EARNINGS CALL

Scripps Weathers Perfect Political Storm

While the company’s third quarter ad gain was well below guidance due to lower campaign spending, a bright spot cited by SVP Brian Lawlor was that at least it’s not shifting to new media, adding that despite some crowding-out by political, core categories did well during the quarter, with gains registered in all five of its top categories, including a 2.5% gain in automotive.

 

The 2016 political take for the E.W. Scripps Co. is coming in dramatically below expectations, with both presidential and U.S. Senate campaigns sharing blame. Nevertheless, the company told analysts in a conference call this morning that it enjoyed a gain in revenue of 25% over 3Q 2015.

According to SVP/CFO Tim Wesolowski, 3Q 2016’s gain was well below guidance in the 35%-40% range, largely due to the low political result, which disappointing though it may have been, still held core growth to 0.4% due to displacement. Retransmission consent income was a major plus. 

Wesolowski said that spending by the two presidential campaigns amounted to only a third of what was spent in 2012 in their markets. The company said that the $26.9 million in political income during 3Q has it on the way to a $100 million total for the year.

To put that number in perspective, at its May 6, 2016 financial results conference, the company said it might take in $150 million in political by year’s end.

Wells Fargo Securities (WFS)analyst Marci Ryvicker commented that the $150 million estimate had been revised down to $135 million during the 2Q results call, and that the “miss” for 3Q alone amounted to $23.1 million off of WFS’s $50 million estimate for the quarter.

According to Ryvicker, the negative political effect will extend into the fourth quarter. Scripp’s guidance of a 30% gain in revenue to close out the year is significantly below WFS’s earlier prediction of a 48% gain.

BRAND CONNECTIONS

SVP Broadcast Brian Lawlor explained: “While the Scripps geographic footprint was perfectly aligned with some of the most competitive and best financed races in the country during the 2012 elections, that has turned out not to be the case this year.”

The company expected hot presidential spending in Florida, Ohio, Nevada, Colorado and Wisconsin. Colorado and Wisconsin fell off the list and spending was still less than anticipated in the other three. “We were disproportionally hit by challenges on the presidential side,” said Lawlor, adding, “Donald Trump, in particular spent a fraction of what past Republican candidates have spent on television ads.”

Income from Senate races was also disappointing. Competitive races were expected in the same five states, but the Florida, Ohio and Colorado races never developed, and Wisconsin’s became less competitive as the quarter progressed.

Nevada has been the lone bright spot, and has produced a 15% gain in revenue over 2012.

Eight-five percent of the difference between 2012 and 2016 political can be attributed to just five markets, said Lawlor: Cleveland, Cincinnati, Detroit, Denver and Milwaukee.

However, conditions have improved. Lawlor said that thanks to the combination of the Clinton campaign’s recent decision to broaden the state-by-state spending strategy and the Trump campaign’s dramatic increase in spending, the presidential race has belatedly achieved the spending levels the company thought they’d be seeing all along, echoing comments made earlier this week by executives with Sinclair.

Scripps may not have made as much as it expected in the political category, but at least the reason is not that it’s shifting to new media. Said Lawlor: “We’ve been in regular communication with the top political shops in Washington on both the Republican and the Democratic side. They’ve confirmed to us there’s been no additional shift to digital dollars and the broadcast dollars held up really well.… When it all shakes out you’re not going to see much of a shift.”

President-CEO Rich Boehne made the case for television when it comes to political advertising in the future. “Some Washington pundits will say earned media has an increasingly impactful role in the election year dialog and based on what we’ve seen in 2016 they would be exactly right.… At the same time, Hillary Clinton has been strong in key states where she spent significantly on television advertising and as Donald Trump has increased his local TV spending recently state polls have grown much closer.”

Boehne concluded: “Broadcast TV political advertising remains the clearest and most far-reaching vehicle for political candidates and issue groups to share their paid campaign messages.”

Lawlor said that despite some crowding-out by political, core categories did well during the quarter, with gains registered in all five of its top categories, including a 2.5% gain in automotive. He added later in response to an analyst question that the category is up 6% year-to-date.

“Ford honestly has been a little bit of a challenge all year,” noted Lawlor. “They’ve booked money and canceled it, booked money and canceled it, so what they’re doing now is no different than what they’ve done all year.”

He speculated that Ford is going to need to sell a lot of cars and that the category as a whole will finish the year strong, and that the strength will carry into the first half of 2017.

In general, Lawlor noted that there is still a lot of business to write for 4Q and that there is nothing unusual about that fact.

Lawlor also said that Scripps remains in constant communication with its core advertisers and works with them to “manage expectations” as they navigate through the diminished inventory conditions during peak political periods.

The company has five NBC affiliates and together they pulled in $10.3 million in revenue attributable to the Rio Olympics, a figure that Ryvicker said was on par with expectations.

Retransmission consent revenue in 3Q grew by 46%, and a pair of under-way negotiations representing 3 million MVPD subscribers is expected to contribute to a 20% gain in the category during 2017.

Lawlor said that the current negotiations represent 17% of the company’s subscriber base, and that the total for 2016 will be 19%. Only 8% of the base is up for renewal in 2017, but more than 35% will be negotiated in 2018.

The List, the company’s infotainment syndication offering, was cited as a plus, with a presence in 44 markets reaching 30% of all U.S. TV households.

Asked about the prospects on the M&A front, Boehne said: “There’s not a ton going on out there at the moment. I think the auction has still kind of frozen the market, and what’s going on with the election — it’s been hand to hand combat the last few weeks — and I don’t think anybody’s terribly focused on the M&A market.” He suggested perhaps there will be “an explosion of supply” down the road.

As for putting the auction in the rearview mirror, Boehne believes there is a good chance it will wrap before the year is over.

Boehne touted the company’s excellent financial profile, which leaves it positioned to take advantage of whatever growth opportunities may present themselves. In general, when it comes to making use of the full range of financial strategies, Scripps’ approach is “all of the above.”


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