Earnings Call Transcript - SSP Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for joining us for the Scripps First Quarter 2021 Earnings Call. All participant lines are muted for listening only. There will be a chance for you to ask questions later. This call is being recorded. I will now hand it over to Carolyn Micheli, Head of Investor Relations. Please proceed.

Carolyn Micheli, Head of Investor Relations

Thank you, John. Good morning, everyone and thank you for joining us for a discussion of The E.W. Scripps Company’s financial results and business strategy. 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 includes forward-looking statements and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. The COVID-19 pandemic enhances the uncertainty of forward-looking statements we make about our operations and financial conditions. We do not intend to update any forward-looking statements we make today. Included on this call is a discussion of certain non-GAAP financial measures that are provided as supplements to assist management and the public, and they are now in evaluation 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; Scripps Networks President, Lisa Knutson. Also on the call is Controller, Dan Perschke. Now here is Adam.

Adam Symson, CEO

Thanks Carolyn and good morning everyone. We are excited to share our first quarter results, which have met or exceeded expectations across the board. A year after the onset of the COVID-19 pandemic that significantly impacted global economies and the U.S. advertising market, we are seeing a strong recovery as we move into the second quarter with considerable momentum. Last year during this call, we suspended our financial guidance due to uncertainties surrounding the pandemic. However, we committed to leveraging that uncertainty to our advantage to continue transforming our company. Today, we are reinstating our guidance based on our confidence in the recovery and our stronger, more resilient, and focused E.W. Scripps Company, which is well-positioned for the future of television. Since election day, we have benefitted from a rebound in both the local and national television advertising markets. Businesses have reopened, mask restrictions are easing, and vaccination rates are increasing. Americans are returning to normal life with more disposable income, and advertisers are eager to reach them. Scripps is prepared for this wave. Over the past year, while many stayed home, we focused on enhancing our local media operations, enhancing core ad sales, exploring new advertising revenue, navigating the political advertising climate, and maximizing retransmission revenue opportunities. The results we present today reflect our success in executing our strategy, leveraging our portfolio’s scale, and delivering significant value. In the national arena, we undertook acquisitions and divestitures aimed at maximizing shareholder value and improving profitability. We realized high returns on our investments in podcasting and digital audio through the sales of Stitcher and Triton. Acquiring the ION Network has significantly enhanced our cash flow, and together with our rapidly growing Katz networks and Newsy, we've created a powerful collection of national television networks—Scripps Networks. We are now a fully integrated television company with a broad reach across the United States while maintaining a deep connection to key local markets. Our media businesses connect nearly all Americans via cable and satellite, streaming services, and free over-the-air television. Free over-the-air television plays a crucial role in the media landscape for both audiences and advertisers. There is growing evidence that consumers are feeling the impact of streaming service fragmentation. A recent Bloomberg analysis highlighted that accessing popular streaming services can be as costly as the average cable package. Moreover, a Deloitte survey indicated that the average American subscribes to a significant number of paid media services, leading to feelings of overwhelm in managing their entertainment options. In contrast, over-the-air digital television is cost-effective—a one-time purchase with no ongoing fees. The Scripps Networks provide engaging crime and justice dramas, classic films, popular sitcoms, and trustworthy journalism, while our local stations deliver essential news and sports programming over the air. While subscription services focus on high-budget original content, the most-watched shows are often the same premium programs that viewers can enjoy for free on our networks. This accessibility makes it easy for consumers and provides advertisers with a valuable audience that isn't disappearing into ad-free streaming platforms. In fact, over-the-air audiences are growing, with Nielsen reporting a 10% increase from 2019 to 2020. Research predicts that by 2025, 65 million households will watch over-the-air TV, whether exclusively or alongside other services. As a leader in network television and local stations, we will capitalize on this growth, which we believe we can further accelerate. A significant number of current streamers are not utilizing digital antennas, which presents an opportunity to connect with the estimated 40 million Americans who do not subscribe to cable or satellite services. We see this demographic of non-subscribers as a key target for our over-the-air strategy, which is central to our growth plans. This approach aligns with current consumer behavior, not speculative futures. By executing well in local media and leading in the Scripps Networks space, we are driving new value for shareholders. We anticipate our strategic initiatives could generate between $210 million to $240 million in free cash flow—a significant improvement compared to previous years, particularly in non-election years. This transformation in our cash flow position allows us to take immediate action by reducing debt, with plans to redeem $400 million in bonds this month, marking our return to customary leverage levels and reaffirming our commitment to delivering on our promises. Now, I will hand it over to Jason.

