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

All right. Up next, we have Tom Carter, CFO of Nexstar. Tom, thanks for joining us this morning.

My pleasure, Steve. Thanks for having us.

You all have had a pretty successful year. I think the last time we talked, the stock was in the 80s and now here it is at just under $110. So pretty big move. It seems like you must be feeling much better about 2021 than where you were a few months ago. We're trying to square the fact that cases are moving in the wrong direction, but there's a lot of optimism around vaccine. So maybe first, you can talk to us a little bit about what you're seeing on the ground in the advertising environment with all this in play.

Sure. Well, thanks for that. And maybe we ought to just schedule another call a month from now, and we'll see where the stock is then and, coincidence maybe, but maybe there's a cause and effect here.

Every time you do a Wells Fargo event, it's a 20% move. So...

Schedule me -- again, schedule me for one next month. But no, look, I think the recovery has been nice. It's been pretty consistent from our perspective. As we have said historically, sequentially every month has gotten better during the year, and that held true all the way through the month of November as well, being the -- month of November being the best month we've had even in spite of the fact the first 3 days were pretty heavily politically oriented. We were able to kick save any displacement from those first 3 days to later in the month and recapture all of that. Demand feels better, as we said on our previous call and the trend continues here as well. From second quarter to third quarter, auto pacings were 20 points higher, which is, obviously, material when that's your largest category, and it makes up 22% to 23% of your advertising. It's just math, right? If 22% or 23% of your advertising is up 20%, that's a pretty good start. But we've seen continuation in that. Your question with regard to current conditions is -- we haven't seen any pullback in terms of advertising yet. The municipal actions that are taking with regard to whether it's curbing outside dining in California or meetings in groups, et cetera, hasn't -- we haven't seen anything materialize in our numbers yet, and that's through the last pacing report I had, which was last Friday. And December continues to look promising from our perspective, but it's a small sample size so far. And I think we're in -- we feel very good about where we are exiting 2020, going into '21, knowing that there are going to be, I think, some events in '21, like the Olympics that got postponed. We believe that the NCAA will figure out a way, whether it's a bubble, et cetera, that there will be an NCAA tournament this year, which was a high 7 or low 8 figure loss for us last year because it happened kind of right at the nexus of the beginning of the pandemic, and there was no way to really save any of that money or make apportionments around it. So I think there's some good events and specifics for '21 that we feel pretty good about. And again, I think a lot of the restrictions that are being placed on the economy are on the margin, but it's not a complete shutdown. I've never heard anybody say that we're going to go back to the third or fourth week of March, where basically, we just pulled the plug on everything. There are still commercial transactions being -- taking place in the economy. Look at auto sales, look at furniture, et cetera, look at Cyber Monday statistics, I think people are finding a way to try and return as much of their life to the new normal as they can, including from a retail perspective.

One of the comments we heard from one of your peers is that they're seeing advertisers spend a lot more deliberately in this period than they did in kind of late Q1 and Q2? Do you think that's a fair characterization that now we've kind of been through this before, and as you say, it's a little bit less of shutdown mode?

I would say so, but I'd say probably the biggest thing I can point to maybe buttress that argument is, look, we're still not seeing -- our visibility is maybe 30 days out. Normally, you would expect it to be maybe 45 or 60 days out. So they're not making us longer-term commitments, even if 60 days is a long-term commitment, but the commitments they're making are shorter. And so therefore, maybe a little bit more targeted or delivered, maybe the word to use, but I would say it's probably consistent with what we're seeing.

And I know it's tough to prognosticate on 2021. But if we have the Olympics and we have March Madness, could it approach 2019 levels?

Yes. I'm not saying it's going to, but could it? Sure. And look, every quarter in 2020 has a story that's slightly different. So every quarter in 2021 on a comp basis, is going to have a slightly different event. I would say Q1 is going to probably be the most comparable quarter between '20 and '21. Q2 '21 is going to far outpace '20 just because Q2 of '20 was such a down quarter. I think you'll see up quarter in Q3. And then Q4, I think it still remains to be written what 2020 turns out to be. But without the political in '21 that we experienced in '20, that inventory returns back to commercial availability. And I think that will drive better results there. So overall, we expect '21 to be better than '20. Does it approach '19? That may be a tougher bet. But look, I think we're -- we feel good about where we are and the trajectory we're on.

And maybe just on political, is it safe to say that it exceeded even your most aggressive internal plans? And then do you have much exposure to the Georgia runoffs?

