Nexstar Media Group Inc (NXST) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Nexstar Media Group 2017 Fourth Quarter Earnings Conference Call. Today's call is being recorded.

At this time, I'd like to turn the conference over to Mr. Joseph Jaffoni, Nexstar Investor Relations. Please go ahead.

Thanks, Evan, and good morning, everyone, and thanks for joining Nexstar Media Group's 2017 Fourth Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first, I'll review the safe harbor disclosure.

All statements and comments made during this conference call other than statements of historical fact may be deemed forward-looking statements within the meaning of the federal securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause future results to be materially different from those expressed or implied in the forward-looking statements.

Important risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements are specified in Nexstar's other filings with the SEC.

At this time, it's my pleasure to turn the call over to your host, Nexstar Founder, Chairman, President and CEO, Perry Sook. Please go ahead, Perry.

Thank you, Joe, and good morning, everyone. Thank you all for joining us today to discuss Nexstar's record fourth quarter and full year 2017 results.

This morning, we will discuss our continued operating and financial momentum, including last year's successful integration of Media General. We'll discuss our return of capital and leverage reduction activities and our outlook for the 2018-2019 period as well as our other ongoing initiatives to drive free cash flow growth and shareholder returns in 2018 and beyond.

As always, Tom Carter, our Chief Financial Officer, is here with me on the call this morning.

Nexstar's record fourth quarter mark the conclusion of an active and transformational year for the company and another period of growth across all financial metrics that exceeded consensus estimates. Our strong performance reflects the economic and strategic benefits of last January's Media General transaction and our successes in extracting synergies that were ahead of projections, combining with our ongoing progress in diversifying our revenue streams and driving operational efficiencies and maintaining a healthy balance sheet and a flexible capital structure.

I'm grateful to my colleagues and our dedicated teams across our 100 markets and our half-dozen digital offices as their level of coordination, cooperation and sense of urgency in bringing the companies together in a near-seamless manner enabled us to take advantage of opportunities that were both expected as well as others that came to bear as the result of their work and their commitment.

I believe that our precise execution on the synergy front reflects the intense level of integration planning carried out leading up to the closing of our transaction and our preparedness in terms of identifying the right personnel and teams to lead our individual businesses.

To this point, just over a year ago, we were embarking on our 100-day plan, following the promotion of Tim Bush to serve as President of Nexstar Broadcasting. We put in place an expanded regional manager structure and filled 25 General Manager positions. We doubled the size of our Washington, D.C. news bureau and added sales resources to the former Media General markets. We unwound unprofitable digital operations and prepared for a future of sustained digital revenue growth with the appointment of Greg Raifman to serve as our President of the Nexstar Digital subsidiary.

During the year, we also extended or entered into new affiliation agreements with the networks, including rights for OTT carriage. We agreed to acquire LKQD, a leading independent video advertising infrastructure company, in an accretive transaction that brings broad strategic benefits to our growing digital division. And we refinanced our term loans and credit facility in a free cash flow accretive manner. All of which is to say we had an incredibly active year. We delivered the financial results we were expecting and then some. We upsized our capital returns to shareholders and positioned ourselves to take advantage of our expanded platform throughout 2018 and beyond.

Nexstar's record fourth quarter and full year numbers speak for themselves. Our expanded scale and the ongoing growth of our noncore advertising revenue streams offset the cyclical year-over-year decline in political advertising and the nonrecurring revenue on our NBC stations related to the 2016 Summer Olympics.

Taking stock of our scale, let me pick through some of the highlights of our sixth consecutive year of record financial results.

Net revenue was up 120% to $2.4 billion, inclusive of $996 million of retrans fee revenue and $231 million of digital revenue. Adjusted EBITDA rose 93.6% to $802 million, and 2017 free cash flow rose 108% to approximately $528 million, with the EBIDTA and free cash flow stats excluding our onetime transaction costs.

With our growing free cash flow profile, we invested in our broadcast and technology platform and select accretive acquisitions, including the operating assets of CW in Providence, Rhode Island and, as I mentioned before, LKQD. And we reduced net debt by approximately $400 million as well as returning over $154 million to shareholders in 2017 in the form of dividends and share repurchases.

As a result, we ended the year with just under 46 million shares outstanding.

This year, we expect Nexstar to benefit from key factors, including the Winter Olympics, extraordinary levels of midterm election spending and the continued retransmission and digital revenue growth as well as the recurring free cash flow benefit to be derived from the enactment of the Tax Cuts and Jobs Act.

Based on these factors, Nexstar expects to generate average annual free cash flow of slightly over $600 million per year for the 2018, 2019 cycle.

While we're shifting to the 2018-'19 cycle in terms of our free cash flow target, it should be evident from our 2017 results that we would have exceeded our prior target on pro forma average free cash flow of approximately $574 million per year for the 2017-'18 cycle. Our 2018-'19 guidance includes expectations for multiple interest rate hikes as well as the fact that Nexstar will be a virtual full cash taxpayer beginning this year.

I'll now review the fourth quarter highlights, after which Tom will go through the finances, including an update on our balance sheet and other items of interest.

In Q4, we, again, saw quarterly sequential improvement in core advertising and overall core was healthy for Nexstar, with 6 of our 9 top 10 categories -- 6 of our top 9 categories, I should say, posting year-over-year increases and a seventh category flat. In addition, notwithstanding the expected year-over-year decline in political, special elections in Utah and Alabama and early-stage PACs spending, all combined to drive political advertising bookings to nicely surpass our expectations for Q4.

