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

Good morning, everyone. My name is Avi Steiner, and I cover the media sector from the debt side here at JPMorgan. And it's our pleasure to have with us at the 51st Annual JPMorgan TMC, representatives from Nexstar Media. With us here today is Perry Sook, Chairman and CEO; Tom Carter, President and COO; and Lee Ann Gliha, Chief Financial Officer. I'm going to run through some Q&A. We're going to have some spirited back and forth here, hopefully, and then I will open it up to the floor for any questions and if anyone has questions online as well. And with that, thank you all for being here. It's a real pleasure.

And Perry, I'm going to start with kind of maybe a broader question here. You've long been grouped with other local broadcasters like TEGNA, Gray and Sinclair, but given your growth, you're more than 50% bigger than the largest of those companies with a substantially larger market cap. And with your investments in News Nation, acquisition of a major broadcast network and the CW, you're starting to look more like the larger diversified media companies, but perhaps more free cash flow focused. So how do you think about your positioning in public markets? And how do you differentiate yourself?

I think the statement you just made probably defines us pretty well. We're beginning to look a lot like a larger diversified media company, but we are extremely free cash flow focused. And I think that is what differentiates us in the marketplace. We kind of think of ourselves as Unicord, way bigger than the pure-play broadcasters and with a cable network and a broadcast network in addition to all of our station assets, we look a lot more like companies that are larger and a little bit more diversified. And so hopefully, we grow into that definition over time, but the one thing that won't change is our laser focus on free cash flow.

All right. That's a wonderful segue, extremely free cash flow focused. I think I calculate the average '23, '24 free cash flow yield to your equity would be above 20%. You'll correct me if the math is wrong. What does management believe the market is missing or that investors might be too pessimistic about?

Yes, I'll take this one. I think your math is correct on the 21%. And I think what investors are missing is that we're going to be generating cash flow 5 years on. If you just take our average annual free cash flow guidance of $1.25 billion for '23, '24, our market cap is taken care of in less than 5 years. And I think what investors are thinking is that we just don't have growth prospects beyond that and that we just don't agree with. I think you just -- even if you just take our core business and say, okay, that business is going to grow for some period of time, and maybe it doesn't grow forever. We do have a number of internal organic growth prospects that could be really significant. The first and foremost is one that everyone likes to talk about, which is our acquisition of the CW network. We believe that, that can be a significant growth engine for the company. If you just look at the other networks that are out there and what they've been able to accomplish over time with similar footprints, we think that there's opportunity there. Number two, we think that we have a great business in News Nation, which if you just look at what Fox's or Fox News or CNN has done, there's significant opportunity with respect to the ability for that to grow and to create value over time. And then third, we've got our ATSC 3.0 opportunity, which is the monetization of our spectrum in a B2B data transmission services environment, which we think could be as big as our distribution revenues are, which is half of our revenue as it stands today. So I think what investors are looking at is they get sort of bogged down with the accidental crisis of what's going to happen with cable television subscribers, and they're sort of forgetting that there's a bigger company there and an opportunity to grow over time.

That's terrific. I'm going to hit on definitely some of those topics that you brought up. But maybe one more just on the free cash flow/valuation point. Can you remind the audience the size of your share buyback authorization? And maybe how you all think about capital allocation here between share repurchases, debt reduction, investments in the business?

Go ahead.

Yes, we've got about $1.1 billion-ish left on our share repurchase authorization as it stands today. Our strategy really is to create the highest and best return for our shareholders. Historically, if you look over time, that's actually been M&A. The company has really kind of grown its share price pretty dramatically by making very, very accretive acquisitions. And so we like to have a balance sheet that's available and ready to execute on that type of a transaction, should that come to be. We have some required calls on our capital. We do have some mandatory amortization, which is minimal. It's about $120 million a year from a debt perspective that we have to repay. We also have a dividend, which we increased this year to -- we increased it by 50% versus our normal 25% increase. And then after that, we sort of look at what is the best use of capital. And if we don't have an M&A transaction, we look to buy back stock at that really great 21% return. We can -- we feel like that's a good use of our capital versus repaying debt, which is kind of in the after-tax in the 5% to 6% range.

All right. Terrific. Let's go broader here and start with the ad environment, if I can. Can we get a snapshot of what the company is seeing today? I believe on the last call, you had said that you had seen a slight slowing in the second quarter versus how things shook out in the first. Correct me if I'm wrong there as well and then let us know if that's still the case or however you can enlighten us.

