Nexstar Media Group, Inc. (NXST) Earnings Call Transcript & Summary

Okay. Good morning, everyone. This is Bryan Kraft. I'm the media, cable, telecom analyst at Deutsche Bank. And I'm here with Perry Sook, Chairman, President and CEO of Nexstar; and Tom Carter, the CFO of Nexstar. Gentlemen, good morning, and thanks for joining us.

Thanks for having us. Morning.

Good morning.

Maybe just to start off, core advertising in the fourth quarter was healthy, grew about 1.3% on a same-store basis. Can you talk about what you're seeing so far in the first quarter in terms of core advertising pacing?

Sure. Consistent with our earnings call, we did say that sequentially, there would be a deceleration from Q4 to Q1 of 2020. Obviously, Q4 of '19 was up against displacement from political, and Q4 of '18, which is why that growth was, as you termed, healthy. We, at this point, see our core revenue being slightly up in the first quarter. So kind of back to a more typical pattern. And I just want to -- I, again, remind everybody that in any political year, like 2020, core revenue will approximate something less than 40% of the total ad revenue. So we are, this year, less exposed to core ad revenue than in any year in our history.

And I think a lot of people are thinking about, on that topic, the impact of the coronavirus. Can you talk about the impact that coronavirus has had on your business, whether it's ad revenue, ratings and maybe any particular weakness that you're seeing in categories in response to what's happened with the virus recently?

None, whatsoever, from a commerce standpoint. We've had no cancellations, no business that has been postponed at this point. In fact, the early read on Q2 is flat to the prior year on a pace, and so that's fairly typical right now. And we've not seen any, I mean, people are not sequestering or sheltering at home or anything, so we've not seen any uptick in ratings or anything along those lines. I would say, news programmings are generally being paid more attention to. That's a good thing since that's our #1 revenue producer, but there's really been nothing that has moved the needle positive or negative for us at this time. It is, by and large, business as usual. And again, travel for us is not even a top 40 category in terms of ad revenue support. So I think our first quarter and our early read in the second quarter is, as we forecast on core revenue, a slight deceleration from Q4, but then, again, you've got political revenue that is substantially above our expectations, at least, for Q1, so far.

And you mentioned that political's off to a strong start. Can you talk about your expectations for this political cycle compared to, say, the midterms and the 2016 presidential year?

Sure. We're expecting healthy 2020. And all of these expectations, just to kind of frame the issue, were generated in November of 2019, and we haven't changed those, given recent information, most notably, Mayor Bloomberg, entering the race and Tom Steyer entering the race. So what we have said, and we're consistent with this, is 2020 will be a high single-digit increase over 2018. And if you relate that to 2016, it'll be a mid-teens increase over 2016. And as Perry mentioned on the call a couple of weeks ago, we've already made our Q1 budget for political, largely thanks to Mayor Bloomberg. And again, given that none of the Bloomberg effect was embedded in our number, and we haven't changed our guidance yet based on that, simply because we wanted to get past the 2 Super Tuesdays now, last Tuesday and today, and see where the candidates shook out and where spending looked to go forward, I think we're -- we feel very good about our political projections for the year. But keep in mind that 50% to 60% of political spend comes really between Labor Day and the election in the first week of November. So really, in that kind of 2-month period, we're going to get the most of it. So while we have a really nice trend so far. It's a relatively small sample size in that Q1 of a political process will be somewhere between 10% and 15% of the total for the year. And so that 10% or 15% looks really good, but 85% has yet to hit our books. And so I think -- our hope is to be able to walk that up as we get more data points during the year.

And the Trump campaign didn't spend heavily on television in 2016, as you guys know. Are there signs in 2020 that his campaign is going to spend a much more, call it, normal amount in television?

