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

So we're happy to welcome Nexstar. We have Chairman and CEO, Perry Sook; President and COO, Tom Carter; and CFO, "Lee Ann Gliha. They're going to do a presentation followed by a short Q&A session. So Perry, take away.

We'll briefly run you through our investor presentation. It's slightly updated from what's on the website today. This will be posted later today. But if you've had a chance to look at this previously, you know that our differentiating factors are, we believe our scale, being the largest company in linear television at the local level with an iconic collection of brands across 200 markets or 199 television stations and 1 radio station. The leadership team with Lee Ann's addition, we believe, is best in class in terms of creating value for shareholders and that our track record, obviously, would support and substantiate that. The company is organized around content with the -- a foundation of local content. We've added national content now with our national cable network, political content with The Hill. And if you think about an M&A strategy for us going forward, most of our thinking is organized around content growing on a go-forward basis. Here's just a snapshot and profile. Obviously, we have 3 divisions under Nexstar Media, which are: the linear television stations, Nexstar broadcasting, Nexstar Digital and then also NewsNation. We do own 31% of the Food Network and have multicast channels Rewind and Antenna TV that we own and operate ourselves. The Hill acquisition and the BestReviews acquisition, both of which were made in the last year or so, contribute meaningfully to our digital presence and have diversified our digital content.

Just quickly on the financial side for a second. For fiscal 2021, we generated about $4.6 billion of revenue, $1.9 billion of EBITDA and a very strong 41% margin. We're able to convert 66% of that EBITDA to free cash flow, and that's a levered free cash flow stat after interest expense, after tax free cash flow. We allocate that free cash flow to [ use it for ] return of capital to shareholders. We used 53% in the last year to return as a dividend or in share repurchases or for strategic M&A or daily payment. Our balance sheet is very strong. We have leverage of just 3.7x coming off a non-political year and a strong BB credit rating. And we have diversified revenue sources for 2021 more than half of our revenues from distribution. Those are the retransmission payments from the cable satellite and streaming platforms that pay us to air our content. A little over 1/3 of our revenues from core advertising, 1% in this period from political, which, as you probably know, grow substantially in political years, especially presidential years. It was 11% of our total revenue in 2020, the last presidential election year and 7% of our revenue is from selling advertising on our websites and digital marketing services we sell to our advertisers and local markets. So back to Perry.

