Earnings Call Transcript - SSP Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to The Scripps First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. This conference is being recorded. I would now like to turn the conference over to our host, Ms. Carolyn Micheli, Head of Investor Relations. Please go ahead.

Carolyn Micheli, Head of Investor Relations

Thank you, Tony. 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 this morning from Scripps President and CEO, Adam Symson; Chief Financial Officer, Jason Combs; Local Media President, Brian Lawlor; and Scripps Networks President, Lisa Knutson. Also on the call is Controller, Dan Perschke. Now, here's Adam.

Adam Symson, CEO

Thanks Carolyn. Good morning, everybody. Thanks for joining us. Once again, in the first quarter, Scripps delivered a terrific financial performance with outstanding results in Local Media coming as a result of Scripps’ commitment to new business development and better-than-expected retransmission revenue. And at Scripps Networks, ad revenue outpaced its marketplace supported by both growth in ratings share and advertising share. None of this is by chance; it's a reflection of our company's evolution over the past several years. We have crafted and continued to craft a durable and high-performing company that delivers a steady stream of free cash flow. This comes despite fluctuations in advertising marketplaces and across political spending cycles. Through investments that have grown our top line, ongoing sales execution, and careful expense management, we have built an economic engine that is not just stable but designed to grow meaningfully every year. To illustrate this point, in the first quarter of 2022, our free cash flow was three times higher than the comparable quarter in 2020. Our growth strategy is fairly straightforward. It relies on American TV consumers' desire for easy-to-use technology, efficient delivery of the shows they love, and the most cost-effective ways to watch television. Whether that be over-the-air, on a connected TV service, or through cable or satellite, Americans are watching more television than ever before. Of course, how and where they're watching is changing. At Scripps, we have put ourselves in the best position to profit from the evolving TV marketplace. Our brands, local and national, can be found across every linear TV viewing platform: pay TV, over-the-air, and connected TV. So for Scripps, it continues to be an all-of-the-above approach, meeting the media consumer wherever they may be. We execute our strategy with the best of both the pure-play broadcast business and the lucrative national networks marketplace. As you know, we're delivering strong growth with our nine fully distributed over-the-air networks. We benefit as free over-the-air television is buoyed by the rising cost of subscription video on demand services, consumer fatigue, and inflation affecting the American pocketbook. We continue to expand those same networks’ distribution into the connected TV ecosystem through free advertising-supported television services. We told you that we would be launching programming from most of our national networks on major connected TV platforms this year, and we continue to do so. We're finding big new engaged audiences in this rapidly expanding marketplace. Remember that I said it's an all-of-the-above strategy because pay TV customers account for the majority of the audiences for our local media brands. We believe forecasts of the demise of cable are not just premature but ill-informed. Pay TV appears to be benefiting from subscription fatigue and prices of subscription video on demand services rising, while the typical household’s internet and subscriptions now surpass the cost of the cable bundle. Again, American consumers are today, more than ever, guided by their wallets. Here's recent proof: our pay TV subscriber households are up from the prior quarter, and we saw significantly lower churn year-over-year. And then there's spectrum and the opportunities we see ahead with the transition to ATSC 3.0 NextGen TV. Scripps is the largest holder of broadcast spectrum. Today, the distribution of our Scripps networks also makes us the most efficient monetizer of that spectrum. We are dedicating significant resources to developing new avenues for value creation that will come down the road from this valuable asset. While Scripps has a long history of creating value over the long term, we've also proven to be disciplined operators with an excellent track record of near-term operating results. That financial success comes as a result of all the terrific employees across The E.W. Scripps Company, including the superb work of our local and national networks sales teams. They have been delivering best-in-class ad revenue growth against macroeconomic headwinds, garnering new business, and launching new products, programs, and networks that benefit the enterprise and investors. Now we're moving into what by all accounts will be another record-breaking national political spending season. As leaders of a connected TV political sales consortium and owners of a prime political station footprint, we anticipate a record year ourselves; leading to free cash flow of $400 million to $450 million. At Scripps, our work to evolve and grow this company and create new shareholder value has no endpoint. Instead, we will continue to strive to meet milestones that build to our next big opportunity. Several years of work have produced greater and more even free cash flow generation and a more economically durable financial engine that is creating new shareholder value. And now here's Jason.