Reflecting the benefits of scale and the strong operating leverage in our business model, we posted another quarter of triple-digit growth in all of our nonpolitical revenue sources, with fourth quarter net revenue growth of 111% driving a 66% increase in fourth quarter BCF and a 67% increase in adjusted EBITDA, which drove 82% rise in free cash flow. We brought about 24% of every net revenue dollar to the free cash flow line, a metric that will grow in 2018 with the return of what we anticipate to be record levels of political midterm advertising.

Our core revenue growth continues to reflect healthy levels of new business with new-to-television ad revenue for Q4 of $14 million or approximately 4% of our total core revenue. We see upside to this metric as we have now implemented Nexstar's local sales and business development practices across the newly acquired Media General markets.

Extending our record of political ad revenue growth during the odd-year cycles, we reported fourth quarter political revenue of approximately $14.7 million, which was 75% ahead of Q3 '17. Our healthy fourth quarter core and political ad revenue was complemented by 152% rise in retransmission fee revenue to $253 million, resulting in full year retrans revenue of just under $1 billion on a same-station basis in 2017, which marks another key milestone in Nexstar's history.

With respect to our revenue mix, our combined fourth quarter digital media and retransmission fee revenue totaled $317 million, which was an increase of 152% over the prior year period and it accounted for 45% of net revenue, highlighting our positive ongoing revenue mix shift and that compares to our 2016 fourth quarter levels when these operations accounted for 41% of net revenue.

The year-over-year increase in fourth quarter television -- nontelevision ad revenue reflects new distribution agreements, Media General revenue synergies related to the after-acquired clause in our retransmission consent contracts and our growing and profitable digital operations. I'll add that throughout 2017. MVPD subscriber levels remained consistent with our internal expectations and those embedded in our new guidance, with potential upside coming from the OTT master agreements that were by and large completed late last year.

In closing, core ad sales are tracking with the improvements in the economy and we're beginning to see what we are expected to be record levels of political advertising spend in 2018. These factors combined with the ongoing renewal or retransmission consent agreements and our growth in both our digital platform and its revenue base combined to give a solid visibility to delivering on or exceeding our new free cash flow targets and a clear path with the continued near and long-term enhancement of value for our shareholders.

Finally, we ended 2017 with net leverage of 5x, and we expect to lower it by more than a full turn to the mid- to 3 -- mid-to-high 3x range by the end of 2018.

In February, we announced another 25% increase in the amount of our quarterly cash dividend, with the annual rate now at $1.50 per share and approximately 46 million shares outstanding. We're exactly where we expected to be in terms of our deleveraging ability, and we have the liquidity to consider other shareholder-friendly initiatives throughout the year.

Our significant free cash flow generation, our recent regulatory ownership changes at the FCC and the FCC's supported Next Gen TV services as well as the enactment of the new tax law, all make me very optimistic about our ability to continue to build shareholder value for all stakeholders while super serving the communities in which we operate.

Now let me turn the call over to Tom, who will provide further detail on our financials. Tom?

Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q4 income statement, balance sheet data as well as some housekeeping items, after which I'll provide an update on our capital structure and some points of guidance.

As noted in this morning's release, actual Q4 results, as presented, reflect the impact of previously disclosed onetime Media General related transaction expenses of $2.1 million and $58.9 million incurred in the 3- and a 12-month period ending 12/31/17. The actual results for the 3 months ended 12/31/17 reflect the company's legacy Nexstar Broadcasting and Digital operations net of the 6 Nexstar station divestitures and the third full quarter results from Media General stations net of the 7 stations divested from their portfolio and their remaining digital assets. The comparable 3-month period ending 12/31/16 reflects Nexstar's legacy broadcasting assets and digital operations, inclusive of the 6 Nexstar stations, which were divested simultaneously with the closing of the Media General transaction.

With regard to Q4, net revenue was $653.7 million, which compares favorably to Q4 of '16 of $310 million. Core revenue was up 151% to $347 million, driven by local and national revenue increases both well over 100%. Political revenue, as Perry mentioned, was $14.7 million, which was sequentially a nice growth over Q3, but lagged Q4 of '16, which had $60 million because of the Presidential election last year -- or 2 years ago actually. And digital revenues were $64 million, which was up 148% over the same period for Nexstar in Q4 of '16.

Because of that growth rate, all of the profitability metrics, broadcast cash flow, adjusted EBITDA, free cash flow, both before and after the onetime expenses, were all-time record highs and grew generally somewhere around 70% to 80% depending on the specific metric.

On a combined same-station basis and pro forma for the divested stations, total gross revenue, ex political, was up 9.1%. Core revenues were up 3.4%, which represents $11 million of increase over the same period in 2016. Same-station retrans grew at slightly over 20%, with the same-station continuing digital revenues up low single digits and local station website revenue up 12%.

One housekeeping note here. Effective 1/1/2018, the company will adopt a new revenue accounting guidance issued by the Financial Accounting Standards Board. As a result, beginning in the first quarter of 2018, the company will present local, national, political and digital revenues net of the related agency commissions. So as we report the Q1 -- as we report the quarters in 2018 beginning with Q1, we will also provide the 2017 same-station metric for local, national and political revenue comps as well as digital net of their agency commissions. In addition, we will no longer recognize barter revenue and barter expense related to the exchange of advertising time for certain program material. These changes don't impact the company's past or future income from operations, net income, broadcast cash flow, adjusted EBITDA or free cash flow.