Just if you look at the evolution of the company, I founded the company in 1996 with 1 TV station in Pennsylvania, that's pretty well known. We pioneered kind of the JSA/SSA concept of being able to mine economic benefit out of more than 1 television station in a marketplace. We've led the industry in demanding payments from legacy cable operators and distributors, retransmission consent payments, which was a novel idea in the early 2000s for local television that now this year is $2.5 billion of our revenue. Major acquisition and roll-up focus in the mid-2000s with everything from Newport TV to CCA and then larger acquisitions like Media General then Tribune being the largest acquisition we've made, which we closed in 2019, right before the onset of COVID. So that's as we have grown now, we've assembled the pieces and now the opportunity is to how do we mine maximum economic benefit out of everything that we own and operate. The pivot of WGN America to -- from a rerun cable network to a cable news channel, taking the money we're paying for programming and putting it into journalism and that metamorphosis continues. We'll talk more about that in a little bit, but it's creating value out of an asset that had full distribution, but was not very highly monetized. So we see more opportunity to use the assets of the company to promote the assets of the company and given our reach of 68.4% of all U.S. television households, that is a synergy that we will continue to mine as time goes on. Here, you see the discussion about scale and when we compare to our legacy peer group operators, the company is basically 50% larger than any other company in the space from a financial point of view, from a reach point of view, you can see that our digital assets, we are a top 10 digital news information property, taking all of our station websites as well as our national websites and rolling that up, there is sales opportunity in that, that we are just now beginning to mine. We are a top 3 affiliate group for all of the major broadcast networks and we have the ability to clear content literally across 2/3 or more of the United States. So that's a huge advantage for us. We think -- as we think about our spectrum reach as well, which we'll talk about in a little bit, but ATSC 3.0, we have 6 megahertz of spectrum reaching 68% of the country. And in multiple markets, we have more than 1 channel. So more than 1 swath of spectrum to use, and we will have ATSC 3.0 signals on the air in -- with stations reaching 50% of the U.S. by the end of this year, then we think we can talk about data transmission and other opportunities to mine the spectrum beyond the multicast business that we have today. So if you look at the company, we built the company, as I said, based on local and national content, we have 283,000 hours a year of local content and that number is growing. We're expanding even in New York. We'll be adding a 6:30 p.m. newscast before the month is out. And we will continue to grow this number because, obviously, we own that content. We don't have to share the revenues with anybody, and it is our calling card, and it's the main reason we get the distribution revenue we have because of our local content. We also have a 1,400-person sales organization deployed across 2/3 of the U.S. that calls on more than 30,000 SMBs, almost 40,000 SMBs, and that's an attractive asset that we have that we think we can continue to grow and perhaps our sales organization becomes its own line of business, what can we sell besides advertising to the businesses and the SMBs we call on in our local marketplaces. And I mentioned the spectrum opportunity as well with -- where we and Scripps warehouse more spectrum in the United States than any other companies by a wide margin. We and Scripps actually have a 92% unduplicated reach of the United States with our spectrum assets. And so the cadence of conversations there have increased as to what we can do together to create a business, monetizing our spectrum. And so we believe that, that money will begin to flow later in this decade. And by the end of the decade, 2030 that spectrum revenue could rival distribution revenue or retrans revenue for our industry and certainly for our company, we think that's very much within the cards. Right now, it's a free call option embedded in the stock price, maybe appropriately priced, but we think the monetization will begin literally in the next couple of years. You can see from this slide our local news content is the most valuable asset we have with not only the investments we've made in infrastructure and in human resources, but that our news continues to be the most durable asset we have. Actually, if you look at the composition of the audience, it's a way to reach affluent viewers across our platform. And again, we will continue to invest in this and grow the number of hours of news we do in our local markets as well as continue to build out our national channel as a 24/7 operation. Little bit about NewsNation. Again, when I -- when we took over Tribune, we had a fully distributed basic cable network that had rerun programming. They've made an attempt at some original programming in the past, but really not much different from 99 other basic cable networks that were focused on entertainment. And we saw an opportunity to take our legacy news operation and the 5,500 journalists across the country and build that -- use that as the foundation to build a national news network that is unbiased, that opinion is clearly labeled as such, that is not an echo chamber for particular left or right point of view, but that we're trying to deliver primarily to the middle of the country, but also to that center lane of people that are willing to listen to both sides of an issue. We spend a lot of time focused on making sure that we are fact-based and not opinions. And I'm very pleased with where we are. There will be a press release going out later this afternoon, announcing more expansion of the linear channel. We started with 9 hours of programming -- I'm sorry, 3 hours a night times 7, so 21 hours that will be over 60 hours of programming by June of this year. And as the syndication programming expires, we're taking that money and funding it back into expanding the program schedule and journalism. So the channel is literally self funding. Other than the initial capital to start NewsNation, we have not gone out of pocket for promotion spend or personnel. And again, it's a crawl, walk, run strategy. But we're getting the same cost per 1,000 rates that CNN gets in the scatter market. So it's seen as a peer or replacement for news programming. It's very high quality, I think, and not a lot of repetition. And so we're very pleased at where we are actually ahead of schedule in terms of what we thought we would build in terms of audience. But our numbers just need to grow. Our awareness score is 26% of the United States knows what NewsNation is. When we launched that number was barely more than 10%, but that still means that 3/4 of the United States has never heard of NewsNation, and that's our job. We'll be spending approximately $30 million out of house in addition to using our owned and operated assets at a value of about $70 million this year to increase awareness to NewsNation and increasing awareness is our #1 job with the channel now. So we spend currently in excess of $2 billion on content, primarily on local news, but then also program -- content that we rent or buy from other suppliers, syndicators and networks. So you can see that where that sits right now. And so from our perspective, we are converting our revenue to EBITDA and free cash flow at a very high percent, it's a very efficiently run operation. And from our perspective, we are not going to chase a streaming business that, at this point, would be a license to lose money. We have a number of fast channels on the air in Los Angeles and in Chicago and in San Francisco. Later this year, we expect we'll launch one in New York, maybe another half a dozen markets where we can do that, but it's all kind of a local-based streaming opportunity. We don't see really opportunities to scale that. We're considering a fast channel opportunity for NewsNation. But in terms of any kind of national or international huge business there, we think that our niche in this is more point solutions that can be profitable rather than attempting to scale something that we don't see any path to profitability. So I don't know if Lee Ann or Tom, do you want to cover this?

