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

Thank you so much, John. So as John mentioned, we're now going to be shifting afternoon towards some of the TV broadcasting companies. And there's no better way to start than with Nexstar Media Group. So today, we have Perry Sook, the Chief Executive Officer; and Tom Carter, the Chief Financial Officer, joining us for a fireside chat to kick off the afternoon session.

Good morning.

Good morning. So thanks again for joining us. And I think that we can just kick it off with starting to talk about the impact of the coronavirus and the pandemic on your business. So if you want to start, very high level, with a quick summary and overview of recent developments at Nexstar in the last few weeks and months. I think that, that would be helpful, and then we can move on to the more specific questions.

Okay. Well, we got off to a great start to the year, Hannah, in January and February, and then obviously, had the slowdown in the month of March, which has continued into the second quarter. And from our perspective, we paid down a substantial amount of debt in the first quarter, bought back stock, increased our dividend for the year as has been our custom. So pretty much business as usual until the pandemic hit and affected our ad revenue. And a reminder that in a political year, our ad revenue was less than 40% of our total revenue. So that part of our business has been affected. I will tell you that as we look at the results in the second quarter, May finished -- ad revenue finished a higher percentage to the prior year than did April. June is pacing higher than May, and third quarter is pacing better than second quarter. So we see sequential improvement and look at this as a speed bump in what otherwise would be and may still be a record year, financially, for the company. But the drivers of distribution revenue, political revenue as well as our business serving our communities, our news ratings are at record highs and even have dropped off some from those spikes we saw in March, April, but are still trending in a 15% to 20% above historic levels. So the company is fine from a liquidity standpoint, from a covenant standpoint, and so we see no distress on the horizon.

Yes. That's a really helpful starting point. So how many of your markets have opened up in the last few weeks and how many are still under shelter-in-place order to remain mostly closed?

Well, virtually all of our markets are -- have some degree of openness right now. Obviously, New York and California are a little different than Texas and Florida and other states in the economy. But we have no markets that are under a shelter-in-place order anymore. Businesses here in Texas today went -- service businesses went from 25% capacity to 50% capacity, that goes to 75% another week as long as the public health concerns still remain in check. So we think maybe things are just a little different outside of that Northeast corridor that has obviously suffered the brunt of the pandemic. We do have certain markets that have instituted curfews due to civil unrest. Those tend to be fairly temporary in nature. Again, news coverage and interest in our coverage of that news has spiked viewing levels yet again, and we have had some commercial disruption for continuous news coverage. But it's early in the month, and we think we can make good any of that displaced inventory in the month of June before the quarter end.

Okay. Yes, great. So while advertising has been hurt a bit, as you mentioned, we have seen significant spikes in viewership. What have you seen over the last month or 2 from the measurement companies? Who's watching? Where this increase is coming from?

Well, the biggest increases have come in newscast that usually people wouldn't see because they'd be at the office, right? So our early afternoon newscast, early evening newscast, and we have seen pretty substantial increase in our late news, our 9:00, 10:00 and 11:00 newscast as well. But the viewing has been broad-based increases, younger viewers were watching news, some may be for the first time on a regular basis. But consumption has just generally increased. And as I said, where we saw 40% and 50% increases in our ratings, those are now more like 15% and 20% increases. But we're hoping that some of that does remain sticky and that we'll see other folks sampling our product maybe for the first time or for the first time in a while.

Yes. So how sustainable do you think is some of these ratings? I know you mentioned you're 15% to 20% right now, will remain longer term as it get further and further away from [indiscernible]

Well, it's really impossible to tell, I think. We'll do our best job, we'll put our best foot forward and our best product on the air every night, and maybe people like the information that they see and decide to stick around. It's really impossible to forecast behavior going forward. Obviously, when we have big news events, we have spikes in viewership. So tell how many of those we will have between now and the end of the year, and I will tell you what our ratings and the audience levels will look like. But it's really impossible to forecast that with any degree of accuracy.

Okay. Yes, that makes sense. So moving on to Nexstar's other sources of revenue. You mentioned that in a political year, core advertising is less than 40% of your total revenue. On the retransmission side and political side, Nexstar was a pioneer on getting paid retransmission. Where do you think we are in the payment cycle relative to where retrans may go moving forward?