Well, everybody has a really aggressive plan somewhere in the drawer, whether they admit it or not. But were we pleased with the outcome? Yes. The most aggressive plan? Maybe not, but pretty close. And when you -- to your point, when you add back in what's going to happen in Georgia in the last half of November and December and the first 5 days of January, I think that would be -- for the year, it would beat our entire most aggressive plan, but maybe not through the November 3 elections. And you're right. We are in 3 markets in Georgia. Unfortunately, none of them are Atlanta, which is kind of the 400-pound gorilla from a Georgia perspective. Our total population in Augusta, Savannah and Columbus and some counties of Georgia that are covered by Huntsville, Alabama, pales in comparison to Atlanta as a whole. But we're on track to have -- potentially have an 8-figure number for the runoff elections.

Yes. Maybe shifting gears a little bit to WGN America. I think you recently announced maybe the first vMVPD pickup for WGN. YouTube certainly has not been carrying every cable network out there. So just maybe help us think through what it was about WGN that YouTube found really interesting. Was it their content? Was it the leverage that you have on the broadcast side? Help us unpack that a bit.

Yes. I would say it's both. I think we've done a good job of trying to differentiate WGN America and News Nation in particular with regard to viewers and with regard to MVPDs. And I think that's resonated. But look, none of this happens without the broadcast portfolio that Nexstar has. Make no mistake about that. Because you're right, it's limited shelf space on the vMVPDs and you've got to have pretty sharp elbows to get on there. At the same time, they're not going to carry anything that is not additive to their channel lineup. So I think they view -- and look, we're expecting WGN to morph more into News Nation over a period of time, really starting later in '21. So I think that prospect also weighed favorably on YouTube Live's decision to carry News Nation because I think the product resonates, and we'll be able to put more of the product on in more dayparts in the middle part of '21.

Do you have a sense of where ratings are performing on WGN in terms of share or increase in total viewership since News Nation?

All of those are positive trending. But right now, the biggest issue is just awareness. And that's why YouTube Live is really important because it allows us to reach potentially 3 million viewers that had no other way to consume News Nation and WGN. And -- and you've heard Perry say this before, when we do awareness studies, only 15% of the population in general is aware that News Nation is on WGN America every night of the week. Well, that means that there's, what, 7x that much of the population that isn't aware of it. And that's where the opportunity is. I think if you -- as we look at it, if we view our viewership as a percentage of the people that are aware of the product, it's really well viewed. But if you take that to the broader population and the people that -- the entire population, their ratings are relatively small.

How do you think about just your interaction or approach to the vMVPDs or similar type services over time? We continue to see those as certainly aggregating subscribers. That's been the trend the last few years. It's maybe $10 million out of the sub base today. I know each of them between Sling and YouTube and Hulu are a little different. There's some industry consortiums and then Peacock, I don't think has the stations at all right now. So how do you think about just that is somewhere where subscribers are going to go and making sure that Nexstar is positioned well within that ecosystem?

Right. Well, Sling's business model doesn't include the broadcast for the most part. So that's kind of off to the side from that perspective. But it's interesting because I think that may come up in our negotiations with DISH with regard to WGN America that I think it's well known that they're not going to put the broadcast channels on Sling, but that doesn't mean that they couldn't include WGN America, which I think would make some sense. But look, it's funny, 3 years ago or 5 years ago, when the vMVPD started, they really were kind of introduced as a disruptor to cable [indiscernible]. Now they've morphed themselves into looking a lot more like the basic channels, maybe in a smaller package than what the traditional MVPDs produce. So we view it as another distribution channel for our products, both WGN America and the broadcast channels. And we want to make it available to all of those, but it's got to be on similar terms, net or gross, whichever way you want to count it, both from an economic perspective and from a carriage perspective in that we demand that our stations be at the basic tier of any of these services and not get disintermediated on a tier, away from the population at large.

Maybe that's a good segue into retrans. You did a lot, I think, 70% of the base last year, high teens up this year, which is, I think, mostly in one distributor that you're in some public discussion with at the moment. So maybe the question would be, first, is there anything different now than what it was 2 or 3 years ago in terms of how retrans is getting done? Are the elbow sharper? Are the terms a little bit longer? And then secondly, and I've asked this question to your peers, what inning do you think we are in, in terms of where broadcast retrans can get to?