Sure. He's already raised $0.5 billion. And so far, he's only spent $10 million on his Super Bowl ad activity. So I think you'll see a fair amount of spending directly by the candidate as well as those that want to support the candidate, PACs, super PACs and things of that sort. And I think that will be on both sides of the isle, if you will, because Bloomberg is rumored to be either with Steyer or on his own forming a super PAC to support not only the top of the ticket but down ballot races. So we think that, as always, our guidance number has been well researched. And I think that, historically, people have made a nice amount of money betting the over on Nexstar's political guidance as the year unfolds.

Okay. Switching over to retransmission. You had a lot of retransmission contract renewal activity in 2019, not as much coming in 2020. What does that mean for retrans revenue growth in 2020? And how do you think about the growth outlook over the next few years?

Sure. Well, I would say we're at a pretty unique place and time, not only as it relates to retrans revenue, but net retrans revenue, less network affiliate expense. In that, you had just mentioned, Bryan, 70% of our subscribers renewed last year, the vast majority of that 70% at year-end. And also, if you go to the 10-K that was filed last Monday on Page, I believe, it's either 14 or 16, we have a listing of all of our big 4 affiliate agreements. And if you look at that, through 12/31 of '22, you'll see that we have 70% of our big 4 affiliate agreements inked through that period of time. And when you combine that with 70% of our retrans subs, just having repriced and the vast majority of those are on 3-year deals, so we have, from a contractual perspective, 70% certainty on the contractual terms with regard to retrans. So we're in a very good spot, from our perspective and on a relative perspective, to make a call on the next 2 or 3 years' worth of retrans, and we've done that in that, for 2020, you'll see mid-teens retrans revenue and net retrans growth, and over that 3-year period, '20, '21 and '22, you'll see a low double-digit compounded growth, with, obviously, the majority of it coming in 2020 from that perspective. So -- and obviously, the biggest unknown or the biggest variable from that is subscriber attrition, which we have mountains of data on, we have history on and we have a projection embedded in our retrans revenue growth rate and retrans revenue guidance consistent with, I think, past practices. And again, on our call, a couple of weeks ago, we mentioned that the total subscriber attrition over the last 12 months has been about 3.5%. That includes a higher-than-that attrition rating on traditional MVPDs with some amount of that getting backfilled from growth in OTT subscribers, which, obviously, we are a party to as well. So I think we feel very good about our retrans guidance, its contribution margin to the whole and kind of where we sit in our contractual renewal cycles. Is that responsive?

I'd say, it is, yes. A couple of follow-ups on that. So you talked about the 3.5% decline. I think, excluding the carriage outages, you said it was actually 2.2%, so even better. What do you see for 2020, particularly as you opt the Tribune stations into the network virtual MVPD agreements?

Sure. Well, just to put a finer point. The 2.2% isn't really ex-ing out the outages, it's just the only way that we can really demonstrate kind of what we see as the potential effect. Obviously, a good amount of the subscriber declines in 2019 were due to AT&T, which were due to the outage. It's hard for us to say exactly where those subscribers went or what would have happened without it. So it's really just to be a little bit more illustrative. But from our perspective, we model in larger subscriber declines from the 2 satellite companies, less of a decline from the broadband companies who have a more integrated and a diverse model, and we've seen less subscriber attrition there. And then, obviously, we could see continued growth from virtual MVPDs with the OTT product. And then there's also, I think, a specific set of circumstances as it relates to the Tribune acquisition, which is the fact that Tribune management was pushing hard to have the CWs included in a lot of the OTT packages, which we agree on, conceptually, and more specifically, for some of our local new stations, WGN in Chicago, KTLA, KRON in San Francisco, some others, that really do 60 to 70 hours of local news and have strong local news franchises. Some of the other CWs from the Tribune portfolio don't have that strength of local news, and so it's a little bit different of a sales proposition. But the reason I bring that up was Tribune did not opt-in their big 4 affiliates to all of the OTT platforms. And so that was something we remedied day -- I wouldn't say day 1, but certainly, the first several weeks, we had Tribune as part of our portfolio. So the Tribune big 4s were underrepresented on the OTT platforms historically, and so we've done that in Q4 of 2019, and we believe we will see outsized growth. And we just don't have the numbers to back it up yet in OTT because of introduction of some of the Tribune Big 4s into some of the OTT platforms. So we're -- that was part of the calculus for 2020 as well, and that we think that we'll be able to -- because of that, specifically, we'll be able to moderate subscriber losses, overall. But rest assured, we do have subscriber attrition baked into our 2020 and going forward, retrans guidance.

