Nexstar Media Group Inc (NXST) 2018 Q3 法說會逐字稿

Good day, and welcome to Nexstar Media Group's 2018 Third Quarter Conference Call. Today's call is being recorded. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thanks, Ebony. Good morning, everyone, and thank you for joining Nexstar Media Group's 2018 Third 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.

With that, it's now my pleasure to turn the conference call over to your host, Nexstar Chairman, President and Chief Executive Officer, Perry Sook. Perry?

Thank you, Joe, and good morning, everyone. Thank you all for joining us today to review Nexstar's record 2018 third quarter operating results and to discuss our recent initiatives to enhance shareholder value.

Nexstar delivered another period of consensus-beating growth across every one of our cash flow metrics, including 38% year-over-year growth in free cash flow on what is essentially a same-station comparison. Our record results were driven by strength in 3 revenue streams: Television advertising, retransmission consent and digital.

Our third quarter and 2018 year-to-date free cash flow growth, as well as the robust bookings for Q4 political ad revenue, will result in Nexstar exceeding our prior year guidance for average annual free cash flow of in excess of $600 million per year for the 2018, 2019 cycle. As always, Tom Carter, our Chief Financial Officer, is with me here this morning.

Before we get into the quarter, there are a few data points to share that we believe highlight the value we're building for our local communities, our advertisers, our business partners and our shareholders. Through accretive transactions, we have strategically assembled a highly effective local broadcast and digital platform that delivers exceptional local content to inform and entertain our viewers, while providing premium local advertising opportunities at scale for advertisers and political campaigns. At the same time, our development of complementary revenue streams of retransmission and digital revenue have materially diversified Nexstar's revenue mix, and we continue to focus on implementing new standards and technologies to monetize the unrivaled reach, trust and influence of our leading local platforms. These are the drivers of our near-term and long-term financial growth and they have positioned Nexstar to continue to complete select accretive M&A to reduce our leverage and to aggressively return capital to shareholders.

Through the first 9 months of 2018, Nexstar grew free cash flow at 39% to $434 million on an approximate 11% increase in total net revenue. That's great flow-through and it highlights our operating leverage and efficiency as we brought about 22% of every net revenue dollar to the free cash flow line. I'm not sure we're aware of many companies in the TMT sector that are growing free cash flow at 39% clips on what is essentially a same-station foundation. Keeping with our focus on driving shareholder returns, of the $434 million of year-to-date free cash flow, we allocated a total of approximately $328 million to return of capital and leverage reduction initiatives spread across share repurchases, dividend payments and debt reduction and that number has now grown to over $464 million, as we further reduce leverage in the month of October. Tom will review each of these details in a moment, but I think it's clear that we're true to our commitment that at every step, we're taking decisive action, not only to build a great company, but also to create value for our shareholders.

Turning now to the quarter, the 13.3% rise in third quarter net revenue reflects a strong total growth in television advertising revenue, driven by our ability to capture significant shares of political spending in our markets as well as double-digit increases in retransmission and digital revenues. Our strong operating leverage enabled Nexstar to generate record third quarter BCF adjusted EBITDA and free cash flow, with those metrics growing 33.2%, 33.8% and 37.7%, respectively, on a year-over-year basis. Furthermore, our enterprise-wide focus on managing operations for current and future cash flow resulted in a 24% free cash flow margin. With our success in garnering significant political ad share in the first half of 2018, we raised our 2018 gross political revenue guidance earlier this year. With Election Day now behind us, I'm pleased to report that we will materially exceed the top end of our revised 2018 political guidance and our internal expectations, as we now forecast gross political revenue for this year of $280 million to $290 million, resulted in estimated net political revenue of approximately $245 million. I'll now review the third quarter operating highlights, after which Tom will go through the details of our finances, including an update on our balance sheet and other terms of interest.

Nexstar's spot inventory optimization strategies and initiatives to maximize the political opportunity continued to serve us well in the third quarter, as total television ad spend rose 10 -- 18%, reflecting record third quarter political revenue, which more than offset the reduction in inventory we allocated to local and national spot sales. 2018 third quarter political revenue outpaced our budgets and consensus estimates and rose more than 50% on a same-station basis over the 2014 period, the last comparable midterm election cycle. The success of our strategy is reflected by the modest single-digit decline in combined local and national spot revenue, as we allocated substantial amounts of ad inventory for the political opportunity. In this regard, Nexstar again grew its share of local core spot revenue and drove another impressive increase in our new-to-television ad revenues, which for Q3 amounted to $14.6 million. That marked a 7% improvement over this metric in Q3 of '17, even as we did offer more ad time to the very active political cycle.