Sure. Obviously, we have talked a lot in our presentations with regard to increasing retransmission revenue growth. We continue to see a great opportunity there as in a pay television bundle broadcasting gets approximately 40% of the viewing in the bundle, and yet we're only receiving 24% of the retransmission revenue from the bundle. So there's more to be gained there from our perspective relative to the value that we bring to the bundle. We've been able to grow our revenue in excess of the rate of MVPD subscriber attrition. So that obviously, our entire retrans revenue growth rate has continued to increase. And we continue to see value that we add in the bundle to the degree that we believe that there's another 5 or 6 years of meaningful growth left from a retrans revenue perspective relative to the bundle because of some of the statistics that I just mentioned with regard to viewership. You can see the growth in the charts at the bottom left-hand side of this page with regard to our -- the overall distribution revenue and its growth to exceeding 50% of total revenue currently. And our expectation with regard to continued increases in that revenue stream. Political is something that we benefit from on an every other year basis. And once again, in 2022, we expect to see record non-presidential political advertising in our markets. We -- because of our footprint and our scale, we participate in approximately 80% of all of the gubernatorial, Senate and congressional races every -- biannually every other year. And typically, Nexstar has received between 12% to 15% of the gross advertising dollars spent on broadcast advertising, happens on Nexstar stations. On the bottom right-hand side, you can see the growth rates that we've seen in political advertising, on nonpresidential, the nonpresidential year and a presidential -- to presidential year, both in the 40% to 60% range. We're guiding this year to something more like 20% to 25% in between our last nonpolitical or nonpresidential year in 2018 and the last presidential election year of 2020, we expect there to be political revenue in approximately the $400 million -- I'm sorry, $440 million range for 2022. Part of our value creation strategy is to grow other advertising categories, one that has recently taken shape for television and for Nexstar is the sport -- online sports betting, which has grown appreciably over the course of the last year or 2. Nexstar is in approximately 80% of the states where sports betting is either legalized or expect to be legalized in the near future. And it's grown it into being a top 5 category from a relatively nominal category 2 years ago. We continue to see strength in '22 as new states such as New York, where our assets reached the entire state as well as Connecticut and Louisiana have all launched online sports betting recently, and we've participated in that launch from handsome advertising in those states. States on the near-term horizon include Illinois, which just recently went online sports betting in a more fulsome way because of a change in their law earlier in March, and we expect states such as North Carolina and potentially Ohio to come on board later this year. Sports betting is an interesting category because it's really a service, which has diversified ourselves away from the largest category that we have, which was -- is automobile manufacturing and sales. At its Zenith that was a mid-20% contributor of total average advertising revenue, currently, it sits at approximately 17%. A lot of that has to do with growth in other categories, services in particular, but it also has to do with somewhat of some capacity constraints due to the supply chain disruption with regard to microchips for auto advertising, but we do expect that to recover somewhat towards the end of this year and into 2023. Overall, only 32% of our advertising comes from goods. And so if you think about goods that could be disrupted from the supply chain disruption and 68% of our advertising comes from services. In an inflationary environment, we think that advertising has historically been able to perform well, and we've been able to increase our rates in an inflationary environment. We don't see this necessarily being any change from that going forward. We do have a relatively high fixed cost infrastructure in our operations. So any improvement in the top line from an inflationary perspective could benefit us overall. And again, as Lee Ann mentioned, we're relatively modestly leveraged at approximately 3.7x. So we don't think that we're leveraged into a higher interest rate environment in a meaningful way from that perspective. Overall, also on the digital side, we expect double digit growth rates in revenue from our total digital portfolio going forward. So we believe that, that will be a growth driver, something that right now approximates 7% to 8% of our total revenue, and we could see that growing both organically and inorganically to something closer to 20% over the course of the next several years. So those are just some categories that we're most excited about with regard to potential growth drivers overall. Perry, do you want to talk about spectrum?