Sure. I would say it's generally the same. But I think what we've seen is a couple of particular things. Just as a backdrop, about 70% of our advertising revenue is locally generated, 30% is nationally generated. And the local business has been much more resilient than the national business. For each of the last couple of quarters, our national business has been down double digits, and our local business has been down low single digits. We're seeing a little bit of softening in some of the larger local markets, the top 5 markets in the country tend to behave more like national advertising market as opposed to our local markets, and we're seeing that in the New York, Chicagos, Los Angeles, et cetera. That's a little bit of the weakness. And also, there has been -- and I know we'll get into this a little bit more. Auto has been up double digits each of the last 2 quarters. It's not up double digits in the first quarter because we're seeing, in particular, a couple of Japanese nameplates having trouble getting inventory on the lots for their dealers. And that's the biggest emphasis for dealers to come back into the market for local advertising is inventory. We're not seeing that with the domestic manufacturers. We're not seeing it with the Korean manufacturers or European. It seems to be kind of targeted at a couple of Japanese nameplates, and that's taken a little bit off of auto growth, which has affected overall local growth as well.

Right. And let's touch on Auto a little bit more if we can. I'd love to get a sense of how important a category is it for the company, number one. You touched on maybe softness on the Japanese manufacturer side due to availability, obviously, supply. But Tesla recently talked about them potentially starting to advertise. Obviously, they don't have a dealer group, but it still seems like the trend is your friend and going higher. So whatever you can tell us about Auto would be terrific.

Sure. Auto is and has been our largest category. Back in pre-'08 to 2010 recession, it was as high as mid- to high 20% of our total advertising. It bottomed out probably at 15% in 2010. And right now, it's probably closer to 17% to 19% of our total advertising. So it's still our largest category. But as Auto has kind of ebbed and flowed, other categories have taken up as well; hospital, medical, pharma, all of those are large categories for us. So it's still our largest category. It's one that we spend a lot of time thinking about and talking to dealers on the local basis about, but it's not quite as a big a factor as it was 10 or 12 years ago.

Perfect. And then very last one. You touched on the local national split, which I believe you said is 70-30, but that must have evolved some with the CW now in the mix, the News Nation now in the mix. So maybe talk about how that's evolved and how your portfolio is positioned to capture those dollars.

The CW, unfortunately, historically has not been a major contributor to advertising dollars. So it has shifted it by 1 point or 2, but not in a meaningful way. But look, we have, in addition to all the initiatives that Lee Ann had mentioned, we've hired, for the first time, a Chief Revenue Officer, and he and his team are really focused on the national market. We're participating in the upfront this year for the first time, because we now have a portfolio of national assets that are large enough to matter and to be meaningful to advertisers, the CW News Nation. We cover 68% of the population with our local television group. We can put together an unwired network for advertising on a national or a regional basis there. We have 90 million uniques monthly on our news and information websites. It's a top 10 news and information portfolio of assets. So all of that can be bundled together in a national product to take to the market, which is something that we've never had before, that scale and that level of interest, and we're very excited about that opportunity going forward.

I really want to ask about retrans, but you brought up CW a couple of times here. So I'm going to skip to the CW and maybe ask a couple of questions there. I think it's been a little over 6 months since you closed on the acquisition of 75% of the network. It's early days, but I think it's worth discussing the changes you're making on the network from the cost side first and maybe how that's trended relative to your expectations.

In the grand Nexstar tradition, we have been able to exceed our cost takeout targets across the board. And that is, at this point, for the most part, behind us in the rearview mirror, that's already been achieved on both, the programming side and on the operations and overhead side.

Okay. So Perry, Tom and Lee Ann, you've all talked globally about CW last week or maybe 2 weeks ago, you had the upfront. And I'm going to quote, I don't generally do this, but I saw a great headline in Vanity Fair talking about the CW upfront which noted superheroes mostly fly away in describing the upfront. So maybe talk about the entertainment programming changes you're making. I know you can't make all of them at once. And I'd also love to dive into why those are important to make.