Jason Combs, CFO

Thanks, Adam and good morning. Before we start our discussion of Scripps First Quarter 2021 results, I want to point out that our earnings tables from February 26th provide an illustrative look at both local media and the new Scripps Networks divisions for the full year of 2019 and quarterly periods of 2020. Those tables provide a view of results as though we have not owned WPIX New York. They also present illustrative Scripps Networks results as though the division had been formed on January 1, 2019. Just as a reminder, the sale of WPIX closed on December 30th and the acquisition of ION closed on January 7th. So my comparisons today will be on that adjusted combined basis. You can find our as-reported results in today's press release. Let's begin with the local media results for the first quarter. Total division revenue was up 2.2% from the first quarter of 2020. We were pleased to deliver results above the prior year first quarter, which included $18 million of political advertising. The strong performance was driven by core advertising revenue, which was up 2.3% as we saw momentum in advertising continue from the fourth quarter. We had guided to core advertising being about flat in the first quarter, so we were very pleased by these results. I'd also like to point out that in the first quarter of 2020, we had $8 million of lost local media revenue from cancellations due to the start of the pandemic in mid-March. So we were largely working with pre-pandemic comps. Political ad revenue for Q1 was $1.3 million. Local media retransmission revenue was up 15% in Q1 as we annualized the reset of about half of our Pay TV households during 2020. We also saw stabilization in our fourth quarter subscriber counts, they were about flat from Q3 to Q4, our latest reporting period. Local media expenses increased by just 3% over the prior year quarter and expenses were actually down 2% if you exclude our fixed programming costs. Local media segment profit was $56 million. Now let's turn to our first quarterly report for the new Scripps Networks division. This division includes ION, the Katz Networks, and Newsy. Advertising for these networks will be sold together and their support functions have been centralized to create efficiency, so our financial reporting on that division will reflect the way we are operating now. Scripps Networks revenue for the first quarter of 2021 was $220 million, down just a bit from the prior year quarter adjusted combined results and in line with our guidance. Excluding from both periods the two ION multicast networks that we shut down in February, networks revenue was flat to the prior year. Lisa will provide more color on the networks' revenue performance in just a moment. Segment expenses declined 3.3% over the Q1 2020 adjusted combined results. Segment profit for the quarter was $95 million, delivering a margin of 43%. Also, a reminder that Stitcher was sold on October 16th and the sale of Triton just closed on March 31st. Triton's results for the first quarter are now included in the other segment. Turning to shared services and corporate expenses, they were $19 million in the first quarter, right in line with our guidance. The company's Q1 loss from continuing operations was $8 million or $0.10 per share. We made a $67 million non-cash adjustment due to the increase in the fair value of the outstanding common stock warrants during the first quarter. As a reminder, we brought in Berkshire Hathaway to help us fund the ION acquisition and as part of that arrangement issued them 23.1 million warrants at a price of $13 per share. So our stock price gains in the first quarter increased the fair value of those warrants. We realized this non-cash charge creates some noise in our reported EPS, but keep in mind, this charge is completely unrelated to our strong first quarter operating performance. The quarter also included an $82 million gain from the sale of Triton, $29 million in acquisition and related integration costs, and $7 million in restructuring costs. These items decreased income from continuing operations by $29 million or $0.36 per share. On March 31st, cash and cash equivalents totaled $538 million and net debt was $3.3 billion. On January 7th, the company issued an $800 million term loan and received $600 million of financing from Berkshire Hathaway in exchange for Series A preferred shares. The proceeds from these transactions, in combination with the $1.05 billion of bonds issued on December 30th and other cash on hand provided the financing for the ION acquisition. On May 15th, we will redeem $400 million in senior notes that were due in 2025. The redemption price of the notes is equal to 102.563% of the aggregate principal amount plus accrued and unpaid interest on that date. We will use cash on hand to redeem the notes so it will not impact our leverage ratio. This is a significant first step towards reducing our debt and as we move forward, we anticipate continued strong results will allow us to pay down additional debt this year. Our net leverage ratio at the end of the first quarter was 4.7 times per the calculations in our credit agreements. That's lower than the five times we projected at the close of the ION deal. Our strong fourth quarter results and ongoing momentum in local core advertising raised EBITDA more than expected. As Adam said, we are reinstating our guidance, so I'd like to take a moment to look ahead at a few key items. We expect total local media revenue for the second quarter to be up in the high teens percent range; that includes core ad revenue up in the mid-40% range. We expect local media expenses to be up in the low to mid-teens percent range as we come up against some significant expense cuts in Q2 of 2020. In the Scripps Networks Division, we expect Q2 revenue to be up about 20% compared to adjusted combined results for Q2 of 2020. Expenses are expected to increase around 10%. We expect shared services costs of about $20 million in the second quarter as we fully integrate ION and restore some COVID-related cost cuts. And for the following below the line items, I have a few full-year updates from our February call. We now expect cash interest outlay of $120 million to $125 million, pension contributions of about $25 million, cash taxes of $85 million to $90 million, and CAPEX of $65 million to $70 million. We expect to deliver 2021 free cash flow of between $210 million to $240 million, far exceeding what we would have generated in a non-election year prior to our recent transformation. And now here's Brian to talk about local media.