Yes, we see our place with our spectrum being the wireless interconnector of the Internet of Things. And when you think of the opportunities that, that can present to us, the opportunity set is pretty dramatic. And I think that other attempts that spectrum monetization have been to develop a product and try and sell it to consumers. Our view is let's create a toll road and see who wants to drive on it. We and Scripps are involved in a test up in Michigan that literally driving a car from Detroit where Scripps has a station through Lansing, where we have stations to Grand Rapids where we also have stations to determine if you can hold a signal -- a video signal continuously, much like the early days of cellphones. And both Sony and one of the major OEMs participated in that test. Their thoughts about entertainment, their thoughts about navigation, their thoughts about all kinds of data transmission opportunities from distributed power to just mundane uses, but GPS and tying the navigation aids and the sensors in your car down to literally less than a meter, which is a capability far enhanced and -- far in excess of what the current safety aids would provide. There's a lot of interest in automotive and whether it's entertainment to the headset in the backseat of the car or embedded in the headrest or whatever. But we think there are literally 2 dozen base uses here, some of which we've listed on this screen here that conditional access is of interest to us as well as distance learning. But again, I think the way to think about our capabilities is to be the wireless connector of the Internet of Things and that the primary use of this will not necessarily be more diginets, although we would have the capability to triple the number of diginets we could offer with our spectrum, just the more efficient use of it. But I think the data transmission opportunities are substantial and varied. And BIA said -- came out and -- with a white paper on ATSC 3.0 that kind of affirmed what I have been saying is that by the end of this decade, we think spectrum monetization could rival distribution revenue today, which again for us is about $2.5 billion. And done the right way we wouldn't necessarily have to share that revenue with anyone else. So we think it's a huge value creation opportunity and that the spectrum revenue will begin to flow about the time we reach what I consider terminal velocity on retrans revenue, where it will still be a huge annuity, but it won't have double digit growth characteristics from a unit rate perspective and a pricing perspective anymore. So if you look at the runway out over the next 7 to 10 years, I think it's a pretty positive development for increasing value creation with this company, and in fact, this industry with the focus on monetization of our spectrum assets. And as I said earlier, we'll have stations with a 3.0 signal on the air reaching half the country by the end of this year, and we think that experimentation at that point can only accelerate as to what is the art of the possible.

So the other area for growth will be M&A. Nexstar has a track record of creating significant shareholder value through its historical M&A strategy, and we expect to continue to do so going forward. Because we've got some regulatory restrictions, we'll continue to focus on station acquisitions where we can. But more broadly, our focus will shift to assets that we can leverage across our platform or drive or protect revenue or create synergies. Key categories will include digital and content acquisitions and the news sports, weather, entertainment content segments, and we have a growing pipeline of acquisitions of varying sizes. To put some context on the type of deals we would do, The Hill is a perfect example. This one ticked all of our boxes. Number one, it was unbiased political news content, which fits well with within to our news platform; number two, it was a digital media asset, which fits well into our desire to grow that segment; number three, it has synergies across all of our platform from a content perspective, content and personalities from The Hill can be used with respect to NewsNation. And on the revenue side, our advertiser relationships could be brought to bear to help drive revenue growth. And then on the fourth side, it was accretive on an EBITDA and a free cash flow basis. And I think we will also periodically look at sort of larger-scale M&A, which has been very accretive for the company in the past. In particular, I'll turn it over to Tom to talk a little bit about this deal.

Sure. In 2019, we did the largest acquisition in the company's history, the $7.2 billion acquisition of Tribune Media. Obviously, we had done another large-scale M&A in 2017, which was Media General. So we have a track record of being able to execute on scale M&A. We did leverage up to do the acquisition, but we were at pre-transaction leverage levels less than a year post transaction. And in addition, the most important thing about this acquisition, it was 50% free cash flow accretive. We looked at market-by-market television stations to drive $185 million worth of synergies. In addition, we looked at some underutilized assets, the old WGN America cable channel, which has now morphed into NewsNation. We basically turned that around from a general entertainment cable channel into a soon-to-be 24-hour a day news channel -- cable news channel profitably to make that into an earning asset where it was undervalued before. And we were very pleased, obviously, overall from the transaction with regard to the accretion, the scale that it brought us, the assets that were hidden in that and the overall financial profitability of that transaction. So something that we were proud of and I think demonstrates the capability of management to execute in M&A.