Okay. And then one more follow-up, too, on the reverse side. As you well know, there is a long-standing concern among investors that an increasing proportion of your retrans revenue is going to flow to the networks. Did your 3 renewals in 2019 support or refute these concerns?

I would say, it's business as usual, and that we will, from a retrans perspective, have in excess of a 50% margin during the period, the 3-year period, and that's given substantial amount of new contracts that we have. Believe me, we've got several file servers dedicated to this internally from a modeling perspective. And I think we have really good visibility because of the length of contracts we have and the amount of contracts, both from a -- that cover the amount of subscribers as well as the amount of Big 4 affiliates. So I would say, it's pretty much -- it's been business as usual for the last several years, and we see that kind of continuing and have the contracts to back it up.

I'd just add that our net retrans margin will actually go up this year because of the reset of 70% of our subscriber pricing at the end of the year. The addition of the Tribune portfolio, which has more exposure to CWs, which carries a much higher net retrans margin than the big 4. So all of those factors taken together, our net retrans margin will increase this year.

Okay, great. And then switching gears, I know on the integration front, you've accomplished a lot already. Can you talk about where you are exactly in the integration process? And what's the time line for realizing the full $185 million in synergies that you've got?

Sure. I would say we're somewhere between 90% and 95% done. The biggest holdup or the biggest gap, if you will, between that and completion is, we had to get the K out and until we got the K out and got audit approval from PricewaterhouseCoopers, we ran, basically, a good amount of accounting staff we retained from Tribune in Chicago, so that we could get through any compliance or SOX-related issues. Once the audit was done, there was a round of separations that was done at the end of February and early March, related to accounting and finance, kind of my staff, that was probably the biggest amount of people and amount of expense that had not been taken out of the system at that point. Retrans was done basically during the fourth quarter, and the first quarter will show complete retrans synergies. I would say, the vast majority of the station, personnel expense and OpEx expense has been done and kind of the laggard, for the reason I just mentioned, was on the corporate side, but that will largely be done. There'll be some that happen over the course of the balance of the next 6 months through the end of September. But I would say on a run rate basis at the end of the first quarter, we'll probably be 95% done.

Okay. Should we be thinking about reinvestment of that -- of any of that $185 million? Or will that all be kind of falling to the bottom line?

I would say, it all falls to the bottom line. We -- there are individual projects, and we've talked a little bit about News Nation on WGN America where we're reinvesting the runoff of syndicated programming rights and the payments associated with that back into News Nation, which will launch this summer, currently scheduled for July. But most of this is clearly synergies where we're just riding the expense ship with regard to inheriting the expense base from Tribune, and then obviously, retrans revenue, which was on the top line as opposed to an expense line.

Okay. And let's talk about the balance sheet for a minute. You're deleveraging rapidly, given the EBITDA growth, the free cash flow generation, the Fox deal closing and the Sinclair settlement, so -- and how should we think about your use of free cash flow as you approach the leverage target of below 4x by the end of this year. Is there anything else you would potentially do with the cash besides repurchasing shares and paying the dividend?