Well, the CW was run for the benefit of the 2 studio owners prior to our taking over, which were Warner's and CBS Paramount. And the shows that worked well in their syndication model where I call them the comic book shows, right? The superhero shows, some call them the men-in-tights shows. And they attracted a loyal audience, but it was not a very large audience. And in fact, with the changing demography, it was a declining audience. So we looked at the CW and said the average user of the CW app is in their mid-30s. The average viewer of the linear network is in their late 50s. A lot of [indiscernible] cry about that at the time, but the facts and data don't lie. So we said, we need to program this network on the linear side to a broader audience, a slightly older audience. And it is a broadcast network, so we should be looking to attract the largest possible audience possible. So with the exception of 2 shows in the fall, both of which that will be likely impacted by the writer strike and have a delayed start to maybe first quarter, our schedule will be entirely new. There'll be shows that my wife would love to watch, Sullivan's Crossing, that's done by the same folks that do Virgin River. We have a night of sitcoms, which the CW hasn't really had since it was the WB, and that was 15 years ago. And we have a Night of Reality. We're going to air FBoy Island, which won't attract everybody in this room, it might attract some in this room, because it's saucy reality along the lines of The Bachelor and the Bachelorette, and we're trying to make some noise. So we think that by definition, we will reach a more diverse audience than we have historically, and we hope it will be a larger audience than we have had historically.

Definitely looking forward to the new season. Okay. Subscriber fees, retrans, net retrans, some topics that are obviously focal points, but at times, give consternation. Let's start here. Your net distribution revenue guidance for the year, quite healthy. Can you contrast that with the drumbeat of declining pay TV subscribers, that seems to be a constant talking point? It's a reality, but it's also a constant talk but it doesn't match with your own guidance.

Right. Well, how long have we been tracking or talking about subscriber declines in the traditional pay TV universe? I think it's now for a decade. And so with that overlay, our distribution revenue has increased every year sequentially over the last decade, and it's very simple. Our ability to get rate trumps the churn or decline in the subscriber base and the fact that there are new subscriber sources, virtual MVPDs, Paramount and Peacock where we're -- if it's in the pay TV ecosystem, we're participating in it in some way, shape or form. So while distribution may go -- revenue may go from one pocket to another, we're still participating as long as there are some pay TV service. And it gives me solace that 75% of adults over the age of 45, maintain a pay TV subscription of some sort. And if you're looking for a firewall, I think that's as good a place to start as any.

Okay. Nexstar and the CBS affiliate group held pretty firm at the beginning of the Fubo CBS Network deal discussions. I think that ultimately was recut in your favor, at least a better outcome. You can correct me on that as well. But since then, the company has signed agreements for its independent CW stations with Hulu and YouTube TV, and the question here is really, when might things evolve to the point where the local TV station group owners such as yourselves might be able to negotiate carriage directly with the virtual distributors for their Big 4 affiliates?

I would say that from our perspective, these discussions are about money and clearance. And our delay in reaching an agreement was not a change in the business thesis for the industry even though we saw $1.5 billion in market cap [ just appear ] because of a dispute with the smallest virtual MVPD, but it was a fight over money and clearance. And so as a result now, we have -- we achieved the financial points that we were looking to achieve. We also have clearance all of our CWs as well as all of our independent stations, all of our MyNetwork stations and a lot of real estate that we wanted to get cleared and paid over the course of this. But we, as an owner of the CW are constructing a new affiliation agreement template that would allow affiliates to opt out of the CW deal with the virtual MVPDs and cut their own deal or they could opt into the deal that we have already established for them. The larger companies are going to opt out, because they have other business to do with the virtuals. The smaller companies are going to say, "I can't do as well on my own." It goes back to the comment I made earlier about distribution negotiations are all about scale and leverage. And so we can't be advocating for this and then put our network hat on and say, not so fast. So will other networks follow the CW's lead? We are hopeful. We certainly have advocated that with our network affiliate hat on to all of the other networks that you built the business with the traditional MVPDs without using our proxies to get there, why are the virtual MVPDs any different? There's really no defensible argument for that, and so we're going to lead by example.

That will be fascinating to watch and hopefully, they do follow your lead. A couple more here, if I can. Somewhat the same topic, but NBC is going to stream a wildcard game exclusively on Peacock. And the shift in certain programming by networks that are streaming platforms would seem to impact discussions with the networks. So I'm wondering if you can confirm and possibly talk about that.

We pay the Big 4 networks and the CW as an affiliate group. But we pay them for the content they provide and exclusivity for that content in the local markets for a period of time. To the extent that the content is less and less exclusive, it becomes rapidly less and less valuable to us over time. So a playoff game on Peacock, it's certainly not helpful to the ecosystem and doesn't do any favors for us. So we've registered that point of view with Mike Cavanagh and Mark Lazarus and -- but they didn't need our permission and didn't call for advice. But we have made the point that less and less exclusivity is going to lead to less and less dollars from your franchisees, which are the affiliates.