Jason Combs, CFO

Thanks, Adam, and good morning. Our earnings tables in today's press release include our as-reported results for the first quarter of 2022. We also provide an illustrative comparison to the first quarter of 2021, as though we had owned ION beginning January 1, rather than January 7 last year. My network's division comparison today will be on that adjusted combined basis. Let's begin with the Local Media results for the first quarter, which are all same station. Local Media core advertising revenue was up 3.4% driven by our strong sales execution in attracting new advertising business. Total revenue was up 4.5%, aided by solid core ad performance and retransmission revenue growth. Political ad revenue in the quarter was about $6 million; that's about 70% higher than the first quarter of 2018, the last midterm cycle. Retransmission revenue was up 2.5% to $160 million. Local Media expenses increased 6% from a year-ago quarter, and segment profit was $54 million. Turning to the Scripps Networks division, revenue for the first quarter of 2022 was $239 million, up 8.5% from the prior year on an adjusted combined basis. Networks segment expenses rose 23% over the first quarter 2021 adjusted combined results. We continue to cycle through the cost of launching Newsy, Defy TV, and TrueReal over-the-air, as well as continued investment in programming and higher costs tied to revenue growth. Segment profit for the networks was $85 million. Shared services and corporate expenses were $23 million. The company realized Q1 income from operations of $0.10 per share. The quarter included $1.6 million of acquisition and related integration costs as well as a $1.2 million gain on extinguishment of debt from the redemption of senior notes. During the quarter, we redeemed a total of $123 million on the outstanding principal of our senior notes. As of March 31, cash and cash equivalents totaled $35 million. Our net debt at quarter-end was $3.1 billion, and our net leverage was 4.7 times per the calculations in our credit agreements. With our new cash flow profile and our 2022 political ad revenue outlook, we continue to expect to move our leverage to about four times by the end of this year. Now looking ahead, I'd like to give guidance on a few key areas for the second quarter of 2022. We expect total Local Media revenue to be up about 10% from the second quarter of 2021. We expect political ad revenue in the mid-$20 million range. We expect retransmission revenue to be up about 10% in Q2. We expect Q2 Local Media expenses to be up in the high single-digit range. In the Scripps Networks division, we expect revenue to be up low single digits despite the macroeconomic climate. Networks expenses are expected to increase in the mid-20% range. During the quarter, we will continue to cycle through the startup costs for the three new over-the-air networks that we launched in the back half of 2021. We are assuming production costs for the Scripps National Spelling Bee broadcast and the Bounce Trumpet Awards, both of which take place in the second quarter. Lisa will speak more in a moment about the benefits of our bringing the National Spelling Bee production in-house for the first time this year. We do expect the network's year-over-year expense increases to moderate significantly as we move into the back half of this year. Second quarter shared services costs are expected to be about $21 million. One note on our Other segment: it includes the expense for our over-the-air consumer marketing campaign. We expect about a $6 million operating loss in the Other segment for Q2, and about two-thirds of that is related to the marketing campaign. Finally, we continue to expect to deliver free cash flow of between $400 million and $450 million this year. Just a reminder that the midpoint of that range equals about a 55% free cash flow conversion and would represent the highest amount of free cash that this company has delivered since we spun off our cable networks back in 2008. And now here’s Brian to talk about Local Media.

Brian Lawlor, President of Local Media

Thanks, Jason. Good morning, everybody. Our Local Media team was very pleased to exceed expectations for core advertising revenue and total division revenue in the first quarter. We had guided to low single digits for both and then achieved 4.5% growth in total revenue and 3.4% growth in core advertising. Q1 was our fifth consecutive quarter of year-to-year growth in core. The growth in core was driven by two categories in particular: services, which was up 11%, and home improvement, which was up 12%. Five of our top seven categories showed year-to-year growth in the first quarter. The two categories showing declines were auto, which continues to be challenged with supply chain and inventory issues, and our new category, gambling, where we now report sports betting. Without gambling and auto, core was up 11%. Within gambling, sports betting continues to be an emerging and material segment. We now have two years of experience with this segment and are better understanding the cadence of the business. As states legalize sports betting, we see an aggressive push for new customer acquisition by state-authorized companies. After a defined period of time, these companies take their spend to more moderate levels as they focus on customer engagement and move dollars into new states where they seek to replicate this playbook. We look forward to Ohio and Kansas coming online this fall and other states in the near future. Overall in core advertising, we were pleased that our local sales teams, once again, developed business from more than 1,000 new-to-TV advertisers. That sales execution has continued to be a driver in Scripps' core advertising performance. Now I am proud our teams have not taken their foot off the gas in their focus to help local businesses grow beyond the pandemic. For the second quarter, it’s still early, but we’ve been seeing orders getting booked later as businesses manage through the current economic climate, waiting to make sure they have product and employees before advancing their marketing. In addition to core performance, our total division revenue growth of 4.5% was aided by an increase in retransmission revenue. We continue to see a slowing of subscriber churn from mid-single digits to low-single digits year-over-year, and actually up 1% from the prior reporting period. Virtual subscribers continue to grow meaningfully for us. Looking ahead, we are greatly anticipating this election year. Forecasts continue to call for record political ad spending, and as we have experienced in Ohio over the last month, Scripps is extremely well-positioned to capture more than its fair share of dollars. You may have seen our April 5 announcement. We are leading a group of local broadcasters informing a political CTV consortium; nearly $2 billion of the $9 billion in projected election spending this year is expected to go to connected TV, and we’re making it easy for agencies to access local broadcasters' CTV inventory. In terms of overall spending in the U.S. Senate, forecasts call for $1.5 billion for just nine top races, and we have 12 stations in five of those states: Arizona, Florida, Nevada, Ohio, and Wisconsin. More than $1 billion is expected to be spent on nine governor’s races as well, and we have 10 stations in six of those states: Arizona, Kansas, Maryland, Michigan, Nevada, and Wisconsin. Overall, we’ve projected about $270 million in revenue from the Scripps footprint. We began to expect that record number about a year ago, and now we are even more confident in that opportunity. And now here’s Lisa.