Sure. In the investor deck that we have up on our website, you will see a page in there with regard to the relative positioning of the broadcast channels in a pay bundle versus the cable channels in a pay bundle. And you'll see that we still get approximately 35% of the viewership in a pay television bundle is in the broadcast channels. And if you go back and look at various analysts and services and what they project, that we're somewhere in the high teens to approximately 20% in terms of the fees paid by the programmers or paid to the programmers by the pay television providers, the MVPDs. So we believe that there is still substantial growth on a relative value basis between the viewership that we deliver into the bundle and the fees that were paid from the bundle, so that we think that there is another, call it, 6 years, plus or minus, of continued growth. It won't be at the high teens to low 20% growth that we have experienced and experienced in the first quarter, and it will trail off over that next 6-year period, but that we will continue to see substantial growth in retrans, something approximating 80% to 100% growth over a 6-year period.

Yes. Yes, that's encouraging to hear. And so while you stated that you don't anticipate the pandemic having a material impact on the retransmission side or political for that matter, how do you anticipate COVID-19 will impact cord cutting? And how are broadcasters protected against this risk moving forward?

Well, we have seen some loss of subs in prior recessions due to people not being able to pay their bills. So there may be some of that at work here. I would also tell you that in some -- in past recessions, sub levels have held up incredibly well because of the array of entertainment traces out there, the bundle is generally seen as one of the most efficient, least expensive, if we're not -- we don't have the money to go out to a restaurant or to a movie, maybe don't want to do that, then I think that cable, entertainment bundle and information bundle becomes that much more important in households. So we've seen no, through the first quarter, the sub losses that were reported, and that we have seen have been less than the attrition that we have budgeted in our model. So I'm not sure this will be a change event. It may be a blip in a trend. But I'm not sure we see the long-term trends changing. And again, our view on that is that the rate of subscriber decline will continue to moderate, and eventually, we'll get to a core baseline number of paying subscribers in the traditional wireline and satellite companies. But then we also factor in the increase in OTT participants for which we are also paid. And so again, we've had some decline, some attrition in our financial models and embedded in our guidance for the last half a dozen years, and it has yet to reach a point that it has been greater than what we have modeled and what we have guided to. So we're pretty comfortable with our guidance as it stands.

Okay. Yes, that makes a lot of sense. And then moving along to a few questions on political. Nexstar had a very strong first quarter in political ad dollars. While the timing of political advertising spend may have shifted with primary it's getting moved around, and that's what we're seeing as a result of the pandemic, is there still no change to your expectation around political for the full year of 2020, which is expected to come in at record level?

That's correct. We haven't changed our full year guidance. I think you're right. It's going to be a little bit more of a barbell approach, heavier in the first quarter because of Mayor Bloomberg and what he spent some of the primaries in the second and third quarter are getting shifted around a little bit. But at the end of the day, the game has really played between Labor Day and the elections. So that kind of 8-week period, where we're going to see in excess of 50% of the total political spend in that period. And we think that, that will still be very robust because, again, if you think about it, you are not going to see candidates out in large gatherings, large public gatherings. They're not going to be shaking hands, they're not going to be kissing babies, et cetera, et cetera. So that the most efficient way for them to get their message out will be through advertising and broadcasting takes the largest share of that. So we think that we're well positioned for the fall.

Can you just quickly touch on some of the large reasons that you're looking forward to in your political calendar moving forward?

Well, the states that -- well, first of all, this presidential election year, that will account for maybe 1/3 of total spending, plus or minus, going forward, and that will really manifest itself after the conventions taking place in whatever form they take place. But we have statewide races. We expect that Pennsylvania and Michigan and North Carolina will be very active, Florida will be very active. And we are blessed with geography. We reach about 2/3 of the members of the house that are all up for reelection this year. Some of those races are more competitive than others. But it is -- the statewide races, whether it's at the state level or the federal level, contested statewide will drive the bulk of our spending, along with issue spending and PAC spending. And one of the things we do on a regular basis is touch base with the advertising agencies in Washington, D.C. that plays the vast majority of the political ad spend for the candidates in this country. And in fact, Tim Busch, President of our Broadcast division, is headed there next week, along with the President of WGN America, and they're going to be not only asking for business for our various station and cable platforms, but they're also going to be having dialogue to being informed. We also keep a good focus on the fundraising, and all of that would indicate that this will be a record year. And again, people have a pretty successful history in the past that when we give guidance that embeds a political number, embedding the over on that political number, and I would expect this year will be no exception.

Great. That's helpful. And then you touched quickly on WGN America. Can you discuss your longer-term strategy for WGN? I know you have [indiscernible] in the fall. And then after that, you can probably talk a little bit about your 31% stake in the TV Food Network as well.