In total, our new advertisers accounted approximately 7.7% of third quarter local ad revenue, an increase of 6.8% from last year's third quarter. We continue to see our local sales effort as a proven means of building share, and I applaud our local sales teams, managers and everyone who supports the Nexstar Nation's sales machine, for their continued dedication and commitment, which has differentiated us both in our markets where we operate and on Wall Street as well.

Looking at our categories. Auto accounted for 25% of core television billing, with manufacturer and dealer group spending increases from Ford and Honda, although not enough to overcome the slower spending from Dodge Chrysler Jeep that we've spoken about on previous calls this year. Outside of auto, we generated year-over-year revenue gains in 4 of our top 8 advertising categories. The positive results we're achieving from our strategies to grow new business and optimizing spot inventory is partly attributable to the application of Nexstar's local sales practices, our enterprise-wide focus on new-to-television ad revenue and incentive compensation changes at the former Media General markets this year.

Political was the best growth category among our third quarter ad-supported revenue streams, as political ad revenue rose almost tenfold year-over-year to approximately $70.1 million. Reflecting our presence in states with high levels of political spending activity, 2018 third quarter political revenues significantly outpaced our internal budgets as well as Wall Street estimates. By category, we booked about 49% of our Q3 political revenue from candidate spending; PAC and issue spending made up the balance.

Over the last several years, Nexstar has taken actions to continue to position our platform as a preferred and trusted solution for candidates. For example, we've expanded our local news resources and reporting capabilities, including investments in both our Washington, D.C. and state capital bureaus, and we hosted and produced dozens of debates for senate and gubernatorial races this year.

Our expanded political resources and coverage bring the local communities we serve direct access to local lawmakers and candidates, as we inform constituents and deliver important public service through our forums that allow voters to engage directly with local leaders on the issues that matter most to their families and their community. These events have strengthened our local news brands and other local content in our markets, thus better positioning them as essential, trusted, proven solutions for businesses, candidates and other advertisers seeking to reach and influence local consumers.

Our broadcast and digital solutions were used by federal candidates across a wide swath of our operating platform, including multiple battleground districts and a dozen heavy-spending races in Nexstar markets, including West Virginia, Indiana, Florida, Missouri, Nevada, Tennessee, North Dakota and Arizona. On the gubernatorial front, we were positioned well in 6 states viewed as toss-ups, including Connecticut, Florida, Iowa, Michigan, Ohio and also Nevada. Combined third quarter digital media and retransmission fee revenue of $353.6 million rose 13% over the prior-year period and accounted for 51% of our total net revenue, illustrating again the positive and ongoing shift in the company's revenue mix.

Overall, the year-over-year increase in third quarter non-television advertising revenue reflects recent renewals of distribution agreements with MVPD and OTT providers, the January '18 accretive acquisition of LKQD in our digital portfolio and organic growth across our profitable digital operations.

With the renewal of retransmission consent agreements representing approximately 10% of our subscriber base in 2018 and more than 70% of our subscriber base to be renewed and repriced in 2019, we see continued revenue growth from this source and it's highly visible for 2019 and beyond.

In addition, we continue to see consistency in MVPD subscriber levels in our markets, with continued meaningful growth in OTT subs, for which we are now being compensated. In summary, we continue to execute at industry-leading levels in terms of capitalizing on the political opportunity, driving growth levels to new-to-television business, producing elevated levels of trusted original local content and delivering great service to our viewers, advertisers and our brands. Our operational improvements, combined with our focus on enterprise-wide expense management, efficiencies and further optimizing the company's capital structure and cost of capital, are fundamental to our near- and long-term growth. And with our year-to-date progress on debt reduction, including payments and prepayments now in the fourth quarter, and the biggest midterm election cycle in the company's history now in the books, we continue to expect Nexstar's net leverage, absent additional strategic activity and discretionary capital returns, to decline to the mid- to high 3x range by year-end of '18. Tom will now provide further details on our financials. Tom?

Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q3 income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance. But first, just a couple of comments with regard to changes in accounting during the year. As noted previously, effective 1/1 of '18, the company adopted the new revenue accounting guidance issued by the Financial Accounting Standards Board. As a result, beginning January 1, the company presents local, national, digital and political revenues net of their related agency commissions. This morning's release also provided the 2017 third quarter and year-to-date local, national, political and digital adjusted to net out the commissioned sales, so that you get them on an apples-to-apples basis.

In addition, we no longer recognize barter revenue and barter expense related to the exchange of advertising time for certain programming materials. 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. Also effective 1/1 of '18, the company adopted the Accounting Standards Update No. 2017-07 -- I'm sure you're all excited about that -- which requires pension and other post-retirement plan costs or credits, other than service costs, to be presented outside of income from operations. Thus, the income from operations during these 3 and 9 months ended September 30, 2017, was decreased by a pension and other post-retirements credits of $3.2 million and $8.9 million, respectively.

Now turning to the Q3 income statement. And again, as I think Perry mentioned, most of these are same-station as well as reported results, with the exception of digital, which did have some activity, both in 2018 and in 2017, and I'll call that out specifically.

Net revenue was $693 million, which was up 13.3%. Television ad revenue, local, national, political, was $331 million, which was up to 18%. Local revenue was down 4.1% to $189.4 million and national revenue was down 5.8% to $71.6 million. On a core basis, local and national, the revenues were down 4.6% year-over-year.

As Perry mentioned, political revenue was up a striking almost 900% to $70.1 million. Retransmission fees were up a healthy 10.4% to $284 million and digital revenues were up 25.2% to $69.3 million, and on a comparable basis, that's an 11% increase. Broadcast cash flow and adjusted EBITDA were both up approximately 33% and free cash flow of 167 -- $164.7 million was up 37.7%. The third quarter station direct operating expenses net of trade expense rose 10.8%, primarily reflecting the growth in broadcasting ad sales as well as budgeted increase in network affiliation expense and expenses for the LKQD acquisition, which occurred in January of 2018. Same-station fixed expenses, excluding program expenses, were down 4% year-over-year. Our 3.8% decline in SG&A expense reflects our previously disclosed reclassification of certain digital administrative expenses to corporate. For 2018, we reclassified some of the digital administrative expenses under an adoption for the Accounting Standards Board as well as the pension expense, which affected that line.

Nexstar's third quarter corporate expense was $27.7 million, including $8.2 million of noncash stock comp and $1.3 million of onetime transaction-related activities. This was in line with our guidance for the third quarter recurring cash corporate overhead, exclusive of stock comp, which was $18 million to $19 million. Fourth quarter recurring cash corporate overhead exclusive of stock comp is expected to approximate $18 million, while noncash compensation is forecasted to be between $8.5 million and $9 million for the quarter and $32 million for the year, which is consistent with our expectations.

Turning to the balance sheet, I'll review a couple of key items. As of September 30, as Perry mentioned, we continue to make great headway with regard to absolute quantum of debt reduction as well as leverage reduction. Total leverage as of September 30 on a net basis was 4.23x, which compares to 4.69x at the end of Q2. And the first lien covenant, which, the covenant is 4.25x, the actual was 2.59x. So we have, obviously, a great amount of headroom there and that compares to 2.92x at the end of Q2.

Net debt at September 30, 2018, amounted to approximately $4 billion compared to $4.1 billion at June 30 and $4.7 billion in January of 2017, when we closed the MEG acquisition.

Thus we already reduced total debt by nearly $700 million since closing the Media General transaction through 7 quarters of operation, even as we've allocated capital to other shareholder enhancement initiatives. As you will see in the 10-Q, subsequent to quarter end, we made another $125 million in voluntary principal payments and $10 million in scheduled principal payments on our senior secured debt, bringing total leverage reduction to approximately $362 million for the 10-month period, well positioning us to deliver our year-end '18 leverage target of mid- to high 3x.