Fourth quarter station direct operating expenses net of trade and SG&A expenses rose 173.5% and 116.2%, respectively, primarily reflecting the operations of the acquired stations and digital assets, increases in network affiliation expense and expanded local programming.

Comparable pro forma fixed expenses, excluding network affiliation costs for the quarter, were actually down 2.3%.

Nexstar's fourth quarter corporate expenses were $16.2 million, inclusive of $6.6 million of noncash comp and $2.1 million of transaction-related costs, all relating to the Media General transaction and other strategic initiatives during the quarter. Net of these items, corporate expense was well below the $18 million to $20 million forecast we've provided at the time of the Q3 report. For the full year, cash transaction-related expenses, primarily severance and success-oriented fees that could not be capitalized, came in at roughly $59 million or right in line with the amount we previewed on the last call. Absent strategic activity, we will not incur additional meaningful transaction expenses in 2018.

For the 2018 first quarter, we project recurring cash corporate overhead of approximately $19 million to $20 million, exclusive of the stock comp. Noncash compensation for the first quarter is expected to be $6 million and $30 million to $32 million for the year, reflecting the anticipated issuance of new equity incentive awards in Q1 or Q2.

For 2018, we have classified -- reclassified some digital administrative expenses to corporate as well as moving out of corporate expenses, pension gains to reflect them as nonoperating items going forward. Neither of these items is expected to have any effect -- either of these reclassifications are expected to have any effect on EBITDA, net income or free cash flow.

Turning to the balance sheet. I'll review the key items as of 12/31/17. As Perry mentioned, net leverage was 5x -- our total net leverage was 5x. Covenant first lien leverage was 3.2x versus a covenant of 4.5x.

Nexstar's outstanding debt included approximately $2.8 billion of first lien debt, including term loans and the balance on the revolver. And 3 note series which represented on a net basis $273 million, $408 million and $886 million, again net of issuance costs in terms of the net debt associated with that.

Additionally, cash at the end of the quarter stood at approximately $116 million. Net debt at 12/31/17 amounted to $4.25 billion compared with $4.7 billion at January '17 when we closed the MEG transaction.

Taking into consideration the payments on the term loan and our total net -- our total net debt reduction was approximately $400 million during the full year of 2017.

Our platform is generating significant free cash, which enables us to take advantage of strategic opportunities, reduce leverage and return capital to shareholders, both on a scheduled and opportunistic basis. So in addition to reducing the debt by approximately $400 million during the full year, we allocated $154 million from cash from operations to shareholder repurchases and quarterly cash dividends. We invested in our DC news bureau and the rest of our platform and announced the $90 million acquisition of LKQD, which closed in early January of 2018.

All told, this amounts to approximately $560 million that we put -- I'm sorry, $650 million that we put to use for shareholders in 2017 in the form of leverage reduction, repurchases, dividend and platform building.

One other item worth noting on the balance sheet, since the closing of the MEG merger through a series of strategic and operational initiatives, we have reduced the unfunded amount of MEG's retirement pension plan from $110 million to $23 million and it currently stands at 94% funded. And obviously, this is meaningful, not only from a balance sheet perspective, but from an employee and retiree perspective, in terms of the quality of those funds and the retirement benefits that they are receiving.

Q4 total interest expense amounted to $52.7 million compared to $45.2 million in Q4 '16, while cash interest expense was $50 million in Q4 '17 compared to $43.6 million in Q4 '16. We expect cash interest expense in 2018 to approximate $200 million, and approximately $50 million of that will be recognized in Q1 of 2018.

Q4 taxes amounted to a $293 million benefit compared to $26 million of cash taxes in Q4 of '16.

As you know, with the enactment of the Tax Cuts and Jobs Act in December, the federal corporate income tax rate was reduced from 35% to 21% effective for years beginning in -- after 12/31/17. Although the federal corporate income tax reduction is only effective for periods beginning in 2018, the applicable accounting guidance requires the company to remeasure the existing net deferred tax liability in the period of enactment. The reduction in the federal tax rate provided by the act resulted in provisional reduction of the company's net deferred tax liability of $322 million and a corresponding deferred income tax benefit in 2017. Excluding the effect of the $322 million income tax benefit related to the remeasuring, the company accrued income tax expense of approximately $30 million and $88 million for the quarter and for the year of 2017. The Tax Act is timely in terms of the benefiting Nexstar and beyond, and we expect cash taxes in 2018 to approximate $100 million to $110 million, with Q1 cash taxes totaling approximately $5 million.

Nexstar's CapEx for the quarter totaled $23.6 million, of which $20.7 million was related to local news and station infrastructure investments, with the remaining $2.9 million for station repack and relinquishment of spectrum costs. We expect CapEx in Q1 of 2018 to approximately $19 million.

Our Q4 free cash flow was approximately $155 million, inclusive of the $2.1 million of onetime transaction expenses. As such, our fourth quarter recurring free cash flow from operations of approximately $157.5 million compared favorably with consensus of approximately $145 million. We continue to believe our capital structure represents the ideal balance of fixed and floating debt and attractive weighted average cost of capital of less than 5% in both prepayment and refinancing flexibility. As noted a moment ago, we have well-staggered maturity profile with no significant maturities until 2022, at which point, we expect that we'll have significant headway towards substantial debt reduction and leverage reduction.