Brian Lawlor, Local Media President

Thanks, Jason. Good morning, everybody. We've been very pleased by the continued strong performance of local core advertising since the end of last year. We entered the first quarter with uncertainty about the economy and the timing of the vaccination rollout. But January broke much earlier than usual, and each month grew throughout the quarter as the economy began to rebound. The first quarter brought together the benefits of our new business development efforts over the last year with the return of some advertisers who sat dormant for several months of the pandemic. In the first quarter, we had more than 800 new TV advertisers across our 41 markets. These new clients are providing added lift to our performance as we welcome back our longstanding clients. While these new business dollars spanned many categories, no category benefited more from our efforts than services, our largest category, which represented about a third of our total ad dollars in the quarter. Insurance, medical, legal, financial, and home services all showed year-over-year growth inside of the services category. Looking beyond services, our other top five ad categories all showed year-over-year growth in March. Auto reached positive territory in March for the first time in over a year. Looking ahead, we expect auto to stay positive through the second quarter, despite the industry's well-documented supply chain issues. I'd also like to call out the first quarter performance of our travel and leisure category, which was up nearly 100%, and keep in mind that compares to a pretty normal quarter last year before the pandemic. Although Travel and Leisure has been one of the worst hit categories, due to the lockdowns and COVID restrictions, it has come back thanks to the addition of sports betting. Sports betting is a lot like capturing political dollars; it's geographically based. More and more states have been legalizing sports betting this year, and Scripps is well positioned with markets in seven of them already. Many sports betting companies are working to establish their customer base as the state opens up, and we expect the industry spending to grow into a meaningful new core category. Also in the first quarter, we were pleased to see the NFL continue to rely on the networks and their local affiliates as primary distributors of NFL games for the next decade. As we have expected, the NFL expanded its distribution to include all the big four networks, adding ABC into the regular season. This move will have a positive impact on our large ABC footprint in stations, and with the addition of ABC into the Super Bowl rotation, we have the Super Bowl every year in the Scripps portfolio. In addition to the NFL, Scripps received good news on two other important sports rights. Late last year, the SCC conference announced it would move with its football and basketball rights to ABC starting in 2024 in a new 10-year deal. Then last month, the National Hockey League announced a new agreement with ABC and ESPN that would bring NHL regular season games and the Stanley Cup to ABC in a new seven-year contract. This is a big opportunity for Scripps, which has ABC stations in some of the NHL's most important cities, including Tampa, Las Vegas, Detroit, and Buffalo. And keep in mind that NBC's agreement with the IOC for the Olympics continues until 2032. Bottom line, major sports organizations will continue to use broadcast as their primary source of distribution for a long time. I'd like to end with political advertising; although this is not a major election year, we do have a competitive Governor's race in Virginia this fall, as well as a California Gubernatorial recall election where we're beginning to see some spending. We expect to deliver political in the low $20 million range this year. For 2022, our recent station acquisitions have put us in a strong position to outpace 2020, as I had said previously. We have 18 Senate races, 19 Governor's races, and about the same number of competitive House races that we saw in 2020. So we expect another stellar political spending year right around the corner. Now, here's Lisa.