In October, Nexstar closed on its $2.7 billion repricing of the outstanding senior secured loan facilities. That includes $1.657 billion of a new Term Loan B, which is now priced at LIBOR plus 225. The new 5-year $853 million Term Loan A, which bears interest currently at LIBOR plus 175, with periodic adjustments based on leverage. Same pricing for the $166 million revolver. And these maturities -- the senior, I'm sorry, the Term Loan A and the senior secured revolving facility, the maturities were extended to 2023. All of this essentially represents a 25 basis point interest rate reduction compared to the company's prior senior secured term loans and revolving credit facility, resulting in approximately $7 million in reduction in annual interest expense, increasing net income and free cash flow by approximately $5 million on an annualized basis. The refinancing of our senior secured debt again highlights Nexstar's focus on actively managing our capital structure and cost of capital to drive free cash flow growth, while affording us financial flexibility to add -- to act on other opportunities to enhance shareholder value. With our expectations for significant annual free cash flows leading up to the first senior sub-debt maturities in 2022 and the flexibility to prepay first lien borrowings without penalties, we feel very good about our overall capital structure and weighted average cost of capital in a rising interest rate environment. We remain on pace and continue to expect Nexstar's next leverage, absent additional strategic activity and discretionary capital returns, to decline to the mid- to high-3 range by the end of this year, with a significant amount of reduction in debt outstanding.

We remain committed to applying our growing free cash flow to drive shareholder returns, and during the third quarter, we allocated approximately $162 million to a return of capital and leverage reduction initiatives, including the WHDF TV and KRBK TV acquisitions, which I'll touch on in a moment. During the quarter, we paid our 23rd consecutive quarterly dividend, which amounted to $17 million, and reduced debt by approximately $145 million and net debt by approximately $110 million from Q2.

As Perry noted, our record operating results included $434 million of free cash flow in the first 9 months, enabling us to remain opportunistically active in taking action to enhance shareholder value. And in the first 9 months, our return of capital and leverage reduction initiatives amounted to approximately $320 million -- $328 million in total.

In addition, we funded the $97 million acquisition of LKQD Technologies, our enterprise digital video advertising technology infrastructure business in Q1, and funded approximately $17.4 million of the aggregate approximately $21 million purchase price, including working capital of the previously announced 2 television acquisitions in Huntsville, Alabama and Springfield, Missouri.

Q3 total interest expense amounted to $56.2 million compared to $53.6 million in the year-prior Q3, while cash interest expense was $53.8 million this year compared to $50.9 million in Q3 of '17. We expect cash interest expense in Q4 to amount to approximately $52 million, which partially reflects the repricing of the term loans and the revolver. In Q3, we had operating cash taxes of approximately $35 million compared to $32 million in the previous year. With the enactment of the Tax Cuts and Jobs Act in December of '17, the federal corporate income rate was reduced from 35% to 21%. The Tax Act was timely in terms of Nexstar benefiting, as NOLs were minimal at year-end, we expect cash taxes in 2018 to approximate something approaching $100 million. Nexstar's CapEx for the quarter totaled $26.4 million, which included $19.7 million related to station infrastructure investments to our platform, digital programming, et cetera, with the remaining $6.6 million for station spectrum repack and relinquishment of spectrum costs. With the passage of federal action, we believe with the addition of $1 billion for repack reimbursements, our FCC mandated repack cost will be fully reimbursable. Through 9/30 of '18, we have spent approximately $13.5 million, including in CapEx, of which $12.4 million we're being reimbursed for year-to-date. We expect CapEx in Q4 of 2018 to be approximately $25 million, with an additional amount from repack CapEx. Our Q3 free cash flow was $164.7 million, inclusive of the impact of $1.2 million in onetime expenses, which compares to consensus expectation of approximately $147 million. We continue to believe our capital structure represents the ideal balance of fixed and floating debt at attractive weighted average cost of capital of approximately 5% and both prepayment and refinancing flexibility. We have a well-staggered maturity profile with no significant maturities until 2022, at which point, we expect we'll have made further significant headway towards substantial debt 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've 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.

As we continue to benefit from the record 2018 midterm political spending, including our new expectation for $280 million to $290 million in gross political revenue, the growing value of our retransmission consent agreements and the profitable operation of our digital assets, we are raising our guidance for the annual free cash flow in the current cycle to approximately $615 million annually or $1.23 billion on the 2-year basis, which represents approximately a $30 million increase on the 2-year basis, $15 million annually, and translates to approximately $13.40 per share on a fully-taxed basis based on shares outstanding. With these results, we continue to believe we have forged a clear path for the continued near- and long-term enhancement of shareholder value.