As it relates to management's focus on free cash flow generation, our positive outlook for Nexstar Media Group will follow the approach we successfully deployed in terms of building the top line, maintaining close control of fixed and variable costs and optimizing the balance sheet and capital structure. This plan will continue to support our goals of generating significant free cash flow growth, while allowing us to reduce leverage, pursue additional selective accretive acquisitions, pay dividends, repurchase shares and take other actions that can enhance shareholder value.

In summary, Nexstar is executing well across all functions, including operations, integrations, synergy realization, capital allocation, cap structure and our service to our local communities. As such, today, we initiated guidance for the -- of annual average free cash flow in the 2018-2019 cycle of approximately $600 million or approximately $13.10 a share on a fully taxed basis. This amount also includes assumptions for multiple Fed actions during the next 2 years, resulting in higher LIBOR in both periods. That concludes the financial review for the call.

I'll turn it back over to Perry for some closing remarks before Q&A.

Thanks, Tom. That was a lot. With Nexstar's founding more than 2 decades ago, we built the company through a disciplined approach to platform building. Our proven ability to significantly expand free cash flow by identifying, executing and financing accretive transactions highlights Nexstar's role in the industry as the leading consolidator with an unrivaled record in terms of our execution consistency, our capital allocation and the enhancement of shareholder value. In each transaction, large or small, we followed our well-established playbook to enhance the operating results of our acquired stations and digital businesses, while delivering exceptional service to the local communities where we operate and to add value to our shareholders.

Local broadcast television remains the most powerful place to be within the media and advertising ecosphere, and our strong local platforms command the greatest share of audience reach within the market. As the most trusted medium among viewers with the brand safe environment and the greatest influence on consumer purchasing and voting decisions, local broadcast television is the unrivaled, leading provider of ROI-driven marketing solutions for brand managers, advertisers and political campaigns. The enduring value of Nexstar's unique locally produced news programming and local content married with marquee national network content and access to new and emerging digital distribution platforms combines to be an unbeatable value proposition in our local markets.

This is an incredibly exciting time for local broadcast television. Nexstar's unique local content and our leading news programming is an important locomotive, not only for traditional MSOs, but for the emerging OTT providers as well. As traction builds on the OTT front, we're working to create another new revenue stream for Nexstar just as we are doing with our initiatives now underway to monetize our spectrum opportunity through our ATSC 3.0 spectrum consortium, which also is continuing to gain momentum.

In addition to the return of significant mid-term political spending this year, organic and acquisition-related revenue growth, contractual retrans revenue growth and the profitable operation of all digital assets, all have combined to position the company with a high visibility that 2018 will meaningfully surpass 2017's record level of free cash flow. All of that is reflected in our new guidance for 2018, 2019, as Tom and I've mentioned previously, of approximately $600 million or approximately $13.10 per share per year.

At the beginning of the call, I thanked the more than 9,200 team members of the Nexstar nation for all they do every day to benefit our communities, our viewers, our users, our local and national businesses, and our valued shareholders.

Their contribution, successes and outperformance through 2017 instills great confidence in me and the rest of our management team that 2018 will be another great year.

Long term, we are highly encouraged by the FCC's intention to modernize local ownership rules -- media ownership rules to reflect the realities of the evolving media marketplace as well as the FCC's support to continue advancing the new ATSC 3.0 standards for innovative Next Gen TV services.

So it's easy to understand why with now over 38 years of professional experience in the industry, I'm excited for what the future holds for Nexstar, and my optimism regarding our near and long-term prospects for growth and shareholder value are stronger than ever.

On behalf of the entire Nexstar team, thank you for your continued interest, support and for joining us here on the call this morning.

Now let's open the call to our Q&A time to address your specific areas of interest. Operator?

(Operator Instructions) Our first question comes from Dan Kurnos from Benchmark Company.

Let me just start, Perry, on core. Just if you could give us a sense of Q1 pacing category? And maybe some monthly color. Obviously, it sounds like there was some incremental crowd out from NBC. So just how we should be thinking about Q1 core? And then, in your prepared remarks, you did mention some of the OTT sub timing. Your retrans was down a little bit sequentially. I don't know, if there was just some noise there. I know you really talked about really 2019 being more of a benefit from the OTT sub transition and especially since you are in smaller markets, but if you could just give us a sense of how you would expect kind of this year to play out and the impact on your retrans, that would be helpful.

I think if we look at core of Q1, we're looking at kind of a flat performance there. Retrans, digital and political are all pacing to finish above our expectations for the quarter, with -- you mentioned the Olympics, 34 of our 170 stations are NBC affiliates. And if you do the math, that's 20% of the portfolio. The other 80% are not. So the NBC stations are going to post double-digit growth for the quarter, which is virtually exactly in line with the percentage growth that they show on a same-station basis in both '14 for the Winter Olympics last and in '16. For purposes of illustration, if 20% of your portfolio is up double digits and the average of the rest on core is basically flat, you're looking at slightly up in the core for the quarter. And I think that flat to slightly up is where the game is played in Q1 and that is per our -- embedded in our guidance and kind of per our expectations. As the category information, if I go back to Q4, we have 6 of 9 categories up. Auto was down a little bit, down 2% in the fourth quarter. Fast food was down 5. Furniture was flat. And then retail, attorneys, medical, insurance, cable and banking were all up somewhere between 4% and 10%. So I think first quarter, we'll see automotive a little softer than in Q4. I think that automotive spending at the local level by and large kind of stayed away from Olympics, maybe a little bit more than they have in quarters past or years past. But again, I think embedded in the guidance we gave you this morning is the sum total of our expectations for first quarter, so certainly at our expectations and no surprises from our end. As for retrans, the OTT benefit has -- is yet to be seen. I mean, the only revenue that we are receiving on a consistent basis today is CBS All Access revenue. But the OTT platform, some of those agreements, as I mentioned, were signed late in the year or, certainly, late in the quarter. So we've not yet gone through a billing cycle where we've been able to add revenue to our existing retrans numbers. So that may explain some of the noise, as you call it, in Q4.