Lisa Knutson, Scripps Networks President

Thanks Brian and good morning, everyone. In the new Scripps Networks Division, we have been working diligently over the last few months to launch our new business and begin capturing our year one deal synergies. We approached the first quarter with these objectives in mind to create the most efficient and effective organization that captures the synergies we promised at the ION acquisition, drive strong operating results, and lay the foundation for long-term value creation. I'm happy to report we're off to a fast start. We have been integrating our new employees from ION and elsewhere as we're building the right organizational structure, presenting our new networks upfront advertising story, transitioning our direct response sales to our proven DR agency, and shuttering the low-performing ION multicast networks in order to replace them with our own. We also are in the midst of planning for the launch of our new networks, True Real and Defy TV in July and the launch of Newsy over the air this fall. We expect these networks to reach more than 80% of the country by year's end. A launch so strong is only possible because we own so much of our own broadcast distribution. Our end goal for this work is to make the most of the leadership opportunity we've created for ourselves in the growing over-the-air marketplace so we can capture the benefits of scale, growing our audience, and advertiser base. Five years ago, Katz and ION were each taking just 7% share of national network viewing over the air. Today we've taken share from the national broadcast networks and in 2020 garnered 26% of that viewing, and that's before we launched two new networks and took Newsy over the air. And as we're growing, the number of people watching over-the-air is growing too, projected to go from 50 million homes today to 65 million in the next five years. Over-the-air is a massive marketplace and Scripps owns that space. In addition to leveraging the growth in the over-the-air marketplace, the Networks Group has three other key drivers for future growth. We will expand the distribution of our networks across all TV viewing platforms, not just over-the-air, but OTT and Pay TV. We will continue to expand our portfolio of networks as we increase our ownership in the space and will optimize our advertising rate yield by carefully managing our mix of general market and direct response advertising for the best possible outcome. These four drivers are helping us to create a national networks powerhouse that we expect to deliver double-digit revenue growth over the next few years, as well as a highly efficient expense structure to result in division margins of more than 40%. Additionally, in our first quarter reporting as a division, we were very pleased to have met expectations for financial results. As our networks portfolio moves through the upfront season, we are getting good traction from advertisers regarding the massive unduplicated national audience we can deliver to them. These advertisers see us as the solution for reaching cord-cutters who would subscribe to non-advertising streaming services, but self-bundle with free TV over-the-air. We're seeing building momentum in the scatter market as we offer advertisers portfolio sales, where we combine networks with similar demos to expand an advertiser's participation with us and cater to a very specific need for ad buyers. We are on track to realize the synergies we expect from the ION acquisition. In addition to the corporate cost synergies, as I mentioned, we've begun to move our networks onto ION spectrum. During the first quarter, we transitioned more than 200 channels from other broadcasters over to ION. This was a major move towards more fully serving the over-the-air viewer. I'd like to end with a few programming notes. It's been a big few months for Court TV, which provided video for its viewers and other news outlets in the courtroom for the Derek Chauvin trial in Minneapolis, as well as live gavel-to-gavel coverage with expert legal commentary and on-the-ground reporting. Court TV has received high international visibility and viewership from the trial. Its full-day audience on linear TV was up 119% across the three weeks of the trial, and its average weekly streaming audience was 105 million viewing minutes, compared to 20 million pre-trial. Advertisers have followed this audience growth and we expect the network's progress to continue with several high-profile trials ahead this year. During the quarter, we hired veteran journalist and TV network executive Kate O'Brian to lead our Newsy Court TV news vertical. Kate will lead the way in planning Newsy’s news programming lineup and news coverage strategies as it launches over-the-air in October. We'll be filling the day with original news gathered by reporters and 12 bureaus across the country. While we plan a number of changes to bolster Newsy’s national visibility and impact, we will not change its straightforward fact-based approach to covering the news. Moreover, at ION we're adding more than 600 hours of new content to its crime and justice lineup this year, including offering Chicago Fire for the first time and new seasons of Law and Order SVU and Chicago PD. These networks together deliver a collection of audience demographics that are attracting premium advertisers and driving strong ad rates both immediately and over the long term. We will harness the scale of our business to continue growing audience and national advertising share. And now operator, we're ready for questions.

Operator, Operator

Our first question is from John Janedis with Wolfe Research. Please go ahead.

John Janedis, Analyst

Thanks. Good morning. Maybe one for Brian and then one for Lisa. Brian first, just on the 800 new TV advertisers, can you tell more about what the contribution is, is it new businesses opening up post pandemic and if not, where is that money coming from? You seem more bullish on auto versus your peers; what do you think differentiates Scripps portfolio from others? And then for Lisa, with the national networks coming together, as they get integrated into the upfront and you touched on this a little bit, but can you talk more about any incremental pricing power you're seeing given the reach with conversations ongoing, are there any anecdotal comments you can share from advertisers? Thank you both.

Brian Lawlor, Local Media President

Hey, I will kick it off. Hey John, good to hear from you, it's Brian. As I touched on, more than 800 new business advertisers were on our air across our markets in Q1. We put a lot of focus on new business during the pandemic, as our sales reps were working from home. We put a lot of systems in place to be able to develop virtual presentations; we changed our incentive plans to really focus our business on new business. We shared a lot of learnings across our division as we saw specific categories that were benefiting and spending more during the pandemic. I think we took advantage of all those things. I mean, it was truly the focus, the energy, the hard work of our local sellers. As I mentioned in my prepared remarks, services really benefited from that. A real focus on people who were spending money on their homes; people were taking care of themselves, insurance, medical, but a lot of money in HVAC, home renovations, pools, spas, windows, contractors, and we took advantage of all of that while people were home able to receive those service reps. So it was just a real focused effort and a real great execution by our team to a plan that we put in place early in the pandemic. As for automotive, we mentioned that it grew sequentially each month of Q1. It was positive by the end of the quarter. We're seeing, obviously, the comps are relatively favorable in the second quarter, but we had a really good April and still look good in May. We believe that Q2 will continue to be positive. I think, like everyone else, we're watching what the long tail of the supply chain issues will be relative to the chips; I think it'll probably impact our business to some degree over three to six months. But the foundation is already laid and I think the second quarter will wind up being a pretty good quarter for automotive.

Lisa Knutson, Scripps Networks President

Hey John, across our portfolio, we're really experiencing the resurgence of advertisers coming back in. As we've guided, we'll be up 20% in the second quarter. We're seeing a lot of strengthening in the scatter market and increased buying activity from advertisers. We also think our portfolio sales approach is really taking hold. We're seeing a number of cross-network buys and really great rates. That bodes well for the upfront. We think advertisers and sellers are eager to make up for a rough 2020, and by the time the new TV season starts, we think CPMs will increase substantially as key categories return.