Sure. Well, I would say some of the fact-specific and situation-specific things change, but it really -- it's all about -- and look, we get it, and I think the MVPDs get it, it's a shrinking universe and that causes pressure for everybody. But we still have the foundational pieces of any bundle in terms of broadcast and this is where our size and scale really works to our benefit, plus we have a very large percentage of Big 4 affiliates. And so, we're in 115 markets. And I think we have a pretty good feel for the number of inbound calls that our ads and crawls have generated for that MVPD that you were mentioning before. And I'm sure it has lit up their call center because we're so ubiquitously around the country. Even though from an FCC perspective, we're at the 39% cap. If you unbundle that, it's really more like 62% or 63% of the households. And so we can reach quite a bit of the universe and the subscriber base in the country. So it all comes down to the economics. And we still view our economics as favorable and that we are under compensated for the contribution we make to the bundle relative to viewership. We have a slide in our deck that we commissioned through Comscore And this is now probably 4 quarters old, maybe 3 quarters old, where the 8 major broadcast networks, including the 2 Hispanic networks generated 30% of the viewership in an MVPD home and still at that time, only got 20% of the fee. So that's a 50% gap that we could close and that's what we try and do all the time. And that then leads into your second part of your question is we've come a long way from 2005 where we were nowhere, and we were basically fighting over $0.01 a sub a month to where now we're getting 2/3 of the value that we receive, but we still think that there's 1/3 left to go. So just reverse engineering that math, there's a potential for a 50% increase in total retrans revenues, which will largely fall, we believe, to the Big 4 affiliates. And so in terms of the innings of the ball game, you could say maybe the innings of the ball game, we're in the fifth, sixth or seventh inning of that. And we still think that there's probably, given that the cycles and how this really works on really a 3-year cycle basis, that means we're probably 2 cycles away from a more steady state or a more mature business as opposed to a growing business. Does that make sense?

That does. And how do you think about managing net retrans through that? I understand that there's always going to be timing differences. But I guess more importantly, how do you ensure that if perverse compensation expense is going to grow gross retrans is growing as well?

Well, obviously, the one that we -- we control both of them, but It's -- again, it's kind of reverse engineering. If you have expectations with regard to what your affiliate payments are, then you know what you need to do in order to outrun that on the revenue side. So I would say that's part of it as well. I would say the other thing is we've been successful at getting longer affiliate deals in terms of the tenure of it than the typical 3-year retransmission deal. So you have a little bit more price certainty on the cost side than you would get on the revenue side. And so that gives you a stable base on which to work from. And then it's just managing, and we've got some really smart people in the distribution group that think about this and model it and have, God knows how many servers dedicated towards modeling this stuff out. And so I think we do a pretty good job of thoughtfully considering all of the inputs before we take a step forward.

So for a little past halftime on gross retrans kind of in the same place on a net retrans basis, growth basis?

I think so. Well, maybe -- yes, I would say the pace of change in the net retrans basis over the last 5 to 7 years has caught up to -- it took us 15 years to get to where we are here on the revenue side. It maybe only took 10 years to get here where we are on the expense side. But I think that, look, the networks understand, they have owned and operated groups. They have -- they talk to all of the affiliates with regard to what the economics look like. I think they have a pretty good view of that going forward.

Yes. And maybe moving into the rest of the cost base, I mean you took out a lot of costs this year. your free cash flow for this year is above your initial guidance. And certainly...

I'm sorry, say that again?

Your 2020, yes, your free cash flow. So either you guide conservative or you took some costs out in.

We're a little bit of both.

A little bit of both. Yes. So maybe help us think through that cost journey, and in particular, as it sets up into 2021, and we see a lot of revenue return. I'm sure there is some variable in there, but just how much?

Sure. And you're right, never failed to take advantage of a good crisis and some of this will be sticky. I think that's really what we're going through right now from a budget perspective. And back to your analogy before, we're probably in the seventh or eighth inning of the 2021 budget. We're -- since we turned the page and we're now in December, we better damn be close to the end of it because the calendar is not our friend anymore. But real estate costs will be down. Now that will probably take several years to materialize over a period of time. But look, travel -- and we're going to be doing more of this. We may not do 100% of our Investor Relations virtually going forward, but we're not going to do 0% of it virtually going forward. So I think travel and entertainment will be down, real estate will be down. Interestingly enough, our health and medical expenses came in almost double digits under budget this year. Some of that was just early deferral of procedures, but I think, quite honestly, a lot of people are taking their health more seriously now than they have historically. So I could see that as being again, maybe not a decline in expenses, but a curtailment of the growth trajectory that we've been on historically. So I think there's some of this stuff that's going to be systemic that is going to recur. I hesitate to give a dollar amount to that yet. That's really what we're trying to go through in the budget process. But I think you could easily see a 8-figure amount of expense cuts be permanent.

And I mean as you're generating now all the significant free cash flow, what do you think is the best use of capital? Again, as we said at the beginning, the stock price is a little higher. Maybe this year has taught us all that the market's covenant is a little different than the bank's covenant. So how do you think about leverage versus other uses of capital?

