Nexstar Media Group Inc (NXST) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Nexstar third-quarter earnings results conference call. Today's call is being recorded. All statements and comments made by management during the conference call other than statements of historical facts may be deemed forward-looking statements within the meaning of Section 21 of the Securities Act of 1933 and Section 21A of the Securities & Exchange Act of 1934. Our future financial conditions and results of operations, as well as forward-looking statements, are subject to change. The forward-looking statements and comments made during the conference call are made only as of the date of this conference call. We do not have to undertake any obligations to update any forward-looking statements reflected of changes and circumstances.

At this time, I would like to turn the conference over to Mr. Perry Sook. Please go ahead, sir.

Thank you, Candace. Good morning everyone and thank you very much for joining us today. I realize that there are a number for broadcasters reporting this morning, so I will get right to the numbers, and then we will make time for your questions. Before I start, I want to make mention that Bob Thompson, our Executive Vice President and Chief Financial Officer, as well as Shirley Green, our Vice President of Finance, are here with me this morning as well.

As to third quarter, Nexstar's reported net revenue increased 13.3 percent to 59.9 million in Q3, which was slightly ahead of the updated guidance we issued last month. These results reflect lower political advertising revenue than we originally anticipated, although we still managed to capture over $6 million of political business during the period. That is compared to $1 million in the year ago third quarter.

Going into September, we were on track to meet our original goal, but as the months wore on and bookings remained week-to-week, it became apparent that a shifting presidential electoral map and a strategy to focus only on the battleground states was pushing money out of certain markets where we operate TV stations. Now that kind of pullback is not something that we had expected obviously, and it is not really anything you can plan for.

That said, I think our company did an excellent job of maximizing our share of the political revenue spent in our market. And I attribute that to the attractiveness of the quality local news programming that we air, as well as the efforts of our station sales management working in conjunction with Duane Lammers, our COO, and as we affectionately refer to him our Chief Revenue Officer.

On the positive side, we generated some $5.1 million in summer Olympics related revenue, which helped us generate solid growth in our core local and national advertising categories for the quarter. Our stations generated approximately $2.9 million in new local direct billing in third quarter, which reflects our continued and sustained emphasis on new business development in each of our markets.

As to the category comparisons, our automotive spending increased approximately 3.5 percent during the third quarter of 2004, and this marks the 10th consecutive quarter of growth for our Company in the automotive sector. The growth in Q3 of 2004 was led by increased spending from Ford, GM, Chrysler and a handful of the foreign nameplates. Other category comparisons that were up include furniture, paid programming, health care, media, insurance, schools and financial. Categories that did not grow in Q3 include restaurants, retail, entertainment, package goods, telecom, soft drinks, beer and wine.

On the expense side of the ledger, we worked hard to reduce and control our costs as I think we always do. Our reported year-over-year increase in direct operating expenses, SG&A and program payments was 1.4 million. However, embedded in that number is over 2.2 million of expenses related to Fayetteville, Fort Smith, Utica and San Angelo stations we did not operate or provide services to in Q3 of '03. The result was a 35.5 percent increase in broadcast cash flow to 22.7 million. Taking into account more than a 25 percent decrease in corporate overhead expenses, adjusted EBITDA gained 51.7 percent to $20 million from the 13.2 million generated in the third quarter of 2003.

On a pro forma basis, our total net revenue in the third quarter was 59.9 million. That is an increase of 8.1 percent from the 55.4 million reported in the third quarter of 2003. Just to remind everyone that these pro forma results do not include WTVO, the ABC affiliate serving Rockford, Illinois, which Mission Broadcasting entered into an agreement to purchase after the end of the quarter and to which we began providing services on November the 1st of this year.

Total advertising revenue pro forma, which includes political, local and national, grows 11.1 percent to 60.6 million. These growth rates do not reflect the full benefit of the operating changes we are making at our newly acquired stations. Over time we expect to bring those stations along the growth curve to deliver on current Nexstar operating goals. We have a good track record of creating value this way, and I will address that point in greater detail in just a few moments.