Operator, Operator

Our next question is from Kyle Evans, with Stephens. Please go ahead.

Kyle Evans, Analyst

Hi, thanks. Lisa, there's a lot of moving parts in networks right now. You sound very busy. What are the limitations to adding new stations or networks? What are the timelines typically to getting Nielsen ratings on those launches? And then you mentioned kind of long-term double-digit top-line growth and 40% margins; it seems like you have a lot of tailwinds. What do you think the biggest contributor to growth will be over the next couple of years? And then I've got some follow-ons for Brian.

Lisa Knutson, Scripps Networks President

Yeah, so Kyle, thanks for the question. And we do have a lot going on. It's a pretty exciting business that we're building, and obviously the results, I think, speak for themselves. A couple of things, we just announced this year, taking three networks over the air. So we've really got to execute on those strategies. Your question on Nielsen, certainly, it takes time to build audience and as audience builds, we would add Nielsen ratings. Remember, the former kids networks, were really each of them, with the exception of Court TV, which was Nielsen rated, which is very different. This means you've got demand and you've got eyeballs watching those networks. So we would carefully manage, as we build audience, we will then move toward adding Nielsen ratings, but that will certainly come over time. And I think you have one other question, Kyle.

Kyle Evans, Analyst

The limitations of adding new stations, I mean, it just seems like if you can come up with a great name and find a category that's maybe under-penetrated, and find content that fits it, I just wonder, what are the brackets around that?

Lisa Knutson, Scripps Networks President

Yeah, it is a good question because I think it's a complimentary question to our strategy on OTT. You heard me say in my prepared remarks, part of our distribution strategy is not only over-the-air growth, but OTT growth. I think exactly what you're saying. We are poised to take nearly all of our brands to OTT and to find categories where we can continue to expand other content categories, potentially based on content that we already own or have access to through licensed agreements. So I think from an over-the-air perspective, we feel good about where we are with the brands that we're launching this year. We will always be opportunistic and continue to watch the marketplace to make sure that if there's an opportunity, we would certainly take advantage of that. But I think my answer is both over-the-air and OTT certainly are where we see the opportunities.

Kyle Evans, Analyst

And then I think I snuck another one in there. You have a number of tailwinds behind you right now in its platform selling, its new platforms for existing channels, and its new networks coming online. Which of those do you think is the most powerful growth driver? Then I'll…

Lisa Knutson, Scripps Networks President

I would say that the most powerful growth driver is maximizing our advertising yield, right? It is really about, we're in the early stages of bringing these businesses together. I'm really pleased where the quarter ended, and you can see the guide that we've given on revenue growth for the quarter. We also think that we've created a very efficient expense structure. We're very mindful of delivering on the promises that we made at the ION acquisition to investors, and we're set about to do that and to really pull those levers from a growth driver perspective, certainly revenue being the biggest driver there.

Kyle Evans, Analyst

Great. Thanks. And Brian, I'll just keep it to one question. Help us think about puts and takes on retrans as we move across the quarters of 2021 and then major drivers for 2022? Thanks.

Brian Lawlor, Local Media President

Hey Kyle, look, I think as we think about retrans, we still believe that we've got a couple of cycles of growth ahead of us. As we've now got new scale, we look forward to taking advantage of that. Just to kind of bring the whole picture back together, as you know, we completed renewals last year for about half of our subs and we're really happy with the outcome of those, and that even included Comcast rates renewing at the end of last year. If you remember those renewals drove more than 30% gross retrans growth from 2020 over 2019 on a same-station basis. Obviously, that resulted in pretty good margin expansion there. This year, we had no network renewals to this point; we don't have any up through the end of the year. The cadence of the step-ups and the expenses has been in our favor. I don't think we've given our 2021 guidance yet on retrans, but I think I can say that the timing of margin growth is entirely tied to the timing of contract renewals. We've got about 4% of our households renewing in 2021, we've got about 20% in 2022, and then 75% just two years from now. So hopefully that answered the question you were looking for, Kyle.

Operator, Operator

And next we'll go to Dan Kurnos with Benchmark. Please go ahead.

Dan Kurnos, Analyst

Thanks. Good morning. Maybe just to Brian to follow up on John's earlier question. I know you don't have a crystal ball. We did actually hear from Expedia last night that they were going to start leaning into marketing and especially top of the funnel. So it sounds like travel is coming back maybe a little earlier than anticipated. Just how are you thinking about the year relative to, say, 2019? I know there's a lot of puts and takes, and we'll have to see how political shakes out in the back half of the year; maybe we could start there?