Lisa Knutson, President of Scripps Networks

Thanks, Brian, and good morning, everyone. At Scripps Networks, we are now well into the new advertising upfront season, and we are armed with a number of great stories to share. Our new upfront presentation is themed free to be, and it focuses on our nationwide audience reach across nine networks, as well as our leadership in free ad-supported television of all kinds, over-the-air and on connected TV. During the first quarter, we outperformed our national networks peer group in advertising growth, and we’re also leading viewership performance. During the first three months of the year, we achieved a 5% year-over-year increase in total primetime viewers across our entertainment networks, according to Nielsen. That growth came despite total nationwide linear usage declining by 9%. Our industry-leading viewership trends position us well to continue delivering better revenue performance than our peer set. In fact, our Q1 revenue growth of 8.5% outpaced total national TV spending, which was up only 6%, according to SMI. We compared well against our network portfolio peers whose ad revenue was down. Our success is due in part to our cross-selling of portfolio inventory, as well as our strategy of optimizing our advertising mix, moving our ad inventory between general market and direct response to yield the best market rates. We saw particular success in Q1 at our second-largest revenue network, Bounce. As you know, Bounce produces programming primarily for Black audiences, and we have recently been working to refine their programming and further build its brand with Black communities. This effort paid off in Q1 with a 54% increase in ad revenue, and that growth came across categories and platforms: general market, direct response, broadcast, and connected TV. Our newest entertainment networks, Defy and TrueReal, also exceeded our revenue expectations in the quarter as they continue to see audience growth and rate increases each month. On Newsy and Court TV, revenue was up 21% compared to last year due to growth in each of its revenue streams. Looking into the second quarter, our ad revenue visibility is somewhat limited at the moment given the current macroeconomic environment. We do continue to expect nice year-over-year growth. We are experiencing solid scatter market rates, maintaining levels of 30% to 40% above upfront pricing depending on the network. We are confident that our national advertising marketplace will return to full strength once we’ve moved through this economic climate. On the Q2 expense side, we expect a few new expenses to moderate our profit margin in the short-term, but to bring us audience and revenue benefits in the near-term. We are still cycling through the first year of expenses for launching Newsy, Defy, and TrueReal over-the-year and watching them grow audience and revenue. This year, the Networks division will produce the Scripps National Spelling Bee telecast for the first time, as well as the Bounce Trumpet Awards in Q2 for the first time. We are extremely pleased to be producing in-house marquee events. The Scripps National Spelling Bee telecast was produced by ESPN for 27 years and bringing it into Scripps as a tentpole event allows us to sell the advertising and retain the intellectual property of this iconic American event. In addition, rather than only a cable audience, we will deliver the Bee on cable, satellite, streaming platforms and over-the-air to 95% of U.S. TV households. This greatly expands the Spelling Bee’s audience reach and will allow many more Americans to watch the entertaining and impressive competition of young spellers. The National Spelling Bee finals will air on ION and Bounce at 8:00 PM Eastern Time on Thursday, June 2. I hope you and your families will tune in. Turning to distribution, we continue to make strides in expanding our connected TV audience reach, and we are poised to take more dollars out of the lucrative CTV ad market. During the first quarter, we reached agreements with Xumo, TCL, and Amazon’s Freevee, and we just completed an agreement with Samsung TV Plus, which is by far the largest free ad-supported platform. The Samsung agreement covers all seven of Scripps' fast networks. ION launched on April 27 and Grit Extra and ION Mystery launch on Samsung in the third quarter. As you know, Newsy and Court TV are already fully launched across DTV. Speaking of Newsy and Court TV, I’d like to end my remarks by highlighting how they contribute to creating a better informed world. At Newsy, we sent reporters Jason Bellini to Poland, and then into Ukraine, to give our viewers a closer look at the humanitarian crisis after the Russian invasion. Although Newsy does not have staff overseeing bureaus, we believe it is important to provide objective firsthand coverage of major world events. At Court TV, we made another successful bid to allow cameras in the courtroom this time for actor Johnny Depp’s libel lawsuit against ex-wife Amber Heard. In the past few years, we’ve seen tremendous viewership for high-profile cases. For the Depp-Heard trial, our daily streaming hours have been up more than 300%. In addition to building Court TV’s viewership, televising live court proceedings lends valuable transparency into our legal system. We are proud of Court TV’s ongoing efforts to serve viewers and provide real-time legal coverage. Now operator, we’re ready for questions.