Okay. So I covered this a little bit at the beginning, but at the core, we have a fundamentally superior financial profile that we really think shouldn't be overlooked. Number one, more than 50% of our revenue is recurring and fixed like a subscription model. Number two, our core advertising is expected to perform well in 2022 amplified by the political cycle. Number three, we operate very efficiently with greater than 40% EBITDA margins. And number four, we spend our money wisely. We convert over 60% of our EBITDA to free cash flow. We've got low CapEx, we have low leverage, low cost of borrowing, which frees up cash flow for our shareholders. And all of this discipline translates to The Street, where we've consistently beat consensus estimates. I'm going to turn this over to Perry.

So obviously, I'm a significant shareholder in the company, and that is my main focus, is on creating value for shareholders, and I think that our Board and management have all been aligned in that regard. You look at the amount of cash we returned to shareholders last year, it was more than half of our free cash flow. And I would say that that's behavior. You can expect from the company absent material M&A, we will return half or more of our cash to shareholders and buybacks and dividend increases. We instituted a dividend in 2013. The CAGR on that dividend increase has been about 25% per annum. Our dividend now is up to $0.90 per share per quarter. A little less than 2% dividend yield, but we've also been buying back shares pretty consistently and pretty aggressively, but also opportunistically and taking advantage of buying on the dips, and we had $1 billion authorization that -- we have a little less than $600 million left on that currently. So return of capital to shareholders is for us an opportunity to create value. Obviously, if we have the opportunity to do accretive transactions that will beat the return on buying back shares, then that's what we think you pay us to do, and we'll look at those opportunities. But there's a double digit return on equity by buying back the shares opportunistically as we have over the last several years.

With regard to ESG, obviously, the company is very focused with regard to good stewardship of capital resources as well as our human resources. From an environmental perspective, we don't have a very large carbon footprint. We do -- we are a large consumer of electricity. And so we monitor that, test that and are using our ability to take advantage of sustainable power wherever possible, in addition to changing out some of our electronics to moderate our consumption of power. From a social perspective, at our core, we're non unbiased news and source of information for our local constituents. Additionally, we are very involved in the communities both from a philanthropic as well as from a information perspective. We're a partner with Feeding America. We have a Founder's Day of -- Annual Day of Service in addition to the fact that we do meaningful social reporting, particularly one example of that is a border report that we do annually with regard to the border with Mexico and all of the human trafficking that goes on down there. And then lastly, from a governance perspective, just recently, we announced removing the Class B and Class C stock from our charter so that we only have one class of common stock, 1 share, 1 vote. 9 of our 10 directors are independent, 2 are women. And we believe that we continue to expand our good governance practices from that, inclusive of which is an annual outreach to top 25 or 30 shareholders, representing between 65% and 75% of total shares outstanding to get feedback with regard to the practices that we employ.

So we recently gave free cash flow guidance of $1.4 billion per annum, '22, '23. 2024 is a presidential election year, I don't think anyone in the room thinks our free cash is going to go down that year. So if you look over the next 3 years, our company will generate somewhere north of $4.5 billion of free cash. And we think that in and of itself, that is worthy of consideration. We've been good stewards of the company's capital. And again, returning capital to shareholders as well as beating investor consensus expectations. So this 3-year visibility, I say all the time, now is the time to invest in -- you want to own the stock for the next 3 years because it is going to continue to grow and perform and outperform. And again, we will look at significant and material M&A opportunities but they've got to beat the screen of buying back free cash, which is how it's been, right? That's -- every acquisition we've done has had -- had to have exceeded the accretion of buying back stock in terms of benefit to shareholders. And that's the playbook we will continue to run. We'll look at content-related acquisitions. We're not really looking to get into the ad tech business or anything like that. But first of all, they've got to be available. Second of all, we'll -- they've got to be opportunistic. But more importantly, that they've got to drive more value for shareholders than the return of capital that we will do absent material M&A. So I think with that, I'd love Connor to open it up for questions from you or from folks in the audience.

Does anyone in the audience have any to start or...