Well, I would say -- first of all, I appreciate the question because it's one we love to talk about. But you're right, $1.175 billion of annual -- of average free cash flow, obviously, that number is going to be higher in the political year than the nonpolitical year. So 2020 free cash flow will be higher than 2021 natural cycle. We pay about $100 million a year in dividends now with the recent dividend increase. And you're right, the Sinclair settlement, the $240 million of after-tax proceeds from the Fox sale, if you add that to the free cash flow for 2020, we think we've got between $1.4 billion and $1.5 billion of allocatable free cash flow. We've already paid down $130 million of debt that was in subsequent events in the K. We took the $240 million from Fox and paid down debt. So at year-end, we were at $8.3 billion of net debt. Right now, with the recent pay downs, we're sub-$8 billion of net debt. So we think we're well on the trajectory to get below 4x, and we have all the free cash flow in the last 10 months of the year to help with paying down debt and buying back stock. And I would say, we're always interested in acquisitions. I will tell you, though, that given where the stock price is and the free cash flow yield, that we can get just from buying back our stock based on the new free cash flow guidance. It's hard for us to think of or to find an acquisition that's more accretive than buying back our own stock, not to mention the fact that buying back our own stock has no operational risk associated with it. We can say -- I can buy back stock from my desk, and it doesn't take any M&A -- assuming any M&A risk to get that done, integration and finance, et cetera, et cetera. So I would say, at these levels, it's a 'pay down debt and buy back stock kind of story.

Right. And you took advantage of the low stock price in 4Q by buying at an average price of $102. Obviously, we're well below that level. Is your appetite to buy at these prices similar? Or does the coronavirus macro uncertainty give you some pause at least in the short term?

No, I would say, at these prices, clearly, you're right, we were a buyer at $102.5 range. I would say, we continued to be interest, but it's not an all-or-nothing game. It's always going to be a measured approach where we have opportunities to buy back stock, but you'll see us buy back stock and you'll see us pay down debt this year. We continue to be shown and look at interesting M&A. There may be other tuck-in acquisitions that we're going to do. We have one acquisition with Sinclair. That's a relatively modest acquisition in Lexington that'll happen later this year. So we're looking at M&A, but I would say, the vast majority of it will fall to either paying down debt or buying back stock and allocating towards both of those.

Okay. And you mentioned before, when we were talking about reinvestment, you mentioned News Nation. How's the launch of News Nation and Primetime on WGN going to impact the business? For example, does your research suggest that there's going to be a significant ratings lift to MGN -- to WGN and Primetime?

We are forecasting in our upfront presentations a very modest increase in our Primetime ratings. And we, quite frankly, would love to see a huge increase, but we don't really need a huge increase to be successful. We are in the process of having conversations with advertisers. We've already had advertisers purchase time in News Nation on WGN America post launch and the CPM is roughly double what we are seeing for just regular way programming in Primetime on WGN America. So -- in addition, Dave Rotem, our Head of Sales there, shows me 4 pages worth of advertisers that they can now call on that didn't have interest in buying in free runs that would be interested in buying in news. So we -- our research shows that there will be a ratings lift again. We would rather underpromise and overdeliver. If we do indeed launch in July, very quickly, we'll be up against the Summer Olympics, if indeed, the Summer Olympics are contested this year, which we believe they will. So we think that our ratings will grow over time, and certainly, the closer we get to the election. So again, we have very modest ratings growth projections, and they seem to be accepted as believable by the advertising community, but it gives us intellectual property. It gives us counterprogramming in Primetime where every other broadcaster cable network either has entertainment programming, sports programming or opinion shows. This will be a hard new show, 3 hours a night, 7 nights a week, which doesn't currently exist. So we like our opportunity to fill an unmet need in the marketplace, and we like our opportunity to broaden our advertiser base, and we like our opportunity to increase our CPMs.

But I would say, from a financial perspective, we're not including any uplift in WGN America results as it relates to News Nation. This is just meant to -- basically, the results will be the same or the projected results are based on the same kind of results from scripted programming. If there is an uplift, that will be to the benefit.

Okay, great. And just to give us some color, current WGN CPMs, I'm assuming that those are kind of high single-digit dollars. Is that fair, just kind of normal cable CPMs, low double digits?