In summary, Nexstar continues to execute well across all functions, including operations, integration, capital allocation, capital structure and services to our local communities. That concludes the financial review for the call. I'll now turn it back over to Perry for some closing remarks before Q&A.

Thanks very much, Tom. As the most powerful and trusted voice in the country, the depth of local broadcast television's contributions to serving the economic and public needs of our local communities is immeasurable. Since the very first television broadcast, our industry has been engaged in a perpetual state of change, which is why in an era of rapidly evolving video distribution technology, local broadcast television has proven to be resilient, maintaining its central position in American households.

Looking ahead, with the FCC's support now for the voluntary adoption of the new ATSC 3.0 standard for innovative next-gen TV services, our industry will be able to bring consumers more localized programming content and a broad range of other innovative services, while creating new value and revenue opportunities for our businesses, our advertising clients and our shareholders. As such, Nexstar and several other broadcasters came together early in the fourth quarter to commit to the broad launch of the new ATSC 3.0 standard across various U.S. markets, beginning in 2020. We look forward to continuing Nexstar's leadership role in the implementation of ATSC 3.0 and realizing the potential significant strategic and economic benefits from the new services and the technology offerings in the not-too-distant future. But for now, Nexstar's execution strategy across our businesses and in the management of our financial and capital structures, enables us to continually elevate service to our local viewers and advertisers, while upholding our commitment to enhance shareholder value, with growing operating results and return of capital to shareholders. Our approach and our strategies are proven and tested through up and down cycles. With our results and scale, we are focused on using the tools we have available to us, including deleveraging and capital returns, to create a valuation backstop. We look forward to reporting on our continued growth and accomplishments in the balance of 2018, and on behalf of the more than 9,200 employees of the Nexstar Nation, we thank you for your interest and ongoing support, and for joining us for this call this morning.

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

(Operator Instructions) And we will take your first question from Dan Kurnos with The Benchmark Company.

Obviously, Perry, solid political results, and everybody is, of course, asking now what comes next. If you could give us your initial thoughts on Q4 pacings, how sort of your underlying core assumptions, how it feels in the marketplace, whether Q4 is either benefiting from some pent-up demand or just simply improving fundamentals? And then on the sub front, just, I know you talked a little bit about it in your prepared remarks, we've obviously heard some positive commentary. You guys have a different bit of a geographic footprint. So just general sub-trends, what you're seeing, either in growth from OTT or underlying MVPD trends, would be helpful.

Sure. Well, as it speaks to core, obviously, if you do the math implied in our full year political guidance, we're talking about a number north of $150 million of political advertising embedded in the fourth quarter. That obviously would suppress our core results for local and national in the month of October. The good news is that November, with only 1 week of political revenue, is pacing double-digit -- well, high single-digit points ahead of where October paced on core. and December is pacing ahead of that, and so sequentially, we're seeing substantial improvement in core revenue. We did some extrapolation on auto. And if you look at auto for the quarter and then you look at auto for the quarter taking out October, it's 6 points better, obviously because of the crowd-out factor in the first 6 weeks of the quarter. And it's obviously a very small sample size, but if you look forward to first quarter of 2019, we're showing substantially positive pace. Again, the caveat being it's a small sample size.

On the sub front count, we just looked at this last night, and if we go back 6 months or so and look at just total paid subs, our total paid subs are actually up incrementally over where they were 6 months ago, with an approximate less than 1% decline in traditional MVPD subs, which was more than overcome with by total OTT subs that were added. And I would mention we're still not fully populated on the OTT front. We launched a number of Hulu markets in the month of August, which we haven't been paid for yet. So we don't have revenue or sub counts to report. But with the sub counts that we do have, on the last pay from everyone, the total OTT sub count has more than made up for a minor decline in traditional MVPD subs.

Our next question will come from Marci Ryvicker with Wolfe Research.

Great, I know you have 70% of your subs coming up for retrans in 2019. Can you talk about maybe how that flows through the year, is it more first half or second half weighted?

It's all second half weighted. Some early in the second half of the year, Marci, and the majority of it will come at year-end 2019.

And then, can you remind us on the reverse comp side for '19?