Operator, Operator

Our first question will come from Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber, Analyst

Yes. Hi. Good morning. Thank you. Maybe we start on the TV station side. Brian, maybe can you give a little more specific on your outlook for 2Q core ad revenue for your TV station? So why don’t we start there please?

Brian Lawlor, President of Local Media

Craig, good to hear from you. Right now, still early in the quarter, we got about seven weeks of business to write. But right now we’re looking to be about flattish compared to a year ago.

Craig Huber, Analyst

And then auto. How did that do year-over-year? Obviously a tough environment for auto, but how did that do in the first quarter? And what are you hearing from your dealers, your advertisers out there when you think it might start to at least start to flatten out? The hope used to be middle of the year, second half of the year. What do you think in there?

Brian Lawlor, President of Local Media

Yes. I think that’s still what we’re hoping. In talking to dealers, some are starting to get more inventory made available to them. I don’t think we’ll be back to a normal inventory level in 2022, but we do see improvement in the back half. In the first quarter, it was still down double digits, over 20%. I think I would probably expect the same again in the second quarter.

Craig Huber, Analyst

Okay. And then sports betting, I guess with gambling in total, I think you said it was one of the two categories that was down. Maybe could you just clarify a little bit? Is that because sports betting sort of hit a wall here after an additional flood of advertising when they roll into the various states and then it slows down afterwards?

Brian Lawlor, President of Local Media

No, it really is, yes. Craig, it really is about timing. When sports betting is legalized in states, there is really aggressive spending. In the first quarter a year ago, we had heavy spending in Michigan, heavy spending in Virginia, in Indiana, and some big important markets like Colorado. After a period of time, as I said in my prepared remarks, they peel back to a maintenance level and then move some money to new launch states. So we did see Louisiana come online this quarter. We had Arizona, which launched at the end of last year, but still in its first four quarters with active spending. We saw New York come online in the first quarter. So it really is just timing. Again, I think we expect it to be a very healthy category for us this year. Ohio will come online around the fall, in time for the football season. We think Kansas will have a great opportunity for Chiefs and Browns and Bengals sports betting. So we just – I think it’s the cycle now. And so it will depend on the cadence and the timing of when states launch and how long they stay with the aggressive spending. But we are definitely not reading into anything that this category is going to pull back.

Craig Huber, Analyst

What percent of your advertising, if I could ask, is gambling and sports betting in the first quarter, say?

Brian Lawlor, President of Local Media

Under 10%.

Craig Huber, Analyst

Okay. And my last question, guys. I think I asked you this last quarter as well. Are you hearing or sensing a recession, Brian, in any of your markets? And I have the same question on the Scripps Network side. I mean, given all the macro issues out there, are you picking up – moving into a recession here in the new markets?

Brian Lawlor, President of Local Media

So I can start and then anyone else can weigh in? I don’t think we’re feeling the effects of moving into a recession. I think we are feeling the effects of the challenges of supply chain and employment. And so I think businesses are having a hard time getting products in some categories and in other categories, they’re having a hard time getting employees. So, I think that is the bigger factor that is influencing our local business. I don’t see much of a pullback at this point that would indicate that it’s a recession that is driving any slowdown.

Lisa Knutson, President of Scripps Networks

Yes. Craig, I agree with Brian’s comments. One thing I will add on the national ad marketplace is really the Ukraine crisis. Many advertisers who were doing business in Russia pulled out. So that is a little different nuance in our business, which created some pressure at the end of the first quarter and looking into the second quarter. But really I agree with Brian’s comments about supply chain; labor shortages are really the driving factors at this point.