Our direct operating expenses, SG&A and program payments on a pro forma basis declined 5.8 percent to 32.4 million. Again this is ahead of our updated guidance from last month and I think demonstrates the type of efficiencies we can generate through our operating improvements.

With that said, I would like to turn the call over to Bob Thompson, our Chief Financial Officer, to review the financials in greater detail, and I will be back with some additional comments including fourth-quarter guidance in just a few moments. Bob?

I'm going to review our capital structure as of September 30, 2004, and then give some color on a number of expense items in today's announcement. First of all, our cash on hand at the end of the quarter was $14.6 million. As covered on the second-quarter call, we have amended our senior credit facility and now have in place a $235 million term loan and a revolver facility of $80 million. At the end of September, there was $234.4 million outstanding under the term loan and zero dollars outstanding under our revolver as we paid down $10 million of revolver balance during the quarter. The repricing of the term loan and shifting of $40 million from the revolver to the term loan will result an annualized interest savings of $1.5 million as previously announced in the last quarterly call.

Just to recap our debt balances at September 30, 2004, they consist of the following. Term loans outstanding of 234.4 million, zero dollars outstanding under the revolver, the 12 percent notes have accreted to $156.1 million, the 7 percent notes are at $125 million, which yields operating company indebtedness of $515.5 million less $14.6 million of cash on hand gives us a net debt of $500.9 million at the operating company level. Additionally at the holding company level we have 11 3/8 percent notes outstanding, whichever have accreted to $88.2 million at the end of September giving us debt at the wholesale level of $603.7 million, and additionally there is a FAS 133 hedge adjustment of $2.7 million which gives us total debt of $606.4 million. Our leverage at September 30th as defined in our senior credit facilities, which is based on operating company net debt of $500.9 million as described earlier, was 6.28 times versus a covenant of 7 times at the end of September. The last 12 months EBITDA as calculated in accordance with our credit facilities was $79.8 million at September 30, 2004. And once again to remind everyone on the call, the covenant calculation exclude holding company level 11 3/8 percent notes indebtedness totaling $88.2 million.

Now to touch on a couple of items on the P&L. In connection with our amendment of the senior credit facilities, we incurred a write-off of $1.9 million for unamortized debt issuance costs and transaction fees related to the new senior credit facility which is included in our third-quarter net loss of $5.7 million. This is primarily a non-cash expense and will not be reoccurring. Our corporate overhead costs were $2.6 million for the quarter, which was less than the $3.5 million incurred in the third quarter of 2003, with that 2003 number also included in a 1 million 8 related to corporate overhead. I expect corporate overhead cost increase in Q4 and project full-year corporate overhead costs to be $10 to $10.5 million for the full-year, including the costs related to Sarbanes-Oxley implementation.

We began reporting free cash flow in this recording period, and for the quarter, free cash flow was $5.7 million and comprised of the following. EBITDA of $20 million less CapEx of 3.3 million for the quarter. And with respect to CapEx, we're expecting to have $10 to $10.5 million expenditures for the year, including the newly acquired WTVO station. Our cash interest was $10.3 million for the quarter. Cash taxes were approximately 600,000 and timed brokerage agreement fees of approximately 100,000 yielding the free cash flow of $5.7 million.

As to the WTVO acquisition, subsequent to the close of the third quarter, Nexstar announced that Mission Broadcasting introduced a definitive agreement to acquire WTVO. As Perry noted, Nexstar entered into a local service agreement with Mission for WTVO and began providing services to the station through our owned and operated station, WQRF, on November 1, 2004. Accordingly, contributions from WTVO are not included in reported or pro forma results for the three and nine-month period ended September 30, '04.

For the period ending December 31, 2004, WTVO is expected to contribute approximately $1 million to the Company's reported net revenue and will add approximately $800,000 of direct station operating expenses, SG&A and program payments to the cost structure of the Company. Once again, that is for two of the three months in the quarter ended December 31st.

For those of you modeling pro forma results, we have posted complete financial data for all three stations in the pro forma mix -- WTVO, WUTR and KLST going back to the first quarter of '03 so that you can accurately project your Q4 and full-year growth rates. And the Q3 '04 results pro forma with WTVO will be posted immediately after this call to our Web site.