That is correct. In Primetime, we're kind of in the high single digits on a current basis. And we are well into the teens as are the other networks that are seen as cable news networks for Primetime for the new product offering.

Okay, great. How about the cost side? How does the cost of 3 hours of news programming compared to the current cost to program those 3 hours?

Sure. Well, again, the way we are financing WGN America, other than we are coming out of pocket, approximately $20 million this year on the CapEx side of things. But we are financing the initiation of WGN America and the 140 people and all the technical equipment that we're hiring. That's basically being funded by the roll-off of syndicated program contracts this year, next year and the year after. So there's really no out-of-pocket expense other than the CapEx to launch WGN America. And so we're, out of the box, expense-neutral, and we hope to be revenue-positive. And again, the backbone of this undertaking are the 5,400 journalists that we currently employ in 110 markets and 38 states across the country, and they're going to be the backbone of the supporting -- backbone of our reporting and the news will bubble up from there. So for example, when you saw the coverage of the Kobe helicopter crash, if you happen to be watching certain cable networks, you saw KTLA down in the lower right-hand corner as the originator of that video. Well, KTLA is our station. So KTLA will be providing that video for News Nation and not a third-party on a going-forward basis. And the same with weather events in Nashville, and we not only know what happened, we know the neighborhood. We can put it in context, and we think that will be our differentiator. We'll be on the scene at major events before others can charter an airplane to get their correspondence in. So -- and we'll have the context of where we are and what it means to the local community. So it's a unique opportunity, we think. We think there is a moment in time -- I hear from investors, cab drivers, neighbors, just anybody you want to talk to -- that there is a thirst for a hard news, unbiased news offering in Primetime. We are also going to repeat it in -- we'll go 8 to 11 east coast and then we will repeat the broadcast 11 to 2, which will put it in pattern in Primetime on the west coast, but it also affords us the opportunity if there is a big story that day that we can go uninterrupted for as much as 6 hours of news coverage in Primetime and beyond. So we are excited about the prospect of launching. And we think that it will be an opportunity to create value for shareholders with little out-of-pocket cost.

And any plans to leverage News Nation digitally that you could tell us about?

Sure. A centerpiece of this effort is newsnationnow.com, which we'll be launching concurrently with the broadcast but it will be, from the start, a 24/7 news app. So it will be the 24/7 operation, even though the broadcast will air in Primetime. News Nation now will be a 24/7 operation, and we are budgeting for appropriately to make sure we are significantly manned to provide a 24/7 product digitally. And again, WGN America has currently little to any digital ad revenue as a component of their revenue matrix, and this will allow them to enter that space in a big way.

Okay. And I wanted to also ask if you'd be willing to share any of your thoughts on the upcoming NFL renewals and how they might play out. I guess, any thoughts broadly on the NFL?

Well, I think that the -- all the NFL packages will end up on broadcast television, whether ABC renews a package and simulcast it with ESPN as a way to enter the Super Bowl rotation. I don't see a streaming product exclusively with the NFL. But I think every television package will have a streaming component to it this time around, so I think that's the only change. And of course, everyone will pay more, but beyond that, I'm not looking for any earth-shattering developments out of the NFL renewal.

If one of the Sunday afternoon, in market packages were to hypothetically move to NBC or ABC, could that be a net benefit for Nexstar based on your station footprint from an advertising perspective? Or would that be more of a negative impact due to the relative size of your CBS and Fox retrans base versus NBC and ABC?

That's a very nuanced question. I mean, first of all, we're the largest CBS affiliate group. We're the largest Fox affiliate group. We're the second-largest NBC affiliate group and the third-largest ABC affiliate group. So we kind of designed a portfolio for this instance that if something moves around, it may benefit us in Nashville and hurt us in Rochester, but it's kind of a portfolio approach. And I would say a lot of that depends on what network gets -- where do we have home team status. And if that shifts, it could be to our benefit; if that shifts, it could be to our negative. But I would say, from a network perspective, we're a large partner to every one of the broadcast networks. So it would be very nuanced, I think. It's same with CBS. If they end up capturing the Big Ten, but giving up the SEC, there are certain markets that will care deeply about that and better than half the country probably won't care all that much.