Nothing up in 2019 until the end of the year, which is primarily our Fox agreements. We are in the process of negotiating renewals for the legacy Nexstar CBS affiliations that expire at the end of this year.

Page 16 of the 10-K from last February, this last February, has all of that broken down by network affiliation.

Got it. And then, can you help us quantify your free cash flow guidance, now that you're going to significantly surpass that $600 million? By how much?

Well, I think I attempted to do that during my remarks. The $600 million goes to $615 million or slightly in excess of that, and all of that, really, we haven't reforecasted '19, all of that is a direct benefit from increased political guidance.

Okay. And then, Tom, can you remind us what your return threshold is on M&A and over what timeframe?

The most we can humanly get.

Got it.

But everything has to go through the filter of what is the return on buying back our own stock. And if you look at the now $13.40 per share relative to an $83 stock price, that's 16.5% or 17% cash flow accretion. And so obviously, that's the barometer and in order to take on meaningful leverage and/or meaningful execution risk and integration risk, it's got to be significantly more than that. But that's kind of the baseline.

We'll take our next question from Aaron Watts with Deutsche Bank.

Perry, maybe aim this one at you. Can you talk broadly about the current M&A pipeline, how you're thinking about the opportunities that are out there right now? And what about those available assets makes them more or less attractive as a fit with Nexstar's existing portfolio?

Well, obviously, there is an M&A pipeline, everything from whole company considerations to additional single station acquisitions that would give us more heft in a marketplace. If you troll the FCC database, you'll see one of those that was announced today in Honolulu, where we'll be adding a MyNetwork station to our current FOX and CW portfolio, and so the pipeline is active, and I think the answer is exactly as Tom mentioned. We will focus on where we can get the highest return. We believe that television stations are television stations and linear rank is interesting, but maybe not as meaningful as the local content opportunity, the growth opportunity and what we can do digitally, so -- and there's a price for everything. So from our view, we will always gravitate toward where we get the highest return for our shareholders.

And everything is situational, because you have to look at each individual agreement, what the network affiliation agreement looks like, what the retrans agreements look like. We have to do the work and look at what the potential synergies are and then the math kind of tells us where to go.

Okay. And Tom, if I could put my credit hat on for a moment here, you've done a -- I've appreciated the job you've done in paying down debt and you've brought down your leverage. As you think about those opportunities and financing them, how do you think about your comfort levels with where leverage could go with any transaction?

Well, you're right, there's -- and by the way, Aaron, I didn't know you ever took your credit hat off, but I appreciate that. That's part of the reason, obviously, we've been very aggressive in paying down debt, because it does create capacity and we think we've got significant capacity and a appetite for doing something on a, either on a LQ 8 basis, if that's the way people want to look at it. Or depending on the seasonality, something in the low 5s on a trailing 4-quarter basis in order to get acquisitions done. So it will be less than what we used in Media General, simply because the debt costs more now than it did 18 months ago or so, but there's significant capacity out there.

Our next question will come from David Joyce with Evercore.

Just curious about the free cash flow, the differential between the political and the core spending. So if we were to think about the $30 million increase in your new free cash flow guidance, and looking at the political increases, are there any other factors in there that are affecting the free cash flow guidance? Or is that increase really something to help us back into what the margin is on political?

I don't think it's really anything too nefarious about it. If you take $50 million of gross -- Wall Street consensus right now is basically [2 38]. If you take our kind of a midpoint, we're talking about roughly a $50 million increase in gross political. That translates into about a $43 million net political. If you take out some expenses and some amount of displacement because of that large political, we think that something approximating $30 million on an after-tax basis. So keep in mind, $30 million on an after-tax basis is probably $35 million on a pretax basis. You can bridge the gap pretty easily between $43 million in net political revenue and $35 million in pretax free cash flow. Is that helpful?

It is.

And we'll move next to Clay Griffin with Deutsche Bank.

Clay, are you there?

Yes, can you hear me?

Yes.

So thanks for the color on the renewal schedule, it's helpful. I want to ask, look, we've had several years of very strong pricing for Big 4 retrans. Perry, I guess on a same-station basis, how would you characterize the pricing environment or opportunity for new deals, relative to say, a couple of years ago?

