Fitch Lifts Outlook on Scripps Networks (SNI) to Stable; Issuer Default Rating Affirmed

Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) assigned to Scripps Networks Interactive, Inc. (SNI)(Nasdaq: SNI). In addition, Fitch has also affirmed the specific issue ratings assigned to Scripps Networks Interactive. The Rating Outlook has been revised to Stable from Negative. The company has approximately $3.7 billion of debt outstanding as of March 31, 2016.

The Stable Outlook reflects SNI's commitment to delevering below 2.5x by year-end 2016. Fitch believes the company has demonstrated its commitment by pausing share repurchases and repaying $325 million of debt during the first quarter of 2016. Fitch calculates SNI's gross leverage at 2.6x as of March 31, 2016, which exceeds Fitch's threshold of 2.5x for the recommended rating. Fitch anticipates SNI will generate in excess of $500 million of annual free cash flow, which will facilitate expected debt reduction.

KEY RATING DRIVERS
--SNI's portfolio of cable networks and leading home and lifestyle programming brands provide the foundation of the ratings.

--Acquisition of TVN is in line with the company's international expansion strategy. SNI's financial priorities remain consistent and focused on internal investment and international expansion. However, the acquisition limits the company's flexibility within the assigned ratings to accommodate operational missteps and share repurchases.

--Fitch expects SNI to focus on paying down debt following the acquisition of TVN and de-levering to a range of 2.0x-2.5x. Fitch calculates SNI's gross leverage at 2.6x, which exceeds Fitch's threshold of 2.5x for the assigned rating. Fitch anticipates SNI will generate in excess of $500 million of annual free cash flow (FCF), which could facilitate expected debt reduction. However, Fitch does not expect the company to increase leverage to facilitate a more aggressive shareholder-return policy.

--SNI's reliance on advertising revenues is among the highest within the sector and, in Fitch's opinion, elevates the operating risks inherent in the company's operating profile.
SNI's portfolio of cable networks are the foundation of its ratings, in particular the company's HGTV, Food Network and Travel channel brands, each of which reach nearly 100 million subscribers throughout the U.S. SNI's operating profile benefits from a stable, recurring, dual-stream revenue profile, high operating margins and FCF generation characteristics attributable to its cable network businesses. A level of ratings volatility at any given network is also factored into the credit ratings.

SNI's capital allocation strategy is centered on investing in original programming and production, international expansion, maintaining a strong balance sheet. Fitch expects that SNI will continue investing in its core businesses and international growth initiatives while reducing leverage to a range of 2.0x-2.5x. The company's shareholder returns (dividends and share repurchases) amounted to approximately $121.4 million during the LTM period ended March 31, 2016, which consists of common dividends as the company did not repurchase shares during the LTM period. During February 2015, the board authorized an additional $1 billion under SNI's share repurchase program. Approximately $1.5 billion of capacity remains available under the company's share repurchase program.

Fitch acknowledges a level of event risk is present within the company's credit profile as it relates to the potential rationalization of SNI's ownership interests in Television Food Partnership, GP (TVP). SNI owns a 69% controlling interest in TVP and is the most logical buyer of Tribune Media Company's (Tribune) 31% ownership interest in the partnership. There are no formal put or call rights held by either partner; however, SNI holds a first right of refusal. Fitch considers a potential purchase of Tribune's non-controlling interest as event risk.

SNI generated approximately $502 million of FCF during the LTM period ended March 31, 2016, as higher programming and production costs, cash taxes and dividends paid to non-controlling interests weighed on FCF generation offset by incremental cash flow from TVN. FCF generation generally affords the company significant financial flexibility.

Fitch anticipates that investments in original programming and international expansion will remain key strategies during 2016. Notwithstanding the pressures on FCF generation, SNI's FCF metrics remain strong relative to its peer group. Fitch expects the company to generate FCF margins in excess of 15% this year.

