element of its 2Q 2016 core results, and that if the Cavs repeat their performance as a playoff finalist, and if the finals stretch out to seven games again, it will improve the company’s results for this year’s second quarter beyond current guidance.

Given the uncertainty inherent in those “ifs,” Lawlor did not provide numbers on 2Q core, but he did give some color.

“Our pacing is much stronger than it was in first quarter,” he said. “Automotive continues to be a good category for us. We have seen three consecutive months of year-to-year growth in automotive. Some of the others are still trailing a little bit, but there’s enough on the backside to make up for a couple of the categories….”

He said that dealers are sitting on inventory at the moment, which is forcing them to spend money locally to get cars off their lots.

First-quarter core advertising went exactly as expected, according to Lawlor, with a January decline followed by improved results in February, March and on into April.

He indicated that the trend affected more than just Scripps, claiming the company outpaced its competitors during the quarter. The company reported a 4.5% decline in combined local and national core advertising for the quarter.

“GDP growth of only 0.7% didn’t help much either,” Lawlor added.

“We are seeing improvements in some of these categories in the second quarter and we do expect positive momentum as we build for the back half of 2017,” he added.
Retail, media, insurance and banking got the blame for sluggish 1Q core advertising, he said.They accounted for 75% of the company’s loss in total local and national core income.

Auto was down slightly, Lawlor said, but it would have been flat had Scripps not lost scale on this year’s Super Bowl broadcast.

Other down categories included furniture, medicine, clothing, drug stores, electronics and jewelry. On the positive side were home improvement, HVAC, fitness, medical and legal.

Lawlor said that another big drag on 1Q spending was a considerable amount of churn as major advertisers switched agencies. During the second half of 2016, $26 million in ad spending was under review, he said. That slowed the approval process for 2017 flights.

Lawlor said that three of the company’s biggest accounts — ATT, Honda, and VW-Audi — all shifted to new agencies and are just now beginning to ramp up their spending.

Add Scripps to the list of companies expecting banner political advertising in 2018, when it expects to leverage 16 gubernatorial and 10 U.S. Senate races that will take place in its markets.

On the M&A front, President-CEO Rich Boehne said that Scripps is paying close attention to the market, and is particularly watching markets where it is currently operating and to markets adjacent to them. However, he said there is nothing actionable on table.

Boehne did not rule out the possibility of either buying or selling stations. And he does expect the action to be hot and heavy. “It just looks like a real donnybrook is going to commence in the wake of deregulation.” He added, “We’re not seeing a ton of activity directly, but certainly some of it is going on upstream.”

As for overall acquisition philosophy, Boehne said, “We’re only willing to pay what something is actually economically worth. We’re looking for cash on cash returns so we’re certainly not going to get caught up in any frenzy and we’re also not going to chase … some mythical description of scale.”

When it comes to scale, Boehne said the company is far more concerned with local rather than national scale, and the prospect of competing with companies with a larger national footprint does not concern him as long as Scripps can compete within a given market.

Lawlor added that the importance of national scale is in bargaining leverage for both retransmission consent and reverse comp, and on both counts, the company is satisfied with the deals it is getting.

Asked if the company was hurt by its tendency to acquire lesser stations, Boehne said that the company preferred the return on investment the cheaper stations provide, coupled with the opportunity to take advantage of the upside they bring by improving their performance.

SVP-CFO Tim Wesolowski said that the company’s healthy balance sheet puts it in excellent position to consider whatever acquisition opportunities arise. Leverage is currently below the 2X threshold, and he said that an increase to 3.5X would be acceptable for the right deal.

This will be a slow year for retrans talks, with only 5% of the company’s subs up for renewal. That will increase to 37% in 2018 and more than 40% in 2019.

A huge beneficial event will take place afterwards.

As noted during earlier conference calls, Scripps is currently not getting any financial benefit from two million subscribers on Comcast systems. It is eagerly awaiting the opportunity to begin reaping the benefits of these subs, which will take place in 2020.

Lawlor said Scripps is happy with its OTT deals with NBC and ABC and noted that income is on par with what the company gets from traditional MVPDs. He said talks are underway with CBS and anticipates that Fox will eventually come around as well.