Brian Lawlor, Local Media President

Yeah, Dan look, we're really excited about the opportunity in the back half of the year. I think, as you pointed out, travel as a category we talked about sports betting, which has really been a nice driver. When you look at that, the travel, concerts, sporting events, community events, and festivals, all of that really has yet to break out. We've started to see in the last 60 days, Visit Florida, Visit Michigan, and Visit Ohio started a campaign this week. So we're starting to see the states quickly open back up. But I think, very quickly now we're going to start to see the sports teams coming back, the concerts. We think there's going to be a lot of energy around that. Of course, with the stimulus money now in people's pockets, we see the price of travel, the price of airlines all through the roof. So people are anxious to get out. They're anxious to be with each other and spend. We think that's going to be a real big catalyst of our drive in the back half of the year. On top of that, as I talked about, as we get to March and now we're seeing in the second quarter, retail is really strong with home improvement, communication, and the service categories on fire. Auto is relatively stable; I think it’s going to stay stable. I don't think it will drop back, but I don't think we'll see a surge for a couple of months just due to inventory issues. But I think we have enough other stuff that's driving us to give us a lot of optimism. I think we're building momentum in the back half of the year on political starting to move toward what will be a boomer year next year. In Q2 or in Q1 and now into Q2, we're seeing some issue spending in Arizona, Wisconsin, Michigan. As I said earlier, Virginia Governor's race is spending some money. There's some issue money that's getting spent in places like California recall. So I think we're really optimistic about what the back half of the year can look like.

Dan Kurnos, Analyst

Got it, that's really helpful. And you can cancel come to Florida, as we have enough people coming here already, Brian. Go to Michigan. Maybe on the retrans side, you gave a pretty good set of numbers; obviously, I think you still believe in general or kind of in that mid-single-digit decline range. I don't think that there's probably any change to that. But one thing that's come up in recent calls has just been the economics on the OTT soft front. A lot of those deals were probably struck prior to a pretty significant step-up in subs. I'm just curious as you think about upcoming network negotiations or just kind of where you stand on the economics just on the linear side in the OTT packages; how you're thinking about attacking that opportunity, especially if the SEC decides not to reclassify them as MVPDs, which would be wrong, but doesn't seem like there's any traction there?

Brian Lawlor, Local Media President

Yeah, look, we agree with you; we think that's wrong. We do think that these virtual services should be classified as MVPDs. But I guess that's for another conversation. The reality is, Dan, that we negotiate these deals as an affiliate Board representing all the affiliates within networks. These are typically two-year deals, maybe something like that, three-year deals. While there's clearly been a great step up and the market has moved in the last couple of years, since these virtuals have launched, I can tell you that for two of the networks I've been involved in the last 90 days, we've completed new renewals on new financial terms that I think reflect market value. So I wouldn't model that we're working off of old numbers there. I think the affiliates are having the opportunity to renegotiate that with the networks as often as they're renegotiating their deals with the virtuals on our behalf.

Lisa Knutson, Scripps Networks President

Yeah, we definitely, as you said, crushed it in the first quarter. Obviously, we're just over 100 days operating as the new divisions that we're still parting ways with employees, also adding new employees as we build throughout the year, evaluating our program schedules and those sorts of things. Our expenses, as I reiterated, are at 40% margin in the near and longer term. We will have some lumpiness this year. We did announce a couple of new networks that are launching in July, including Newsy over the air in October. You'll see a bit of lumpiness throughout the year, but we are reiterating that 40% margin for the year.

Dan Kurnos, Analyst

Okay, and then my tinfoil hat question, the beauty of AVOD or OTT and OTA is that it's portable beyond domestic borders if you have content rights. Like crazy to think that there's a longer-tailed opportunity to get some of this stuff, I know they have distribution agreements, probably internationally already with a lot of this content. But is that a crazy thought, that you can start to push some of this a little bit beyond the U.S. over time?

Lisa Knutson, Scripps Networks President

I'll address the short-term aspect first, and then Adam can provide insights on the long-term perspective. As you may know, we do have some international distribution with Court TV in the UK, and we noticed strong engagement during the shopping trial. However, for this year, our team is primarily focused on achieving our domestic goals, both through traditional broadcasting and over-the-top services. We have several initiatives set to launch that we believe will significantly impact our CTV and OTT operations in the long run. Now, I'll hand it over to Adam for the longer-term international discussion.

Adam Symson, CEO

Hey, Dan. I mean, I think there's, you're pointing out to the scalability of the business. Obviously, particularly the OTT space with FAST services, the free ad-supported television services, you can easily see how you're not constrained by borders. I think we'll continue to look at the opportunity since we have the infrastructure and the wherewithal already set up, we'll look at the opportunity we have to continue to expand beyond North America as the case merits. Lisa's point is exactly right. I think at least in the near term, our focus is going to be on making sure we do what we say we do, continuing to expand upon our leadership position in the network television space in North America, both over-the-air and OTT, and ideally expanding our ability to grow our audience and yield higher revenue from here.

Steven Cahall, Analyst

Thanks. So maybe first, Adam, if we think about monetization of a big four stations in the bundle and we kind of compare that to monetization of a viewer in the networks division, can you kind of help us just think about what that looks like? I mean, you've got an interesting business here, where my phrasing would be you kind of have a cash cow in local media, but there's some core pressure, and then you have is this growth in OTAs. Can you help us think about how maybe viewers shift the monetization track? And then, Lisa, I think on networks, you mostly sell spots, not impressions. It sounds like the market is strong. Can you just give us any sense of what spot pricing has done for those impressions and how your upfront deals might be impacting pricing as you go forward? Thanks.