That concludes my opening remarks for today, and now I will turn the call back to Perry.

Thanks very much, Bob. With the bulk of the election activity behind us, we have a fairly clear picture of how the fourth quarter will shape up for the Company. Therefore, we would like to issue the following guidance for Q4. Our 2004 fourth-quarter reported net revenue is projected to increase approximately 12 to 15 percent from the 59.0 million reported in the fourth quarter of 2003. That will be driven by a 2 to 5 percent increase in core advertising revenue, which is local and national, plus approximately $13 million in political revenue.

The primary driver is that we see in the fourth quarter other than political our continued strength in the automotive category, as well as the real estate category, tools, insurance, infomercials, as well as our sustained new business development efforts and increases in our DBS subscriber payments.

On the expense side of the ledger, we project station direct operating expenses to be plus 1 to plus 4 percent when compared to 2003 reported fourth-quarter levels. On a pro forma basis, which includes Rockford, Utica and San Angelo acquisitions, our net revenue is projected to increase 7 to 10 percent, while station direct operating expenses will decrease in a range of minus 4 to minus 6. That 7 to 10 percent net revenue increase is driven by an ad spend increase of approximately 14 to 18 percent and a trade and barter component approximately $2 million less than Q4 of '03 which is by design.

Before moving onto Q&A, I would like to take a few moments to outline how we think 2005 will develop for Nexstar. Though we have not issued formal guidance yet for next year, we do intend to do so before the end of the year. That guidance will be based on the completion of our detailed budgeting process which we are in the midst of as we speak, as well as our expectations that certain developments which we have discussed on prior calls will play out in 2005. Given the disproportionate weight of political advertising in our revenue mix during a presidential election year, we think it is safe to assume that we will show somewhat negative revenue comparisons throughout 2005.

To compensate for as much of that shortfall as possible and to generate cash flow that we can use to reduce debt and continue to strengthen our balance sheet, we will focus on the following strategies. The first is to capitalize on continued growth in our core local and national advertising categories. While we don't have a crystal ball in the economy, we do think that the midsize markets in which we operate have been fairly resilient and we expect continued growth in 2005.

The second is to continue to improve the revenue growth at the 60 percent of our portfolio that we characterize as developing stations. We have a strong track record of improving our station's revenue performance when given time to implement our operating strategies.

For example in the third quarter of 2004, the stations we owned or operated prior to January 1 of 2003 performed 700 basis points better on a revenue comparison to the prior year than those stations we acquired in 2003 or this year. So we fully intend to continue improving the topline performance of our developing and recently acquired stations in 2005.

The third is to continue the rolling out of our successful sales projects and sales promotions across our recently acquired stations and our new markets. Projects like the Viewer's Club, Infoline, Neighborhood Weather Network, our carrying company's public service project just to name a few are up and running now in about half of our markets, and we plan to aggressively roll out these projects and more in additional markets during 2005.

Our fourth initiative is to realize increased DBS revenue. We say that that line item can total upwards of $1 million of incremental revenue in 2005, which translates to 3 to 4 cents a share for free cash flow next year.

The fifth is to continue to manage our station direct operating expenses and our corporate overhead. As the cost takeouts from our 2004 acquisitions fully wind their way through our 2005 results, we expect to see little or no growth in our 2005 station operating expense line. And again there remains the opportunity to call our 12 percent notes in April of '05, which could contribute significantly to free cash flow next year if implemented.

In sum, in Q3 of 2004 we delivered solid revenues, cash flow and EBITDA growth, and we are optimistic about our prospects for Q4 and 2005. We are committed to deleveraging the Company's balance sheet through operating improvements and the potential divestiture of nonstrategic assets. As I have said in the past, I don't think it's prudent for me to discuss the specific details of that strategy, but suffice it to say that we are actively evaluating our portfolio and engaging in discussions with all the right players to ensure that we have the best asset mix for our shareholders on a going forward basis.

With those comments, Bob and Shirley and I will be happy to entertain any questions that you might have. Candace?