The next question comes from Aaron Watts from Deutsche Bank.

Just a quick follow-up on core ad sales. Just thinking about this year, with World Cup back in the picture in terms of broadcast TV, is that something you are thinking could provide a nice lift?

Well, again, Aaron, we've got to do the math on, our FOX affiliates are approximately -- let me give you the number. FOX represents about 12% of our portfolio in terms of revenues. So again, they could show a nice gain, and the other stations would not be affected. So I think it's part of the -- it's part of being a portfolio. You're going to have stations that perform well on extraordinary events. Stations that compete against those that are performing well on the extraordinary events. And then each network will have its own specific characteristics, but it will be a catalyst for our FOX affiliates, which can use the catalyst as will Thursday Night Football coming in the fall, and it will have a little to any effect on the rest of the portfolio.

Okay got it. And then just one more from me. As you look back on 2017 and the cadence of this, any acceleration in cord cutting in your markets? And as you look at 2018, is that something that's a concern?

Simple answer is no. I mean, we've now looked at sub counts over the last 3 months, and we have seen virtually no diminution in our subscriber counts in the last 3 months of the year. So if there was seasonality or weather-related catastrophes that might have depressed sub counts during the summer. We saw virtually no attrition for the last 3 months. And embedded in our guidance is a program attrition number, which we will not share with you, but there -- we have programmed in that. So there could be upside to our retrans metric because of the projected attrition that we're not seeing at the current time.

(Operator Instructions) Our next question comes from Bart Crockett from B. Riley FBR.

Perry, I was wondering if you could address the ownership rule changes at this point. And we've -- on the local side, we've got the case-by-case allowance at top 4 stations. We've got some loosening -- meaningful loosening, I think, of how joint sales agreements are handled. And you've got the elimination of the voices cast. And you also have an FCC out seeking comments on getting rid of national ownership cap. When you look at these rules, I mean, how -- because I was wondering if you could break down how impactful each one of these things could be for you? And how you think that will drive the M&A environment and potential for Nexstar over the next few years?

Sure. Well, we are -- we've prepared and are going to be submitting comments on the national ownership cap here shortly and we'll be active on that front, both politically and through the regulatory agencies. The local ownership rules are a boon to local broadcast. We're engaged with multiple companies in discussions of potential swaps that would be allowed under these new rules, that would allow us to rationalize our portfolio and the counterparty rationalize theirs, to exit the market to double up in one that had more strategic value to them. And I believe those discussions will be ongoing throughout the next couple of years. And there is also some opportunity for us to potentially buy in some of the VIE or sidecar arrangements that we have. That's not our first priority. But as we've -- that will present itself over the course of time here over the next year or so, which would have some marginal improvement in efficiency over time. So I think that the opportunities set in this industry has traditionally seen multiple expansion with this amount of deregulatory activity, which we quite frankly haven't seen yet, but maybe we need to show some transactions first for that to happen. But we're working on both fronts, the national ownership cap from a legislative and political standpoint. And we'll be filing those comments in the next couple of weeks. And then the local ownership opportunities. I mean, we're engaged in real-time discussions with a number of counterparties as we sit here today.

Okay. That's great. And then if I could switch on the fundamentals. Just a little bit bigger picture. I think the one thing that's interesting about the TV station business is that you have a large portion of your value really driven by your news content, which Netflix doesn't make news. And that means, I think that viewership trends and ad trends can be better on local news maybe then what the broadcast networks are battling on entertainment where they own the bulk of the economic value and you guys are less influenced. So how would you describe kind of your current kind of sense of the viewership trends on local news and the value contribution with advertising and the contribution to retrans from local news at this point?

Sure. I mean, I think the value contribution is pretty easy and literally 50% of our revenue on our broadcast television stations in aggregate comes from local news. That can be as high as 2/3 in some markets. But the arithmetic average is about half. Half the revenue of our ad-supported revenue comes from our local news. And I would argue and can cite any number of instances where there are multiple network affiliates of the same network on a cable system adjacent to a major market where they significantly viewed and spill in. And so you can go to -- in the case of some systems in Eastern Pennsylvania, you can get CBS from New York, Philadelphia or Wilkes-Barre Scranton, the same for NBC, the same for ABC. Yet I'm being paid to be on those systems, and it's obviously for my local news. And we think that the value proposition of our local content is equal to and perhaps greater than the value contribution from our key network content and that all drives retrans, which is why we have invested heavily in expanding our local content to now what is about 203,000 hours a year of local news content across our markets.

But would you say that the viewership on local news is stabler or not than primetime entertainment?