Craig Huber, Analyst

Great. Thank you, guys.

Operator, Operator

Thank you. Our next question will come from the line of Steven Cahall with Wells Fargo. Please go ahead.

Steven Cahall, Analyst

Thank you. Maybe first, Lisa, just to follow up on that last line of questioning. I think your comments were that once the market comes back, you expect some strong growth in your Networks division. Are we to imply though that at the moment, and especially with the Q2 guide, it does feel like things have softened a little bit? We’ve heard things from companies like radio that they’re starting to see a pickup in pacings as they get into May and June after a slowdown in April. Could you maybe just give us a little more granularity? Are you seeing signs of things recovering? Are you seeing stability? Are you seeing instability? We’d kind of love to know what the trend line looks like right now?

Lisa Knutson, President of Scripps Networks

Yep. Actually, early days of May, we are seeing some – a little bit of a pickup in May versus what we saw at the end of the first quarter and early days of second quarter. So I would echo some of that. For us, it’s about executing our strategy of optimizing our inventory and continuing to find the best rate out there. With our CTV launches, I think we’re really bullish that the marketplace is really strong. With launching ION on CTV, we’re now able to capture dollars in that really lucrative marketplace. So, we’re – I would say, looking ahead, we’re really focused on the third quarter with hopefully a lot coming back on lots and paired with some outlook of improvement that we’re seeing in the early days of May that we’re really optimistic and confident in our growth trajectory.

Adam Symson, CEO

Yes. Steven, it’s Adam. I think I’d want to just sort of add. The Scripps networks’ was up 8.5% in Q1. We expect it to continue to demonstrate really superior revenue growth when compared to any benchmark, local peers, national networks peers. While the networks generate their revenue and the national ad marketplace, like the other cable network portfolios, we’re sort of uniquely positioned to take advantage of the growth of over-the-air, which they for the most part don’t have access to. So we’re really a growth story in the national advertising marketplace on both ratings and advertising share metrics. It’s sort of the best of both worlds. And I say this just because I want to jump in and focus on this notion of the question of Scripps compared to pure-play this or pure-play that; I think that’s really a red herring. When you think about our company, you have to think about the benefits of a company made stronger over the last several years through the development of the Scripps networks. We continue to have terrific scale in local broadcast that takes advantage of the growing dual revenue streams, of course, including the upside with retrans, but the networks is something we laid on top of our local broadcast business, and it’s a growth story; it’s a strong growth story in the national ad marketplace. We expect it to get back to that after we move through a cycle of some macroeconomic conditions.

Steven Cahall, Analyst

Yes. Thanks for those. And maybe Adam, just to give you a little bit more of the floor on that, could you talk about the marketing campaigns that are forecasted in the year ahead? And where you are in terms of achieving those? And what sort of goals we can expect to see, whether that’s customer activation or growth in OTT or CTV?

Adam Symson, CEO

Yes, yes and yes. I mean, we expect our marketing campaign to kick off in earnest probably sometime in Q3, focused on several events that we know are coming that are going to be catalysts for consumer adoption of over-the-air. We really expect to take advantage of this moment when consumers are frustrated with the increases they’re seeing by the subscription video on-demand services, they’re frustrated by the content glut, and they’re experiencing a level of subscription fatigue. I know you all know that because I think you can see the impact on the other networks and the subscription video on-demand services stock prices. According to Nielsen, we have about a 25 to 30 share of OTA viewing at any one time. It’s a really formidable share in that marketplace, and that marketplace continues to grow. Nielsen just recently released some information, demonstrating again, another year of growth in the OTA marketplace. Our focus on growing the OTA marketplace goes well beyond just a marketing campaign. We’re developing now customer activation opportunities with retail partnerships that we’re going to share more about in the coming months. We think there’s a lot of opportunity to solve the problems that consumers have had on the install side and the user experience. In any way we can, we expect to introduce Americans to the opportunity for them to add free over-the-air television to their bundles. Not in a way that’s going to cannibalize the paid TV ecosystem but in a way that’s going to be additive. That’s going to show people who have already cut the cord that if their subscription video on-demand consumers, they should right now plug in a digital antenna so that they can get access to the entire buffet of premium content in the over-the-air marketplace, including, for example, all of the live sports that’s on the big four broadcast networks.

Operator, Operator

Thank you. Our next question will come from Dan Kurnos with The Benchmark Company. Please go ahead.