(OPERATOR INSTRUCTIONS). Tim Wallace. UBS.

Hi, there. It is Herman Goodshares (ph) in for Tim Wallace. How are you? Congratulations on the results this morning. Actually I was wondering if you could quantify what the DBS payments were in this third quarter and what they were in the third and fourth quarter of last year?

The DBS payments in the third quarter will approximate a couple of hundred thousand dollars, and versus last year we had virtually no DBS revenue on the books. It's on about a 90-day lag, and our first market was launched in July of '03 in Little Rock. So we did not begin to receive money basically until the fourth quarter of '04. So virtually zero in Q3 of '03. North of $200,000 this year and in the fourth quarter of '03, it would have been less than $50,000 of DBS revenue.

Thank you.

Bishop Cheen. Wachovia Securities.

Good morning, Perry and Bob. Perry, I know that because of the cycle of political you always focus on intiatives to increase business and you detailed them. But even with the initiatives to replace the political and your admission that the topline will be down, what is the game plan to lower the leverage, which via acquisitions has crept up to a higher mark than you had been?

Well, thanks, Bishop. We obviously as I mentioned are basically hoarding our free cash to hopefully build up a warchest of cash to be able to reduce the face amount of any refinancing around the 12 percent notes in April of next year. We also as Bob mentioned have used our free cash to pay our revolver debt down to zero. And you know, we are evaluating the potential of nonstrategic asset sales, and again with general managers that listen to these calls and we don't want to be specific because as you know deals may or may not happen and we may not have offers at levels that are acceptable to us, but we are active in that process. There are a number of stations that we've had conversations about that we don't think will ultimately fit our long-term strategy whether it is geographic or local content dominance.

So there are a number of situations that we are evaluating. I don't want to handicap the outcome or promise anything will happen because it may or may not. But we are focused on delevering, strengthening the balance sheet. We are not focused on acquisitions. There is no acquisition activity underway in the Company at this time.

So specifically to summarize, Bishop, cash that we accumulated between now and the call date of the 12 percent notes, we will use to reduce the face amount of that refinancing. And then additional cash accumulated through the remainder of the year will obviously go down -- will go first to pay down any amounts that would be outstanding under the revolver, and then beyond that, in looking at the cash flow structure we would make a corporate finance decision as to whether to pay down any amounts on the term loan under the bank credit facility. But keeping in mind that those would be permanent reductions of borrowings that are at LIBOR plus 175.

Okay. How much is left in pending acquisitions right now to complete?

We will close on KLST in San Angelo on November 30th, and that is approximately $10 million which we will expect to be funded out of cash on hand. And Mission announced the pending acquisition of WTVO in Rockford. That is working its way through the FCC at this point in time. We project probably Q2, maybe Q3, probably Q2 if all goes according to plan. The remaining obligation on that will be approximately $7 million of cash that has not already been advanced to the seller. And then our pending acquisition of the Fayetteville/Ft. Smith NBC affiliates, and there is a remaining $7 million to be paid to that seller once we have FCC approval. And I would expect that that would be funded out of cash on hand as well. And that will most likely be a Q1 or a 2005 event and most likely in Q1.

All right. Thanks, gentlemen.

Jonathan Jacoby. Banc of America Securities.

This is Hooper Stevens for Jonathan Jacoby. I just wanted to ask you with Bush winning reelection, any thoughts on the FCC in terms of your outlook for the regulatory environment?

I think the most immediate thing we will see obviously is a change in the face of the FCC commissioners. With Bush winning and also with Daschle being defeated, Jonathan Adelstein's term ends when Congress adjourns for the year. There has obviously been a lot of speculation about Chairman Powell and his future plans remaining at the commission.

I think it is important to note that on the regulatory issues that we have been most actively involved and notably in the noticeable proposal we are making on television. JSA set up all of the comments filed with the FCC in their formal comment period, of which we were a filer. There were no comments filed by any group, public interest or otherwise, in support of the FCC's NCRM (ph) to basically consider abolishing TV JSAs on a going forward basis.