Right. Okay. Given the national scale that you now have after acquiring Tribune, do you see more strategic opportunities to leverage national scale? And are there any examples that you could share?

We are designing, for lack of a better word, our own walled garden, where Nirvana for us would be to ante all of our inventory, digital, national cable, diginet, linear television and be able to sell it on an impressions-based basis and be the exclusive sales agent for that. We have, across all of our sites today, if we aggregate the audience, we have 106 million unique monthly users, which, if it were one site, would be the largest Comscore site in America for news information. So we are looking, how can we aggregate and then participate in that national market on top of what we do today, which is selling the inventory, the video, banner ads locally. So that is a huge part of Greg Raifman's mandate. Greg runs Nexstar Digital as to be -- continue to develop this kind of walled garden approach. And ultimately, we'd like to be able to seamlessly move inventory between our linear, broadcast, cable, diginet and digital assets from a sales perspective. That's a ways away, but I think if we can aggregate to participate digitally when we're in 64% of the country, we're not that far away from an unwired network in say, early morning news or late news, even without the benefit of WGN America and News Nation. So there are all kinds of things that we are pursuing and discussing because there is no other station group like this with this kind of national reach. And so how can we take the assets that we have and monetize them over and above the ways we're monetizing them today, and we spend a lot of time talking about that here.

How about on swaps, do you see more potential opportunities for station swaps, like the recent deal you did with Fox?

There are possibilities for that. We're kind of like an NFL team. We are right at the ownership cap pro forma for all of this activity. So do we have some markets that are punching below their weight from an EBITDA contribution? And could we either double up in those markets if they're singletons or perhaps swap into another market that would be more productive with that cap space? I mean those -- we have those kinds of conversations all the time internally. And listen, we have a battle book depending on who might prevail with TEGNA or we have a battle book for what might happen with other network O&O groups down the road. So I mean I think we've gained theory in a lot of those scenarios, it's just nothing is actionable. But then again, it has to be actionable at a price that is more accretive to our shareholders than buying back stock. I mean, I think that people need to remember that the most accretive transaction we have ever done was the acquisition of Tribune, which was 60-plus percent accretive, and it has to be -- it may not have to be that, but it's got to be more than probably 27% accretive, which is what buying back our stock is today.

Okay. And absent strategic M&A, what other revenue growth opportunities do you see on the horizon over the long term?

Well, again, I think being able to aggregate our inventory and sell it and maybe participate in the national market in a way that we don't today, I think the growth of WGN America, it's worth a little less than $1 billion to us as an asset today. I think it was pretty well documented that when Fox sold certain assets to Disney, they valued their remainder components. And Fox News, as a stand-alone asset, would be worth something around $19 billion to $20 billion. So our goal is to grow WGN America, maybe not to that level but certainly grow the value of it above where it is today. And again, we don't need any equity issuance to do that. So all of the growth that we are contemplating internally endorses the benefit of the shareholders because there's no M&A required. We'll obviously continue to look at M&A. We had a conversation last week. Whether it bears fruit or not, we'll see. But in this environment, we think the thing that we can do is pay down debt and buy back stock opportunistically. And that's probably the best thing we can do in this environment.

Bryan, are you there?

Sorry about that. I accidently muted. I just wanted to wrap up, I want to thank you, Perry and Tom, for joining me today. I think this is a great discussion, and thanks to everyone who joined us on the webcast. So everyone, have a great day.

Good. Sorry, we couldn't be with you in Florida.

Me too.

Thanks very much, everyone.

Thanks.

Bye.