Yes. I think it is a much more sticky proposition, particularly in medium size markets where there are literally fewer choices in the time period for competing local news operations. So many times, we'll be delivered a network lead in at 10:30 or 9:30, depending on the time zone, and we'll deliver a multiple share of audience in our late local news, whether it's Erie, Pennsylvania or Champaign, Illinois or any markets in between that we deliver a higher rating, a higher share of audience and deliver higher unit rates in our late local news than we do in primetime. So I saw a Q study where I think showed entertainment programming over the last, call it, in 2 or 3 years, ratings in aggregate down about 10% in local news, ratings in aggregate down about 1.5%. We don't subscribe to Nielsen, but that probably feels about right to us that the market in every video stream is more fragmented and more competitive. But our local news product is a lot more sticky than entertainment programming is proving to be.

Our next question comes from Marci Ryvicker from Wells Fargo.

Just to clarify Q1 commentary, underlying flat to slightly up. Does that include the Olympics or exclude the Olympics? And I don't know if you provided an Olympic number? I'm sorry, we're a little distracted today. And that's the first question. The second question, can you talk about maybe the cadence of your net retrans growth as we look at '17 versus '18 versus '19?

Sure. Core reflects flat to slightly up includes the Olympics if you go through the illustrative example I gave you before where NBC affiliates will be up double digits and the rest of the portfolio is flat. Just the math would show a flat to slightly up Q1. So -- and again, core is, at this point, 45% of our revenue. 55% comes from digital and retrans. And so it's one of the things we think about. And a political year, political is ahead of expectation, so is retrans, so is digital. So in a multiple revenue line business that core is -- continues to be the slowest growing of all 4 contributing revenue sources. I'll let Tom speak to the cadence of retrans growth.

Sure. Marci, at year-end '17, therefore, affecting '18, we had approximately 5% of our subscribers reprice. So their contracts were up and new rates were included. At the end of '18, that number is approximately 10% of our subscribers. Obviously, that then means at the year-end '19, we've got something a large percentage, 80-plus percent of subscribers renewing at or during '18. There's actually one --substantial one mid '19 rather. So that's kind of the cadence, and that's what's driving retrans in 2018 in particular.

Okay. And then I'm still getting asked about the sequential retrans revenue in absolute. I think it look like Q2 was $253 million, Q3 was $257 million, Q4 was $253 million. I'm hoping I got those numbers right. So there is the concern of the step-down from Q3 to Q4. Was there a true-up or anything in Q3 that brought that number up?

Slightly. But the real answer was subscribers were down less than 1% on an annualized basis in Q4. It was a small decline in Q4. Because as Perry mentioned, we're not -- we didn't recognize or the amount of money we recognized in Q4 from the OTT products was less than $1 million. So there is no replacement of any churn on the traditional MVPDs in the fourth quarter, but rest assured. Q1 retrans results will be up relative to Q4 and relative to any quarter in 2017.

Okay. I'm squeezing one last in. What restrictions do you have on buybacks or restricted payments in your debt covenants for '18?

Well, I'll have to deliver the financial statements in about 3 days. That's job one. But other than that, we do have the tightest RP basket is in the bank deal. That will be in excess of $320 million once I deliver the financial statements. And then also remember, we've said this and it's in the public documents that once our total leverage goes below 4.25, the RP basket is no longer in effect and basically becomes an unlimited RP.

Our next question comes from Leo Kulp from RBC Capital Markets.

Just can you remind us what your pro forma political revenue was in 2014? And what sort of expectations around political and core you have baked into your free cash guidance?

Sure. The pro forma was somewhere -- on '14, was somewhere in the mid-190s. And we're expecting revenue in -- political revenue in 2018 north of $200 million.

Got it. And then one other question. With the passage of tax reform, have you started to see any pickup in interest from potential sellers of stations?

Well, I would say, those conversations are ongoing. There is probably only one inbound call that is specifically related to now the tax reform is an owner -- a single station owner has shown interest in selling. So I would say, it's a small sample size, but yes, we have seen it.

Your next question comes from Kyle Evans from Stephens.

In your release, you give a mid-to-high 3x leverage target for the end of the year. The word high wasn't in your third quarter commentary. Can you help us think about the 2 qualifiers that you have in the release, which is strategic activity and discretionary capital returns? And then I have some follow-ups.

Well, I would say, the mid to high is really a reflection more so than anything, Kyle. In a higher interest rate environment than what we had a projected in 2017, if you think about that and multiply that over a 2-year cycle or take the average of the 2-year cycle, it could be anywhere from $0.40 to $0.60 per share of free cash flow. And that free cash flow, obviously, doesn't go to pay down debt and therefore, requires -- could result in slightly higher leverage. But that mid-to-high 3s really doesn't reflect any meaningful strategic activity.

Got it. You have some NBC affiliate renewals and I think some CBS at the very end of this year. How many CBS at the end of this year? And kind of any early view on tone?

We don't have any NBC. All of our NBC -- we did a deal with NBC in the fourth quarter, renewed all of those expirations out for another several years. We have already renewed 3 of our CBS affiliation agreements that were up in the first half of 2018. We do have a slug, which are primarily the legacy Nexstar CBS affiliates that are up for renewal at the end of this year.

Got you. You mentioned coming in above synergy targets on MEG, is there anything in the fourth quarter that's incrementally new? And how should we be thinking about station direct and SG&A expense as it's embedded in your '18 guidance?