We've already repriced about half of the 10% that we'll reprice this year, and we're very pleased with the unit rate increases and the repricing. I still believe that we're less than -- we're about halfway through the ballgame of starting at 0 and going to where we are fairly valued. And so I think you'll see, and we are consistent in this, saying that you'll see double-digit increases in the gross and double-digit increases in the net, if you want to keep score that way, for as far as our forecast period, which goes out another 5 years, so -- and we believe it will extend beyond that, but our current forecast period is only 5 years out. But I also think that as time goes on, the late local broadcast channels become more and more valuable in these bundles, in these skinny bundles, and so I think that there is a chance that once we kind of reach fair value, that we'll have the chance to grow beyond that, because people will continue to seek out the local content and the marquis network content, that there's really the only game in town for live news and live sports, the kind of magnitude that we have today. We don't see anything in that landscape changing. So we think that, again, as far as our eyes can see, 5, 6 years out, that we'll see double-digit increases in both the top line revenue and in the bottom line net retrans, which is what drives the increase in free cash flow for us.

Makes sense. And I guess, just we've heard some of the MVPDs talking about a deeper integration of OTA content into their video packs, essentially bundling OTA alongside cable networks. I guess, how do you think about that risk? And how are you -- is that something that you think is a real possibility over the near term?

Well, there have been products out there for 4, 5 years, with antennas embedded in cable boxes and things like that, and they've been of no real moment. I mean, you've got to go back to the consumer experience. I don't think anyone wants to go back to the era of 4 remotes on the coffee table to be able to navigate your entertainment or information options. So I think there is value in the bundle. I think what you will see from the OTT entrants, very quickly, none of them are making any money. And a $45 skinny bundle that goes to $65, now rivals a basic cable subscription, and you have to have to receive the OTT product, a broadband connection anyway. So you're kind of right back into the traditional economics of the video distribution system, which has kind of been our position all along, as that's where things would end up. So again, I tell the story all the time. I grew up in Pennsylvania in the '60s, when cable started, where cable started and cable started with distributing better-quality pictures of local television stations. Everything else was an add-on to that. And I truly believe that we are the foundational element of every bundle, every skinny bundle and currently, 15% to 16% of our total viewers, total viewing households, do not take us via a pay service. So they've been over-the-top or over-the-air, since before it was cool, and the happy byproduct of that is we only compete with the other over-the-air options for eyeballs and therefore, advertising and viewing and ratings and time spent, so that helps that side of the house for that piece of the ecosystem. But we feel very confident in our projections to continue to grow top line distribution revenue and bottom line distribution EBIT, if you will, or additions to free cash flow, for the period that we've discussed.

(Operator Instructions) We'll move next to Barton Crockett with B. Riley FBR.

I guess I was interested in really 2 things. One, kind of a detail number and one kind of a bigger issue, and maybe I'll start with the bigger issue. I'm just curious, this all comes down to your audience and this has been a uniquely kind of compelling election cycle that I would think be notable in terms of its audience impact on your local news. What are you seeing in terms of audience for your local news? And are there any takeaways from that for your broader business, do you think, right now?

Well, yes. I mean, I will tell you that we only have a handful of metered markets, where we get metered overnight ratings. But where we host a debate and literally host it state-wide in Tennessee, or Texas or other states like that, where we have the instant feedback, it's obviously very positive. Our local newses were a lot more viewed and focused in the run-up to the election in our LPM markets than our traditional average. Now the final report card for November for our diary-only markets, or non-people meter markets, we'll see sometime in January. So I can't give you a full report, but anecdotally, newses were more viewed and certainly, the advertising was much more in demand, during this political cycle.

Okay, all right. And then the number question I was curious about is, that retrans number ticked up, I think, $8 million or so sequentially third quarter versus second quarter. And I was just wondering if you could unpack for us a little bit what was underneath that? Was that a renewal, was it OTT, was there some accounting quirk? I mean, what's kind of underneath that?

No accounting quirks. We don't allow those. It was OTT. Our OTT -- look, the OTT subscriber growth is crazy, because it's off of a very low base, but did it double from the first half to the second half? Yes. So we're actually getting paid on those, and so that revenue has doubled. It's a very small percentage of it, but yes, it doubled. And there is a one particular MVPD that has a mid-year renewal, which then equates to a mid-year price increase.