Sure. Well, I would say it's the tale of 2 cities. Looking backwards on a historic basis, we paid down $1 billion of debt this year. And some of that came from the Fox station sale, maybe $150 million or $200 million of that. But still, if you just kind of plumb bob it and said, $800 million of your free cash flow went to pay down debt and the rest, which is approximately $200 million to buy back stock and $100 million to debt -- or $100 million to dividends. Next year, we won't have to pay $800 million -- use $800 million of our free cash flow to pay down debt because we've taken it from 5.5 to somewhere below 4x at year-end 2020, it may rise a little bit just because we're going to lose $400 million plus of political in '21. But we don't see it rising materially. So I think the down payment on the deleveraging has been made. And so that then frees us up -- we haven't made, I guess, you could in a back-ended way say, we acquired Charlotte from Fox, but that was part of a buy-sell. And you can say that we acquired Brownsville and Lexington from Sinclair, but that was kind of paid for with the Sinclair settlement money. So we really haven't done a acquisition out of free cash flow this year. I think that would change next year, again, and I think we may have talked about it briefly or I think everybody is aware, there's a pending case before the Supreme Court that could break up a log jam maybe in larger markets for duopolies and consolidation there. And we have some interesting assets that could be part of that discussion going forward. But I think you'll see a larger -- a significantly larger percentage of our free cash flow go to value-creating opportunities. And not that debt repayment isn't a value-creating opportunity, but it will be just accretive to the overall size, scope, EBITDA and free cash flow of the company because we'll be making some investments or we'll be returning that capital to shareholders.

And you mentioned the Supreme Court case. If they do rule in favor of the FCC, what can that do for Nexstar? Is that about taking ownership of JSAs, which we've heard has a nice margin lift to it? Or are there more station-specific deals you can do?

Well, I think the short answer in the first part is yes. I think you -- and you already started to see us do this. We're consolidating some of our JSA partners under Mission. When we purchased Media General back in 2017, it came with them about 5 other or 6 other JSA partners. And it's just inefficient, there's no need to have 5 or 6 of them, because basically, one company can do all of those services and you get rid of whatever duplicate overhead there is. So we're starting to consolidate more of our JSAs under Mission. Also yesterday, Mission got approval from the FCC to buy WPIX in New York City, so that will be happening from Scripps in the not-too-distant future. So I think you'll see that entity become more centralized from our perspective. But what's really interesting, and this is kind of potential new opportunities that haven't really been available to the sector before is more consolidation in top markets, and we have 8 markets now with WPIX permission, where we own or operate a non-Big 4 affiliate. So are there duopoly opportunities for those stations in those markets that didn't exist before because of some of the rules that have been legacy rules from the FCC that this particular case could overturn. And that could be -- we could be a buyer, we could be a seller, we could be a swap partner for somebody there. But you're right, the industrial logic of duopolies makes absolute sense just because your margins are so much higher operating 2 revenue streams off of a 1 fixed cost base.

Yes. So basically, you picked up a lot of CWs from Tribune. Those are non-Big 4. So in a lot of those markets, you'd love to either own a Big 4 or sell a CW to somebody who has a Big 4.

Or do -- one going each way, right? And those markets are now with WPIX, New York, Chicago, Los Angeles, San Francisco, Dallas, Houston, Washington and Philadelphia, that's a pretty good place at start.

And then any risk that if the Supreme Court case does go in favor of the FCC, but we've now got a democratically led FCC, does that reinstitute any obstacles to this type of activity?

Well, not specifically as it relates to this case, but they could go through and make a new proposed rule-making. But that would take time, have to have public comments, et cetera, et cetera, which is a quarters or years-long process. So it's not as though they could just wake up the day after the Supreme Court ruling and change the rules back, they would have to go through a process again to do it because that was really the -- FCC is saying, we went through the correct process. The third circuit court said, "No, you didn't." And so that's what this court case is really about is, did they do -- the Third Circuit court is not saying that the FCC couldn't do what they did. They just said they didn't do the right process. Well, if the process is ruled to have been correct, then the law becomes the law of the land.

Yes. Yes. Last question, Tom. You've been one of the two key partners in the NextGen initiative for ATSC 3.0. Any idea when we might see the business case and be able to put a little more discrete value on that effort?

Well, I think you're starting to see the business case now because we're starting to roll it out in many more markets. And actually, unfortunately, you have to go look for it. But if you're a consumer and want to buy a set with an ATSC 3.0 chip in it, you can have one for Christmas. They're just not as ubiquitous as they would like -- as we would like them to be. So I still think we're several years away from that to really make it be commercially viable in a number of markets so that people pay attention to it. I still think we're years away from that. But it's out of the laboratory, it's into the field, and it is working, and we see the value in it and continue to invest.

I know what to get people for Christmas now.

There you go.

Tom, thank you very much for the time today. As always, super informative. We really appreciate it.

Thanks, Steve. Glad to be here and appreciate everybody tuning in.