Sure. I will speak to WGN America. Tom can speak to the Food Network as he sits on the Board there. But we will be launching on September 1 a 3-hour prime time newscast, live, 7 days a week from facilities that we are building in Chicago, and it starts initially as a counter programming strategy when all other networks, broadcaster cable in prime time are either showing entertainment hopefully, again, sports or opinion shows will be the only hard news, live news option in the daypart at that time, 7 days a week. So that's how we will start. We will repeat the broadcast for the 3 hours immediately following, which is a practice common in cable, and that will then put the programming in pattern in prime time on the West Coast, which is important for our West Coast feed. But it also gives us the ability if there were a big story to literally go live for 6 straight hours, which is 25% of the broadcast day. Obviously, that's what we're focused on. We announced our mainline talent anchors and correspondence earlier in the week, and we're very pleased with the team that we have assembled, very pleased with where we are from a construction standpoint. And obviously, if we're successful in that daypart, we would look at other dayparts to potentially expand into on WGN America. Having said that, we do have syndicated an off network and original programming commitments that we will honor. And so any build would, I think, be a gradual build as contracts run off and we have the ability to grow our news presence. But again, our focus right now is on the prime time broadcast, making that as good as it can be and getting people viewers to sample it as well as advertisers. The sales we have made thus far have been at a much higher cost per thousand than the entertainment programming. So we don't need nor are we counting on dramatic revenue growth to improve our financial model. And just a reminder, this will be profitable, so to speak, from day 1 because there is no incremental operating expense to WGN America to launch the newscast as it's currently configured. We are basically not renewing certain syndicated or off network program shows using those savings to fund the news department. So it's self-liquidating in that regard. And so any incremental revenue we get will be incremental profit to the company, but it will be profitable from day 1 because there's no additional operating expenses beyond what we have budgeted at this point.

And as it relates to TV Food Network, just a reminder, we own 31% -- 31-plus percent of Food Network and The Cooking Channel that is run by Discovery. And that's really more of a financial relationship, whereby we get -- we participate in the profits of that company. During the course of the year, we did receive a $170 million-plus distribution of the profits in March, which really represents the balance of the profits from the 2019 calendar year. And that happens quarterly as well during the year, but in much smaller increments for the balance of this year. So that's really more of a financial arrangement with Discovery. We have reached and begun to reach out to Discovery to try and broaden that to other areas besides just the Food Network and The Cooking Channel. Digital being one in particular, where we can cross-sell opportunities there. So we're going to try and make that a more fulsome relationship with Discovery going forward. But clearly, it's a very -- it's a relatively low-touch area for us. There are no employees. There's no expenses associated with it. There's just 5 distributions during the year. So from that perspective, it's very efficient for us. And we view it as a -- and it has been and continues to grow from a profitability perspective. So it's a nice cash flowing asset for us. It's not as though it's stranded capital in any way, shape or form and that we have a current return from it. And it's our job to find ways to make that a deeper and more profitable relationship going forward.

Okay. Yes, that's very helpful. And then staying along the lines of investments you've made. You've prioritized digital investments over the years. What's the digital opportunity longer term? And how are these opportunities being monetized at Nexstar?

Well, digital accounts for, let's call it, 8% of our total advertising revenue. That's on an immediate historic basis. Our goal is that over the next 5 years, that we double that contribution of revenue. Digital revenue is important to the company and increasing our share of wallet with the business we do with advertisers. And our internal focus is on creating, building and acquiring pieces to create kind of our own walled garden, where we have the must-have, brand-safe video content that everybody wants. And my vision is we create an exclusive sales force, an exclusive point of entry to monetize that, and monetizing digital video at higher CPMs than remnant inventory. And so Greg Raifman and his teams are working to do that. And I expect that our version of a walled garden will begin to contribute increased digital revenue to the company in 2021. As you know, our current digital revenue makeup is about half the revenue as digital comes from our local stations, our local site revenue in our local markets, the other half is from Greg's business and things that we do, managing advertising relationships for other publishers. And so we see growth in both of those areas, competing for larger shares of wallets, given more tools to take into the marketplace, but then also to grow our ability to compete for national dollars with a walled garden with quality content. Obviously, as big as it will be and we hit 1.1 billion page views in the month of April, we're competing against those elephants of Google and Facebook. And so it may require alliances with other companies that have proprietary content and developing a modified competitor to the 2 largest competitors there. But we know that our content is what people want and people are willing to pay a premium for it. We just have to create a mechanism that we can give more access to people to participate in that content.