Well, if you're asking about station direct or SG&A expense on the station, any synergies will be included in there. I would say, the biggest amount of the synergies have happened. I think we had told people before that we think there is $3 million to $5 million of additional gets in terms of potential cost takeouts. And that's all embedded in our free cash flow guidance.

Our next question comes from Clay Griffin from Deutsche Bank.

Just a question on the new OTT agreement. So is there anything unique on the ad inventory side of the equation for you guys versus traditional distribution?

We have negotiated long and hard to preserve dynamic ad insertion capability in these agreements. At this point, it's a concept because none of our network partners are -- we're not yet at the point where we would have the ability to actually actuate the AI. But we have preserved that optionality in these agreements, which is one of the reasons that it's taken us so long to get them negotiated to this point. But that could become a factor in the future. Right now, it's just a concept.

And so as a follow-up to that. I guess, is there an opportunity to work directly with platforms to utilize, targeting, et cetera?

Yes. Quite frankly, there is always been that opportunity. And we have had those discussions at several points along the way. The perception of the value that each counterparty brings to the party is -- are not in sync, and we just not found it to be a financially lucrative transaction for us. The requested sharing of the revenue would just be too much. So that opportunity exists today, but there has not been a financially accretive or actionable deal for us that would make sense.

Our next question comes from Jim Goss from Barrington Research.

Point of retrans matching up with and potentially exceeding local and national ad revenues. And I'm wondering if you -- so that's great for overall stability of revenues, as you always pointed out. And I would assume you expect that disparity to continue, so that will be your biggest ad category. One question I have is whether -- what your current cost percent from reversed comp is in that -- in the overall retrans revenue mix? And then the other growth element in the future, I would imagine, would come from more and more in digital, which may or may not include services you create with ATSC 3.0 with or without the Sinclair or Univision partnership. I wonder if you could comment on those aspects as well.

Sure. As -- I think we've been very consistent in what we say with regard to our net retrans margin if you want to think about it that way, including all of the renewals that Perry just mentioned -- through 20 -- through the end of 2018, we expect our net retrans margin to be north of 50%, and we expect it to be north of 50% for the foreseeable future. So that includes '18 and '19.

Jim, 2017 was the year that retrans revenue became the largest revenue line on the P&L greater than local. And with the year-end finish of just shy of $1 billion on retrans fee revenue and about $1.3 billion on core advertising revenue and the growth rates ascribed to each of those revenue streams, it could very well be by the end of this decade where retrans surpasses all of television ad revenue in terms of total revenue and contribution to our top line. And you're right, digital revenue is the focus area of the company, the focus area for growth, both digital through OTT, through ATSC and through Greg Raifman subsidiary. And that is the growth focus of the company and looking at opportunities there that allow us to continue to build an ad tech presence that can be plumbing for other users in addition to our company, but also a focus on SMBs that we can provide a full suite of services to SMBs and focus on the SMB market, which we think is the opportunity, the actionable and exploitable opportunity in the entire digital ecosystem. So you are correct that those are the areas that we're highly focused right now.

And lastly, is this new addition, LKQD, a facilitator of some of these activities? Or does it have its own P&L on its own?

Well, let me let Greg Raifman, President of our digital subsidiary, who is sitting here with me this morning, answer that question. I mean, it is a profitable accretive acquisition, which are hard to find and negotiate in the digital ad space. But let me let Greg talk to about what LKQD is, what it does and how we see it's future.

This is Greg Raifman. We're excited about LKQD. We were -- we scoured the market for ad tech properties, and we were very patient and thoughtful about an approach. We liked LKQD because of its position in the marketplace, its management team and product and technology. It's focused on monetizing parts of the industry that we think are growing and have tremendous opportunity, which is primarily the video part of the digital industry. And we see it having a lot of upside opportunity for the company given the fact that the videos are potential driver of growth for Nexstar overall going forward.

Our next question comes from Barry Lucas from Gabelli & Company.

Just a couple of housekeeping, if you could. Tom, you mentioned the CapEx, and I must have missed it, but what -- was that $19 million for the quarter or for the year? Or what's the annual run rate in CapEx?

$19 million for the quarter and $75 million for the year.

Right. And just coming back to LKQD, was Nexstar a customer of LKQD? Do you have a peer through? Did you get a good look and feel for it? Or how did that actually come about?

Yes, Barry. Nexstar was a customer of LKQD, which is what attracted us to the company to begin with. And the upside opportunities there, there are currently 2 sales and marketing people for the entire company that Greg can now marry with his team of sales and marketing folks. And we are going to expand our relationship there, literally giving LKQD access to our website video inventory and the ability to sell-through there as well as ultimately introducing LKQD to our sales force to sell into the SMB universe that we call on every day. So there are multiple upside opportunities with LKQD that we just now have to prove and then execute.

Great. Last one from me. I just want to come back to ATSC 3.0. And any milestones that are upcoming or deployments or new additions to the consortium that are possible? And any color on that?