Okay, all right. And then just one other thing, if I can add on to the OTT comment. What -- the TEGNA call before you, they continue to say that the traditional pay-TV subs in the smaller markets, particularly like below 100, I guess, are declining and the OTTs are not in there. And they called that out as a troubling trend that affects companies other than TEGNA, so by implication, maybe you guys, for instance. And I'm just wondering, are you seeing anything like that? How would you describe -- would you agree with TEGNA, or are you seeing something different?

Well, I reported on our numbers, and I think all I can do is give you the facts. And we don't see that trend. I reported our sub counts, which includes our big markets and our small markets. By the way, TEGNA's got some small markets, too. So I don't think I would draw the distinction that maybe someone is trying to lead you to draw. But I reported our numbers, less than 1% in the traditional MVPD universe, more than made up by the OTT subs. Now we just launched a number of NBC subs on, I believe it was Hulu, yesterday. So I mean, we're not fully distributed on all of the OTT platforms that have been launched and we're not fully paid where we are distributed yet. So we don't have a fulsome OTT number, but the number we have today more than makes up for what we have seen in loss of legacy MVPDs. And like I say, all I can do is report the facts and you can take your own measure of them.

Our next question will come from Leo Kulp with RBC.

Just one on the free cash flow guide. You mentioned that you haven't changed the 2019 free cash flow assumption. Based on where we stand today, is it reasonable that we can expect some downside to that, given core trends, where they stand?

I don't know, I haven't done the work yet.

I know what our assumptions are, and I think our job is to be very conservative with you all. So I don't think I would bet the under. I'm not yet prepared to say to bet the over. I mean, we will see -- 4 years ago, there was a Presidential candidate on-air in Iowa in March and that's not baked into our assumptions, because of the Iowa caucuses in January of '20. So I don't have enough information, because as I said, it's a very small sample size. I can tell you we've been very conservative with operating expenses. We have some substantial gets in terms of contract renegotiations on the expense side and lease terminations and so I don't have enough information to respond. But as is our custom, when we report on fourth quarter in first quarter of 2019, we will issue 2019, 2020 guidance for you, and I think you will have your answer then.

And our next question will come from Jim Goss with Arrington Research (sic) [Barrington Research].

A couple of things. One, I was wondering, in the M&A route, if you're able to get a second station [TAP 4] station in an existing market, is it worth paying a premium? Like would that, factoring in the added synergies, would that help make the cut in terms of your ROI requirements?

Well, the 2 that we have talked about, and the one that we basically announced on this call this morning, I would characterize them as accretive, but I would also tell you they are deleveraging. So you can take your measure of that from the buyer's multiple, if you will, pro forma for the synergies of combining standalone entities into one. So that has not been our experience thus far.

Okay. And the other thing I'm wondering, one of your smaller competitors, Gray, is doing its own political ad sales and has saved the agency commissions and it's done pretty well, they feel, on that basis. Is there any thought, that with this gap between gross and net, that there'd be enough there for you to consider doing something similarly?

We're a much bigger company, and I'm not sure that a one-man band could be as effective across a 100 markets and a number that, again, we say is somewhere between $280 million and $290 million for the year, and has potential to go higher, as there is a Mississippi Senate runoff election that will be contested on November 27. That will impact our stations in and those that border Mississippi. So I learned a long time ago in my career, you don't go broke paying commissions. And I think we have a very favorable expense relationship with our rep and every time that we have looked at the concept of self-repping, it was basically a push in terms of if you needed to staff a certain number of offices to adequately serve our television stations, it's about the same as we're paying already, without the headache of having to manage those employees directly. So we're very pleased with the relationship with have. Obviously, we're pleased with the results and we hope you are, too.

And there are no further questions at this time. (Operator Instructions)

Well, thank you very much, operator, and I'd like to thank everyone for joining us here today. Obviously, we have very good results planned to report on for fourth quarter. With 1.5 months in the books and the bulk of the political in the books, we feel very comfortable with our increased guidance, which obviously, all of that increase comes from the 2018 piece of the '18, '19 calculus. And as I said, when we report on fourth quarter in early 2019, we will also issue our first look at 2019, 2020 guidance for free cash flow. So again, thank you all for joining us, and we'll look forward to talking to you in the new year.

And this concludes today's conference. Thank you for your participation. You may now disconnect.