Our attorneys feel that will be a significant fact that will play into the proceeding that if no one filed comments in a negative way for TV JSAs, then why do we need to undertake this review?

Having said that, I don't want to handicap the outcome of a regulatory body whose leaders, i.e. the commissioners, will be the faces of those people will be changing here over the early days and probably well into 2005 and the new Bush administration. So we think still that it will be probably years and not months before we have additional regulatory or even deregulatory activity at the FCC. So we are not anticipating or planning, nor does our business plan contemplate that there would be a significant change in the regulatory landscape in 2005 and probably not until well into 2006.

Thank you very much.

Tracy Young. Bear Stearns.

I have two questions. One is how the political has developed relative to what you expected at the beginning of the year? And the second question is just how fourth quarter is pacing for you? How do you see it thus far and expect it to end up in November, December?

Thanks, Tracy. I will speak to the political number. Obviously we gave guidance of 12.5 to 13 million for the fourth quarter, and we are putting clarity on that. We obviously know there is not going to be a runoff election in Louisiana, so we don't expect that total to increase at this point in time. If you add up the four quarters, that puts us in the $26 to $26.5 million range on gross political.

Obviously we had anticipated a runoff election in Louisiana when we put together our original plan. This is the first time in a long time where there has not been one because you have to get 50 percent of the vote or better, otherwise the top two candidates square off. We anticipated obviously the Senate race in Illinois to be competitive. It was not when Ryan dropped out. And we expected Missouri and Arkansas to remain contested states in the presidential race for a much longer period of time than they did.

So our original expectation on political was a mid-30s number, and it is going to be a mid to high 20s number. That is what it is. If you look at our third-quarter number and our fourth-quarter guidance, it follows predictable historical patterns that the fourth-quarter number would be double the third-quarter number, and in fact it was and then some.

And as it relates to our underlying business, you know we see growth in our underlying business, our core categories in the fourth quarter. We are projecting and, in fact, experiencing growth in the automotive sector in the fourth quarter unlike what some others may have reported, and we see single digit growth excluding political.

I think it is also important to note if comparing this to 2002, the election was one week earlier this year than it was two years ago. So theoretically we have now an extra week on the other side of the election to conduct our regular business to deal with the displaced advertisers, and in fact in the last week, both our local and national pacings have picked up for November and December by a couple of points.

So we think the underlying business will continue to show single digit growth, and we are obviously hopeful that will accelerate in 2005 without the overhang and displacement of political.

(OPERATOR INSTRUCTIONS). Todd Morgan. CIBC.

This is actually Aaron Rickless (ph) with CIBC. Just to focus on the displaced advertisers a little bit more in detail, I think in the past you guys talked about political displacing your core business on maybe a 2 to 1 ratio. So a dollar political would take (inaudible) at 50 cents of core. I was wondering if that was the case in this election as well or if that had changed at all?

It is basically the same dynamic. We figure approximately 50 percent of the political is incremental because it displaces regular advertisers because they all compete for a finite amount of inventory. So I don't think the perspective has changed there significantly in this election cycle versus others.

That is helpful. Just also on WTVO, you gave the pro forma revenue, or that is going to be on the Web site, but I was wondering what effect that station would have on your existing Nexstar station in that market, if you can talk to that at all?

Sure. We did not do the deal for this reason, but we needed to find a new home for our Fox affiliate in that market. We inherited a station there in our Quorum acquisition that was in leased space owned by the city that the lease expires at the end of this year. So we were in a position of having to build or buy another facility to house our Fox station either in the latter part of this year or the early part of next year. So we will save those capital dollars by consolidating the current operations of WQRF, our Fox affiliate, into the Mission WTVO facility. In fact, our Director of Engineering is there meeting with contractors today and tomorrow, and we fully expect that the stations will be fully integrated as one operating unit by the end of Q1 of 2005.

Okay. Very good. Thank you.

It seems there are no further questions. I will turn the conference back over to our speakers for any additional or closing remarks.

Thanks very much for joining us today. We look forward to reporting 2005 guidance later on this year, and we will obviously keep you apprised of our progress in the Company on a going forward basis. Thank you for your time.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.