Dan Kurnos, Analyst

Thanks. Let me pursue the networks side just a little bit more. I guess I’ll start, Adam. Obviously, it’s more than just a play on viewing trends, it’s also quality. It seems like you’re winning, not just because of the mix shift, but you’re winning eyeball share across the broader portfolio in a landscape that has increasing proliferation of AVOD content. So just maybe some incremental thoughts on that to start there and then I’ve got some questions for Lisa and Brian.

Adam Symson, CEO

Yes, I mean, absolutely. I think one has to be reminded of the fact that the top streaming shows in the SVOD marketplace are actually today available for free on our premium networks. And while they’re not on demand and while they’re served up with advertising, free is an incredibly compelling consumer proposition at this moment of high inflation and subscription fatigue. We’re taking advantage of that. You can see it in the share of audience that we’re growing compared to our peers whose portfolio shares and ratings have been down. Our portfolio’s rating share has actually been up, and that is I think a testament to a good programming strategy, premium quality programming, and a growth marketplace over-the-air. Lisa, do you want to add anything to that?

Lisa Knutson, President of Scripps Networks

Yes. I would also say our portfolio – by taking the portfolio approach and having really a genre that appeals to a wide array of audiences certainly is also a competitive advantage for us. Each network is in its own stage of growth; there are some that are growing significantly, like we talked about with Bounce this year, in the first quarter, growing 54%, and Court TV growing over 20%. So I think it’s also that having a portfolio that appeals to a variety of genres is also certainly something that we see as a competitive advantage.

Dan Kurnos, Analyst

Lisa, just you made some comments about inventory optimization. Obviously, direct response was strong now; it’s probably not as strong. Just a, how are you thinking about further inventory optimization as you head into the upfronts and then into the next TV season? And b, do you think all of your networks will be rated by the end of the year?

Lisa Knutson, President of Scripps Networks

I’ll start with the last question. So probably not all of our networks will be rated by the end of the year with really three in startup mode; we are watching that very, very carefully. We turn on those ratings when we see the opportunity to monetize in the upfront and general marketplace. In terms of inventory optimization, we continue daily to optimize, and it’s all about taking the highest rate. As I said in my comments a few moments ago, the scatter market in May is up compared to April. So we’re seeing that as signs of improvement. Those are the dollars we’re writing when we’re seeing scatter rates 30% to 40% higher than our upfront rates. And when we’re seeing the opportunity to shift that inventory into direct response, we are absolutely doing it. We saw that really pay off for us in the first quarter, up 8.5%, and a lot of that was really that inventory optimization between general market and direct response. I do think with the launch of ION and the rest of our fast networks, that’s going to be an even better story for us. Certainly in the upfront, we’re selling both linear and CTV inventory. And so that’s really helped I think our story in the upfront, along with our strong viewing and share numbers.

Dan Kurnos, Analyst

Got it. That’s helpful. And last one, Brian, I know you mentioned it in your prepared remarks, but I don’t know if this got enough coverage. The political consortium that you guys have, especially in the CTV side, partner with Magnet and all of this, feels like it’s TAM expansionary potentially. I think it’s super interesting, love what you guys are doing there. Just would love to hear some more granularity and just how we should be thinking about how that evolves over time?

Brian Lawlor, President of Local Media

Yes. Hey, Dan. Look, we saw an opportunity. Let me just step back. You know our history. The bold steps we started taking a decade ago to carve out our place and our leadership in political, creating an infrastructure, Washington office; we've controlled our own political now for more than a decade. We've continued to advance that and offer new products and data-driven products to the candidates and to the agencies. We've built great relationships with them. We continue to be a leader and forward-thinking in this space. We saw an opportunity where, like other categories, there was going to be a fair amount of money moved or available in the CTV space. We saw an opportunity to not just put Scripps out there, but really to create a marketplace that would be interesting and easy to use for media buyers in the political space. And so with a couple of peers and others, we've put together a consortium; just launched in April. So it's early and I don't have any numbers to share with you at this point. But I think we're seeing acceptance. We are booking orders. Those orders are getting placed in and out of our markets. I think we're going to have an opportunity to play on dollars and roll that space up where these are not our linear channels. It’s an added revenue stream.

Dan Kurnos, Analyst

Got it. That's super helpful. Thanks for all the color, guys. Appreciate it.

Adam Symson, CEO

Thanks, Dan.

Jason Combs, CFO

Thanks, Dan.

Operator, Operator

Thank you. Our next question comes from Michael Kupinski with Noble Capital Markets. Please go ahead.