Probably, the new addition we're most excited about is John Hane coming on board as President. So now we have somebody that can pay full-time attention every day as opposed to the continuous partial attention that Sinclair, Univision and Nexstar we're able to pay from a management perspective. And I had breakfast with him last week in D.C., and he is tremendously intelligent, is already thinking so far down the road in terms of potential uses of our spectrum. And I just think he needs to now kind of hire a staff and beat the hustings, not only to help organize the transition from our current transmission standards to Next Gen, but then also begin to have those monetization discussions. And the exciting thing is we're going to go to the market and let the market tell us what the highest and best use is rather than design a product that we're going to try and sell to the market. And so I don't want to speak for my counterparts at Sinclair or Univision, but we are going to have -- within the next quarter, we'll have our first board meeting, and we'll begin to lay out a budget and a process. And I think this will become a reality. We are uniquely positioned. Nexstar is a member of both Pearl and the Spectrum Consortium. So we see what's going on in both camps and are participating in the full market transfer in Phoenix to the new transmission standard of ATSC 3.0. And then we'll be participating in Dallas, as our corporate headquarters is based here, in the first full market build-out of an SFN, or single-frequency network. And that's very interesting to Samsung who has a large R&D base here in Dallas. So the 2 entities are looking at solving and experimenting with 2 different pieces of the transition. And the fact that we'll have the knowings and the knowledge from both of those efforts here throughout 2018 and 2019, I think, will be a tremendous benefit to our company. And these are -- Barry, as I've said, these are our mineral rights. This is the shale gas that's in the ground, but we have to figure out how to horizontally drill to and hydraulically frack to monetize the asset. But it's there and it's just a matter of -- it's not if, it's just when we will be in a position to monetize our excess spectrum in a material way.

Our next question comes from Davis Hebert from Wells Fargo Securities.

Just a couple of quick ones. The new FOX football contract and just given that sports programming costs continue to go higher. Do you feel like there is any readthrough to you in terms of FOX trying to pass more of that through? And then second question, you talked a little bit about M&A and your leverage profile coming down nicely this year? I just probably wonder if you could talk about what you look at in terms of your debt capacity for further M&A?

I'll speak to FOX and Tom can speak to the debt capacity. I think that FOX made a smart investment for FOX in creating programming and value on Thursday night and a long-term agreement. And believe it, FOX is no slouch in attempting to extract value from their affiliates. So I think they've already kind of taken that bite at the apple. I don't think there'll be any additional readthrough, as you say, regarding that. But I do think it builds value in the relationship and builds value for the network and the affiliates. And it's good programming that will be consistent, not only for 11 weeks, but for 5 years, so we see that as a net positive for the FOX affiliate part of our portfolio. I'll let Tom speak to our debt capacity.

Sure. Well, obviously, we think we'll be well below 4x by the end of this year. That obviously includes on a trailing 12-month basis political revenue. So I would say that if you just harken back to the MEG transaction, we leveraged up to approximate 5.5x, trailing 12 months. But that was at the end of an odd year as opposed to an end of an even year. That combined with the fact that, obviously, we have factored in, and I think the market is factoring in, higher interest rates. And just to put a finer point on that, we're expecting multiple Fed actions each of the next 2 years. So you could see anywhere from 4 to 6 or 7 Fed actions, which would result in higher LIBOR over the next 2-year period, which affects our free cash flow guidance. All of that is to say that debt will cost more, the cost of the debt will go up and therefore, the amount of debt that we can handle on the same basis will go down. All of that combines to say, I would say, that the -- at the end of '18, our leverage covenant level from a comfort perspective is probably somewhere in and around 5x. But that is only for the most transformative and most accretive transactions.

The next question comes from Michael Kupinski from Noble Capital Markets.

My question relates to national advertising. And in the fourth quarter, it was a little stronger than I thought. And it seems like national as a percent of core has kind of trended back up to normalized levels. It was like 39% in the quarter. And I think last year, it was like 35% of core. And if you go back several years, national had been 40%-plus of core in the fourth quarter. And I was just wondering if you can give me some color on national advertising? Are advertisers embracing the larger station platform? Are their efforts to attract more national advertising? Is it possibly coming from programmatic? Or what -- or was there just some sort of anomaly in 2016 fourth quarter?

Yes. Well, I think that's why it's somewhat instructive to not try and create a data point out of a particular quarter because, obviously, in the fourth quarter 2016, we had $60 million of political that crowded out local and -- but particularly national because it's the most rate sensitive. And I think the anomaly would be that, that flowed back in, in 2017. As we reported, core revenue was up 3.5% on a same-station basis and national was up as a part of that. So I really think it's just the cycle of political and the displacement and now having that inventory back allowed core revenue to grow on a same-station basis by 3.5% in the quarter, which includes national.

Just curious if you go back into even the political years, national was 40%-plus of core in the fourth quarter, even with political. And I know 2016 might have been an unusual year, but I was just trying to get a handle on what the movement might be in national?

I think just from a longer-term perspective, we still see local as the stronger of the 2 components of core, both in the recent past as well as the projections and our anticipation for '18 and beyond.

Got you.

We're working hard on programmatic. And we're one of the founding partners now with Sinclair, TEGNA, Hearst, that are trying to develop a programmatic element to reduce the frictional cost in buying national advertising. We're working hard to develop all those catalysts that you talked about, but I don't think I could attribute any of those to Q4 of '17.

At this time, I'd like to turn the conference back to Perry Sook for any additional or closing remarks.

Well, thank you all for joining us this morning. We appreciate your continued interest and support of Nexstar Media Group. We'll be back in about 90 days to report on our Q1 results and continue to give the visibility on political and the other revenue drivers for the year of 2018. 2018 will be a great year for Nexstar, and we look forward to taking the journey along with you. Thanks very much.

This does conclude our conference for today. Thank you for your participation, you may disconnect.