[indiscernible] got pretty good visibility into the next 3 to 4 years. We've got a 20% yield on your equity and maybe into the next 6 or 7 years, as you said, distribution agreements are going to increase. And by the end of the decade, with ATSC 3.0 coming online, what do you think the margins there are at that business? And then could that mean that your free cash flow could grow by 50% by then?

Well, it's all speculative, right, because it hasn't happened yet. It's like the oil's on the ground. We haven't figured out how to drill to it and monetize it. But I'm spending a lot of my time on this because I think it is the single largest value creation level -- lever that we can pull over the next 10 years is to focus on monetizing our excess spectrum. We do -- we have a pretty decent business right now of running multicast or leasing spectrum to people to run their multicast. All in, that's a $80 million a year business, and there's really no costs associated with that. And so again, I think if I'm providing the electronic toll road, my costs are already embedded. I'm spending the electricity to put that signal out over the air. It depends on the business, but if you go back to the slide that showed [ there are any number. I ] don't think there's one silver bullet use of the spectrum. I think it's going to be many uses. But the focus is, again, right now, I can maybe build 5 houses on my spectrum real estate converting to ATSC 3.0. I can build 15 houses. And I don't know what kind of development I want to build there, but I just have more capability. And we think that monetization beyond the $80 million diginet revenue that we generate currently will begin to become apparent over the next 2 to 3 years. It will start slowly and then it will increase we think rapidly as more and more come on the air. And we're doing a lot of self-sharing to get markets launched and with where we have more than 1 TV station. The transition is hard because you can't just flash cut because we're having the lighthouse stations in 1.0 and 3.0 and then the transition will occur kind of market by market and maybe regionally. It's not like we didn't get a second license or a second channel that we can program and say, okay, turn this one off, turn that one on, on one day. It's not going to happen that way. But I'm convinced it's work worth doing because of the underlying value of the spectrum and the path to monetization. But I think you should think of it as a pretty high-margin business once the cash starts to flow.

Perry, the Federal Communications Commission going through change. Any handicap the possibility to go over 39-point whatever percent, any changes in that and how far out?

Well, of course, we continue to advocate for abolition of the cap, right? Why should Google and Facebook and Hulu be able to reach 100% of the United States population, and I'm held captive to 39% or with the UHF discount, theoretically 78% or we're at 68% as a company. Those are outdated ways of thinking about things. However, you see the change of administration and you see increasingly activist regulatory agencies. So I can't predict the future. Anything would be possible. I will say that the worst case scenario would be the rules changed and folks with existing businesses historically have always been grandfathered in as we built this company based on the rules in effect at the time if the rules change, we would be grandfathered, which could limit your growth opportunities. But again, we're happy not to have a big transaction in front of the FCC or the DOJ or the FTC right now until these things sort themselves out. But I'll say, whether it's Democratic or Republican, we always hope for the best with one and fear the worst with the other, and it tends to be more like the status quo that real change doesn't happen, it happens incrementally. So it's not something we're fearful of, but it's something we're obviously cognizant of.

Tom, you spoke briefly on the Tribune acquisition and mentioned there were many pockets of value you found there. One of the not so hidden assets in that mix was your stake in Food Network, which provides I know a nice inflow of cash every year. You heard from Discovery here this morning, that transaction they are working with [indiscernible] make it more or less likely that your Food Network JV continues to live on in its current form over the -- for the foreseeable future? And how do you see that ultimately playing out?

Well, I would say it potentially provides more emphasis, but it's really on their side from that perspective to determine what is and isn't strategic for them going forward. I don't have a lens into that. From our perspective, we're happy with it. We have a good working relationship with them. It's an investment, but it does have, as you pointed out, a nice current return. So from that perspective, we're happy with it. I would say what's the biggest challenge for us is to do something tax efficiently because it's a very low basis, having inherited that from Tribune after their bankruptcy. So I think you're right in pointing out the most likely candidate for a tax advantage transaction or tax efficient transaction from our perspective would be with Discovery, but it's really up to them to decide if there's an asset, some sort of a swap, something there that they could be interested in because, again, we're a minority owner in Food Network LP. So it's really kind of up to them from their perspective but we're open as evidenced by some of the information in our presentation, we're more than open for M&A.

With that, we're out of time. Thank you, guys.

Thank you.

Okay, good. Thanks, everyone.

Thank you.