Brian Lawlor, Local Media President

Hi, Steve. Good morning. I think you're pointing to sort of an old adage that we say all the time around here; two things can be true at the same time. We think we have a lot of opportunity to continue to head in local media. The Pay TV bundle continues, I think, to provide strength as we renegotiate over the course of the next several years, retrans step-ups. But you're right. I mean, there's some pressure on subs, and this company has made a major move into the over-the-air space because we see a growth opportunity there. Just be mindful that we expect that growth opportunity to pay off handsomely for both our networks division and our local media division. As consumers make decisions on their own about where they're going to consume television, we have an outsized share of that marketplace. I would say I think Lisa pointed to the fact that today, Scripps Networks yields 26% of all over-the-air viewing. That doesn't count our local viewing, and it doesn't count our launches of three new networks this year. When we think about the value of a viewer, we expect the value of a viewer in local media to continue to increase as consumers as we reprice retrans and as we obviously continue to execute our content strategy and ensure that our product is very valuable to them. I expect the value of a viewer for our network side will also continue to increase as we grow the share of audience we get in the OTA marketplace. One important point I'd make also is that it's not a mutually exclusive proposition. OTA growth will continue to grow, and a lot of consumers plug in digital antennas along with streaming services, along with participating in AVOD, SVOD and frankly, along with their use of Pay TV services. So for us, it's an all-of-the-above proposition, and we expect to yield a higher return for each viewer as the over-the-air marketplace continues to grow. I think the exciting thing about our company is we've taken this position; where do you otherwise find growth businesses in this media ecosystem with a 40-plus margin, right? Some of you think that we're being conservative there. I expect that we'll continue to expand our leadership position, and that will in turn benefit over the coming years.

Lisa Knutson, Scripps Networks President

Thanks for the question, Steven. We are observing an increase in rates due to rising demand, which is also reflected in the increasing CPMs. We've seen some early success with the programming changes implemented on our networks, and the momentum is strong. This is encouraging for a robust upfront season. Additionally, while we haven't discussed it previously, the direct response advertising sector has maintained its strong growth from late last year into the first quarter, leading to higher demand and rates in that area as well. With our guidance indicating a 20% increase, our focus is on optimizing the mix across our networks to maximize revenue, whether from direct response or the general market.

Operator, Operator

Our next question is from Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber, Analyst

Thank you, a few questions. One, I'm curious how you would describe the programming market now? Is it a buyer’s market or a seller's market? I am asking that both on the Scripps Network side maybe first, and then Brian, I'd love to hear your thoughts too for this syndicated program you're involved with. How do you find it? Is it advantageous right now buying programming or the opposite?

Lisa Knutson, Scripps Networks President

Yeah, actually we are really pleased with the market at this point in time. I think many of the studios that are launching their own D-to-C products are also licensing that content in as many ways as they can. Whether that's through cable and, in our case, through OTA broadcast, I think Craig, cash is king and they're looking for ways to monetize their content. We certainly have really strong relationships with all the studios. As I said in my prepared remarks, we are adding several hundred hours of new programming this year and reiterating our margin of 40%. So we're really pleased with what we're seeing in terms of being able to secure really terrific programming.

Brian Lawlor, Local Media President

Hey Craig, I am Brian; I'll pick the local side. I think right now we're on the syndicated cycle; we are between cycles. The next season will start in September, and so most of our programming is already locked up through that point. What we've learned is that when it comes to syndicated programming, scale matters. When you represent 25% of the country with some great television stations like we have, people come to us fairly early, wanting us to be a launch partner and trying to clear record the country with some of the country's best television stations. We're desirable for many syndicators, and we are a place that they start early. There's nothing that's active right now. I would also just remind you that for more than a decade, we have balanced syndicated programming with our own programming. We have the list shows that we own and produce that run across most of our markets. I think that gives us a lot of flexibility and allows us to manage our stations with either news expansion, our own product, or syndicated. We get to pick what's the best return and the best profile for our advertisers and our audiences. So I think we're in a pretty enviable position.

Craig Huber, Analyst

And then also on the Scripps Network side, can you just name for us if you would, if you can, the channels that you're going to launch this year and what are the ones exactly that you did shut down? I am not clear on that.

Lisa Knutson, Scripps Networks President

ION had some early digital sub-channels and shopping channels, specifically Qubo and ION Plus. To transition our channel to ION's digital sub-channels, we transferred our higher performing networks there and discontinued operations at the beginning of March. The former case networks were relocated to over 200 channels, contributing significantly to the distribution synergies we discussed during the ION acquisition. Networks like Court TV and Court TV Mystery, which are part of the former case networks, have been migrated. We prefer to refer to them as over-the-air networks since they are available for free. We plan to launch two new networks, True Real and Defy TV, on July 1st; one will be reality-based and the other will cater to male and female audiences respectively. Additionally, we mentioned Newsy will be available over the air starting October 1st.