Rating concerns center on the company's high exposure to cyclical advertising revenues relative to its peer group, the lack of scale and scope of its international business (relative to larger more diversified peers), and high revenue concentration within the company's top three brands. Additional rating considerations include the company's ability to adapt to changing media consumption patterns and technology platforms as well as its capacity to deliver programming to its cable networks that drive incremental share of an increasingly fragmented viewing audience. Fitch believes SNI has made a prudent effort to make sure their content is available on all platforms through TV Everywhere initiatives and OTT channel launches.

Advertising revenues represented approximately 69% of SNI's consolidated revenues during the LTM period ended March 31, 2016. Advertising revenues tend to be more cyclical and volatile than more stable affiliate fee revenue sources, exposing the company to economic fluctuations. Moreover, SNI's revenue mix makes the company more susceptible to hit-driven volatility of cable network programming ratings and share of viewing audience. Fitch recognizes that a substantial portion of SNI's programming is consumed live in the linear format which is very attractive to advertisers. Additionally, the company's lifestyle and home-themed programming is a leader in the very desirable upscale female demographic.

To ensure stable demand from advertisers SNI needs to consistently deliver ratings within its targeted demographic. Ratings volatility eventually will lead to volatile advertising revenues. Competition for viewing audience within the targeted demographic will remain fierce. SNI, similar to other cable networks, seeks to differentiate its networks by investing in original programming. To that end many of SNI's networks will increase the number of hours of original programming broadcast across their respective platforms.

International expansion both organically and through acquisition remains a top strategic priority for SNI and presents the company with potential revenue and cash flow growth opportunities. Fitch acknowledges that SNI is in the early stages of executing its international strategies. However, the company has yet to demonstrate that its brands have a broad and reliable global reach and that its content is leverageable in international markets. SNI's acquisition of Polish TV operator, TVN, demonstrates SNI's international growth strategy. Fitch expects international revenues to drive approximately 15% of consolidated revenues during 2016. Overall, Fitch believes international markets represent a compelling revenue and cash flow growth opportunity for many media companies as they capitalize on globalizing their respective brands and content.

KEY ASSUMPTIONS
--Advertising revenues are expected to grow mid-single digit while affiliate fee revenue is projected to grow between 4% and 5% during the forecast period;
--Assumes minor margin pressure reflecting increasing programming and production costs due to higher investment in original programming and international expansion. However, the model assumes that SNI's ongoing cost reduction efforts will largely offset programming and production cost pressure;
--FCF and cash are prioritized to pay down debt and address 2016 maturities;
--No material acquisitions in 2016-2018.

RATING SENSITIVITIES
Positive rating action would likely coincide with SNI committing to a more conservative financial policy highlighted by a gross leverage target below 2.0x. Moreover, Fitch would need to observe improvement in SNI's revenue mix and reduce its reliance on cyclical advertising revenues and growth within the company's international markets. Meanwhile SNI will need to demonstrate that its operating profile can sustain itself amid growing competitive pressures, increasing programming and production costs, changing media consumption patterns and evolving technology platforms.

Negative ratings actions are more likely to coincide with discretionary actions of SNI management including adopting a more aggressive financial strategy or inability to delever below 2.5x by year-end 2016. Other negative triggers include execution risks and capital requirements related to the company's ongoing international expansion efforts having a negative impact on the company's operating profile.

LIQUIDITY
Fitch believes SNI's liquidity position and financial flexibility are adequate for the rating given the strength of its businesses, expected FCF generation, and access to capital markets. The company's liquidity position is supported by the borrowing capacity from its $900 million revolver, which expires during March 2020. SNI's maturity schedule is manageable with $500 million due in 2016 (December).

FULL LIST OF RATING ACTIONS

Fitch has affirmed SNI's ratings as follows:

Scripps Networks Interactive, Inc.
--IDR at 'BBB+';
--Senior unsecured revolver at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Senior unsecured term loan at 'BBB+'.

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