Michael Kupinski, Analyst

Thank you. Congratulations on your quarter, by the way. First of all, I'm going back to the network questions. Particularly, my interest is in the direct response business on your networks. Obviously, during COVID that business seemed to do quite well. I was just wondering in this environment, are you starting to see shifts in terms of national advertising versus direct response? Can you talk a little bit about the percentage of direct response to total advertising and how that might look versus where we were maybe during the pandemic?

Lisa Knutson, President of Scripps Networks

Yes. So, Mike, direct response in the first quarter was a strong performer, despite the macroeconomic trends, certainly putting pressure in some cases in the latter part of the quarter on rates. The strength, I mentioned this just a minute ago, of our portfolio and our ability to optimize that in direct response or general market is really sort of our secret sauce, so to speak. Each of our networks is in a different mix; some of our over-the-air networks like Grit, ION Mystery may have a revenue mix of direct response that’s heavier versus ION, which is more general market focus but continually looking at the best rate possible. That’s why we've invested in Nielsen ratings—to be able to share and to sell each of our networks both in the upfront and in the general market space. So hopefully that answers your question in terms of each network’s different life stage in terms of a split. I think last year we were at about 50/50, 50% general market and 50% direct response overall for the networks division, but obviously that's made up of a lot of different segments. I think last year we were at 50—about 50/50, 50% general market and 50% direct response. Overall for the networks division, but obviously that's made up of lots of different—each network being in a different stage.

Michael Kupinski, Analyst

And Lisa, what is the percentage now?

Lisa Knutson, President of Scripps Networks

It hasn't moved; it's about the same at this point in time.

Michael Kupinski, Analyst

But you're not seeing any increased interest from direct response then, like we did in the COVID period, like a heightened level of interest, just kind of like, I'm just trying to understand the tone of the marketplace for direct response.

Lisa Knutson, President of Scripps Networks

Yes. I would say as the scatter market, I mentioned this last quarter, the visibility and the buys that are coming in sort of later, they’re placing buys closer to knowing whether or not they have inventory. We’re able to then shift some of those dollars that aren’t written and scattered to direct response. But you’re also starting to see, I think in direct response, there is probably more inventory at this point in time out there because other national networks are certainly moving some of the—where they’re not getting dollars written and scattered, they’re moving them to direct response. So there is a bit more demand from an advertising perspective, and there is certainly more inventory available out there.

Michael Kupinski, Analyst

Got you. And in your earlier comments, you mentioned Newsy, so I think it's fair to ask a question about Newsy. It seems like the news and information category is very crowded and it would seem to be hard to get a voice in the space, especially since a lot of the other networks have reporters on the ground in Ukraine. You mentioned Ukraine has usually hit your milestones in terms of delivering upon your expectations. Are you still in investment mode there or are you trying to mine your earlier investments? I'm just curious about where you're at with Newsy?

Lisa Knutson, President of Scripps Networks

Yes. Thanks, Mike. So Newsy is just a little over six months into its newest revision of Newsy with being an over-the-air network. Remember Newsy’s strength prior to making this change last year was also on the CTV side. We’re not Nielsen-rated at this point in time, so I can't share with you those kinds of viewer trends, but what I can share with you is, on the CTV side, which we're well established in, our viewing on CTV is up 40% versus prior year on Newsy. So we see that as really great engagement in some of the work that we've done to really improve the product is coming through. The investments that we've made were to your point, we're really now trying to mine to make sure that we are taking advantage of those investments. So the investment trend on Newsy is sort of—has moderated, but in the first half of the year, we're lapping those expenses that will be in the second half of the year.

Adam Symson, CEO

Mike, if I could add, the news space, depending on how you define it, is potentially crowded, but the space for quality objective journalism on television, in our opinion, is not crowded. What we saw happen across the Street with CNN pulling the plug on CNN+ is a validation of our strategy that America is very interested in quality objective journalism, particularly if it's delivered for free. Our reach across America with both CTV and OTA makes Newsy a unique proposition at this moment. We’re really beginning, again without Nielsen ratings, to really begin to see that resonate. For us, it’s very much stay the course, continue to build the brand, continue to expose more Americans to the quality objective reporting coming out of our team at Newsy, and monetize it.

Michael Kupinski, Analyst

Thanks, Adam. And one last question for Brian in terms of Local Media. I was just wondering if you can give us the tone of advertising, particularly local advertising. Are you seeing advertisers shifting in terms of booking their advertising, maybe closer to air time? I'm just wondering in terms of how much visibility you're getting in terms of the patient data as you go forward, and if there has been a shift towards advertising being booked sooner?