Adam Symson, CEO

Yeah. Hey, Craig. Look, I think that it provides some clarity that was much needed. I would expect that the UHF discount is something that will probably be taken up by this FCC. But what this did do was give us clarity on cross-ownership and most importantly eliminating eight voices. For us, that's a real opportunity. As you know, we have still some upside opportunity to add a second station in markets where we have a dominant position, and we've always wanted to own a second television station. The rules prevented us from doing that, and I think there's a real opportunity for us to acquire second stations. I think it's a little bit of a long shot to get a second big four in those markets at this point, but it's not out of the realm of possibility by proving how the local community would benefit. Even the benefit of adding a CW or mind network and independent and being able to expand our local news and create and expand some of the local programming I talked about, I think that's where our biggest opportunity is right now. Down the road, we'll see what other decisions this FCC makes, but I think the elimination of the eight voices was a big opportunity for our company.

Craig Huber, Analyst

So just to be clear on my end, do you think the Supreme Court ruling will be helpful to be able to get a second big four, or we're at a CW from our mind network and more to come? Does that change much from before the Supreme Court ruling in your mind, the opportunity there for your company and others?

Adam Symson, CEO

Yeah, for our company it does. I think the opportunity to add duopolies in markets that we were limited from having a second station in the past, I think that opportunity now exists.

Craig Huber, Analyst

You think it's easier now? Okay. And just a nitpick question, your retrans subs, Brian, were they down about 5% year-over-year?

Brian Lawlor, Local Media President

I think that's the right range, Craig.

Operator, Operator

And our next question is from Michael Kupinski with Noble Capital Markets. Please go ahead.

Michael Kupinski, Analyst

Thank you. I wanted to follow up on your comments about the better than expected free cash flow. I was just wondering if you can just talk a little bit about your thoughts about target leverage, what your subsequent capital allocation plans might be, when you might begin repurchasing stock and so forth, what your thoughts are about that outlook.

Jason Combs, CFO

Hey Mike, it's Jason. From a leverage standpoint, we've often expressed our commitment to maintaining a cleaner, more flexible balance sheet. The leverage we had at the end of Q1 was 4.7, which exceeded our expectations when we planned for the ION transaction. Our aim remains to achieve a target leverage in the mid-3s. As we move past the most severely affected COVID quarters from our last twelve months, we anticipate our deleveraging to speed up, with the aim of getting back into the low 4s by the latter half of 2022. Regarding share buybacks, the terms of the Berkshire preferred prevent us from repurchasing shares or paying dividends while they are outstanding. Therefore, our primary focus will be on reducing debt and utilizing our newly enhanced free cash flow for that purpose.

Michael Kupinski, Analyst

Thanks for that color. I know that you've been updating some of your stations with the ATSC 3.0. Can you just give us about some thoughts about what you learned from that upgrade and what might be the revenue opportunity there?

Brian Lawlor, Local Media President

Hey Mike, it's Brian. You're right. We're pretty active in the advancement of that and a lot of the testing I think for a year or two, I've been talking to others about the fact that the first real market to launch and test in cooperation with the other broadcasters in the networks is Phoenix. That market has been up and running in ATSC for over a year, and a lot of testing continues there. The expectation is that, I think the target for the industry is to get somewhere in the 50% to 60% of households served by ATSC this year. By the end of the year, we will have maybe 15 to 16 of our markets that have launched in 3.0. But there's a lot of testing that continues to happen relative to not just what we can do in local markets, I think we're starting to get a feel for that, but what does this mean on a grand scale as you put the country together? Where the lighthouse is sticking in Detroit, we've carved out part of our spectrum and basically given it to the auto industry to use as a testbed. We're working very closely with auto manufacturers, as well as suppliers for auto to test the viability of the spectrum relative to updating entertainment systems in cars and knowing where their fleet is and things like that. The other thing we're testing is in places where we have two, three, or four adjacent markets testing contiguous spectrum, and seeing the flow as you bounce from market to market to market, the mobility of it and the credibility of the signal as you continue to flow. What I can say is, there's a ton of testing going on with all the right partners. I think there's going to be a tremendous opportunity down the road. I still think it's several years before the full country is scaled with ATSC, and I think that's when you get to the full benefits. I'm excited about the test, the partners we have, and the results of those tests. There's definitely going to be new revenue streams created from this when it's all said and done.

Michael Kupinski, Analyst

Brian, thanks for the color. That's all I have. Thank you.

Operator, Operator

And with no further questions, I'll turn it back to the company for any closing comments.

Carolyn Micheli, Head of Investor Relations

Thank you, John. And thanks to everybody for joining us today. Have a great day. Take care.

Operator, Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.