Great. And then staying along the lines of digital and opportunities in that space. Can you provide us with your thoughts on the most important aspects of NextGen TV or ATSC 3.0?

Sure. I think the spectrum is the asset. And I think NextGen TV is a higher, better, more efficient utilization of that asset. And a reminder that with our 196 television stations, we own or control more spectrum than any other company in the industry. We look at that as our mineral rights. And whether it's used to create additional diginets, I mean, the spectrum is more efficient. So right now, about the max we can run on any given -- with any degree of quality is approximately 5 digital streams. With ATSC 3.0, which is an IP-based transmission technology, we could run up to 15 streams. So I've got more real estate to develop. I don't know how I'm not going to develop it just yet, but it just gives us more flexibility. We think that we can potentially stitch together, and we have done some of this in what used to be called Spectrum Co with Sinclair and Univision and others, and try and create a -- break the information superhighway, if you will, using our wireless spectrum. We think that over time, we will become the wireless interconnector of the Internet of Things, and that that will likely be a higher and better use of the spectrum and creating other diginets with other varieties of video on them. Having said all of that, we don't know what the highest and best use is going to be. We've got to build the platform we announced that we are converting, along with others in the markets, Scripps and Sinclair to the Las Vegas market, which is now on the air with ATSC 3.0. That's 1 out of 210 markets. And so we have a plan to get another 3 or another dozen markets up this year in ATSC 3.0, at least to, as we say, light the light, so that we've got a signal on the air. And obviously, this is one of those if you build it, they will come kind of an exercise. So we and others need to invest in this area, accelerate that transition now that the repack is just about over with spectrum repack. And we think that there's substantial value to be created. But the true monetization is probably 5, 7, 10 years away before we're really monetizing it as a revenue source that would be a substantial contributor to our P&L.

Yes. That makes a lot of sense. And then I know that we're starting to come to the end of our session. So I want to make sure we have a few minutes to touch on the regulatory environment as well as Nexstar's balance sheet. So shifting to regulation, do you have a view on how the regulatory environment may shift in the coming months with the upcoming election? Do you anticipate any changes to the ownership cap or other broadcasting just the regulation over the near to medium term?

We anticipate no activity in an election year, certainly from this point forward. So I think we are status quo through the end of the year. We'll watch to see if the Supreme Court takes up the case that the FCC has asked that they adjudicate between themselves and the third circuit. But I think that we're, at this point, not anticipating any regulatory change, no increase in the national ownership cap or anything of that sort. And I think what we can expect in 2021 and forward, would potentially be dependent on what party is in control of the executive branch, who makes the appointments at the regulatory agencies. So we don't anticipate that. Even under that scenario, we are not anticipating a tremendous amount of change. I think we're in a status quo environment from a regulatory perspective. And I'll let Tom speak to the balance sheet.

Sure. As Perry mentioned, without material headroom with regard to broadcasting M&A, we do have one pending acquisition in Lexington as a result of the settlement with Sinclair. But I did -- so there really -- the allocation of capital is really for debt reduction. And as we did in the first quarter, share buybacks. The share buybacks in the interim have been suspended as we husband our resources. We paid down $450 million of debt in the first quarter. We have had an excess of $400 million of debt -- of cash on our balance sheet at the end of the first quarter. So we have more than adequate liquidity in addition to a $140 million undrawn revolver. So we think that all of that gives us more than enough flexibility to weather any sort of storm in the short term, short term being Q3 or Q4. And as we migrate through the summer and get into the post Labor Day period when political really starts to kick back in, in a meaningful way, our free cash flow should ramp up materially, and I think that will give us enough freedom to resume more aggressive strategies as it relates to capital allocation as opposed to defensive, which is kind of where we are right now. But as we mentioned in our call, we still anticipate being approximately 4x leveraged by year-end on a total debt basis. So that should give us more than enough flexibility going forward in terms of capital allocation and strategic initiatives.

Great. Well, that brings us right to the end of our session. So thank you both so much for your time. Everyone, this was Perry Sook, Nexstar's CEO; and Tom Carter, Nexstar's Chief Financial Officer. We really appreciate your time.

Thank you.

Thank you, Hannah, and we'll be sliding over to the adjacent conference room for the breakout session, which we'll start here in just about a minute or so.

Yes. Great. Have a nice day.

Thank you.

Thank you.