Brian Lawlor, President of Local Media

Hey Mike, it's Brian. Yes, I think you're spot on there that, first of all, just reported; five of our top seven categories were up in Q1. And if you take out sports betting and auto, our core was up 11%. Those are pretty significant numbers. But that said, yes, there has been a change to the pace of how people are booking business. Clients that would normally book at a quarter at a time or even month to month are definitely holding back and booking two weeks out or a week out. They’re really waiting to determine if they have enough product to sell. They have to look at, do they have the employees to think of, do I have enough employees to install a fence or put on a roof, or deliver a hot tub? All those things are factors now, but I can tell you in the first quarter, as we got to March, we were seeing bookings week to week that were building as people identified that they had the product and staff and could move forward, but we have less visibility than we've had in the past, as we're working week to week now.

Michael Kupinski, Analyst

Got you. All right. Thank you very much. Appreciate that.

Operator, Operator

Thank you. Our next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber, Analyst

Yes. Hi Brian, your net retrans outlook for this year, I think you guys said last call you thought it would be flattish for the year. What are you thinking right now?

Jason Combs, CFO

Hey, Craig, it's Jason. Yes. So we continue to look at it as being flattish. If you recall, we only have about 20% of our subscriber base renewing this year and some contractual network comp step-ups. So it looks flattish this year, but as you look forward to next year, 75% of our sub base is renewing. We are really optimistic about some nice net retrans growth in 2023.

Craig Huber, Analyst

Okay. Very thanks for the update there. And the other thing – the services category, Brian, on your TV stations, in the first quarter, what percent of the total was that? And maybe just talk about what specific piece underneath services were really, really strong in your mind, what you saw there?

Brian Lawlor, President of Local Media

Yes, hey Craig. A third of our core advertising was in the services category, and it's been that way now for a couple of quarters. So it's a big material part of our success. When we talk about developing a thousand plus new advertisers, a lot of that is in the service area. Inside of services, you have medical, financial, legal, and educational. There's a lot there, but a lot of that is local. And a lot of that is our focus as sellers. We're not going to sit around and just accept that auto’s down; we're going to do something about it and work actively to replace it. This is a category where decisions can be made by local owners and we can take advantage of that. It's about a third of our business, it was up double digits, as I said; medical was up almost 30% in spending. So that's a big subcategory inside there. Financial and legal segments were up as well. Banks and insurance are all part of financial, and they’re healthy.

Craig Huber, Analyst

That's great. That's all I have. I actually do have one more thing, on the Scripps Networks side. Did you see a material slowdown in your ad revenue there soon after the invasion of Ukraine back on February 24? This is a material slowdown soon after that, and it sort of stabilized several weeks later. How was that cadence? I'm curious.

Lisa Knutson, President of Scripps Networks

I would not say a material slowdown. I think after the Ukraine invasion, it was probably later in the quarter toward the end of March that we started to see, as large advertisers were pulling out of Russia, the timing of that.

Adam Symson, CEO

And as Lisa mentioned a moment before, Craig, it feels like, if not stability, maybe even an uptick to the benefit of the advertising marketplace.

Craig Huber, Analyst

Great. That's all I had. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Jennifer Lovell with Principal Global Investors. Please go ahead.

Jennifer Lovell, Analyst

Good morning. Thanks for taking the question. As it relates to your free cash flow guidance, I was wondering if you could provide us with capital allocation priorities.

Adam Symson, CEO

Well, in the near-term, our capital allocation priority is consistent. We’ve been saying since the ION transaction, it's paying down debt. We've made a lot of progress since the ION deal closed. We've paid down nearly $700 million in debt. We're on the path to getting to four times levered by the end of the quarter and back – sorry, by the end of the year and then into the threes next year. So that's our number one priority.

Jennifer Lovell, Analyst

And those leverage targets, are they net leverage targets or gross leverage targets?

Adam Symson, CEO

That's our net as defined by our bank covenants.

Jennifer Lovell, Analyst

Okay, great. And one other question as it relates to sports betting. Do you have any geographies that have newly launched here in the second quarter or have pending launches this summer?

Brian Lawlor, President of Local Media

Yes. Hey, Jennifer, it's Brian. Nothing in the second quarter. We do have a couple that launched in the first quarter: New York and Louisiana started in the first quarter, as I mentioned earlier; Arizona launched at the end of last year. They’re still in their first cycle. I think the ones that will be up next will be Ohio and Kansas, and we expect both of those to come online in the fall, hopefully in time for the NFL season.

Jennifer Lovell, Analyst

Thank you.

Operator, Operator

Thank you. There are no questions remaining in the queue. Please continue.

Carolyn Micheli, Head of Investor Relations

Thank you, Tony. That's the conclusion of this call.

Operator, Operator

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