Nexstar Media Group Inc (NXST) 2005 Q2 法說會逐字稿

Good day, everyone, welcome to this NEXSTAR second-quarter earnings results conference call. Today's call is being recorded. All statements and comments made by management during this 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 this conference call are made only as of the date of this conference call. We don't have to undertake any obligations to update any forward-looking statements reflective of changes in circumstances.

At this time, I would like to turn the call over to today's speakers. Please go ahead, Mr. Sook.

Thank you, James, and good morning, everyone. Thank you for joining us today as we review and discuss our second-quarter 2005 operating results. Here with me this morning are Bob Thompson, our Chief Financial Officer, and Shirley Green, our VP of Finance. We will get right to our results and then make time for your questions.

NEXSTAR's reported net revenue for the second quarter of 2005 was 57.9 million, a decrease of 5.4% from net revenue of 61.2 million in the second quarter of 2004. Our core advertising revenues, which exclude political, decreased 1%, while as expected, our Q2 gross political revenues declined $3.5 million year-over-year. Our new local direct revenues developed in the quarter totaled 3.3 million, which equaled our all-time high.

As far as our category results go, the auto category was down in the high single digits, with both the dealer group and individual dealer spending categories down. This was our second consecutive down quarter for this category after a string of 11 consecutive quarters of increases. We had a spate of June cancellations by the automotive advertisers with simply some of them moving their money into July. As far as brands go, GM, Jeep, Toyota, Lexus, Hyundai and Nissan were the brands that posted gains for us, which were offset by losses from Dodge, Ford, LMDA and Mitsubishi.

Fast food, our number two category, posted a mid-single-digit decline, while telcom, our number eight category, posted our largest percentage decline -- in excess of 20%. Other category declines came from department and retail stores, entertainment and movies, attorneys, utilities and banks. We showed gains from the packaged goods category, as well as insurance, state lotteries, lawn and garden, and the drugstore/pharmaceutical category.

On the expense side of the ledger, NEXSTAR's second-quarter reported station direct operating expenses, SG&A and cash program payments increased slightly from 34 point -- I'm sorry, $31.4 million in Q2 of 2004 to $32.0 million in Q2 of 2005. Corporate overhead increased to $2.4 million in Q2 of 2005 from $2.2 million in Q2 of 2004. This resulted in an adjusted EBITDA of 18.6 million for the quarter versus 23 million in the second quarter of 2004. On a pro forma basis, our Q2 2005 net revenues declined 8.4% and our station operating expenses decreased 3.3%.

With that, I will turn the call over to Bob Thompson, our Chief Financial Officer, to review some additional items from our second-quarter financial statements. Bob?

Thanks, Perry. I'm going to first review our capital structure and then address some of the income statement items. Our cash on hand at June 30, 2005, was approximately $10.3 million. Our debt at June 30, 2005, consisted of the following -- term loan of $355 million and our 7% notes that accreted to $197.4 million, yielding total debt at the operating company level of $552.4 million, less the $10.3 million of cash on hand gives us a net debt balance of approximately $542 million at the operating company level. Additionally, at the holding company level, our 11 3/8% notes had accreted to $95.9 million and given us total debt through the hold co. of $648.3 million at June 30. Our corporate overhead costs were $2.4 million for the quarter, and we are still on track with our guidance of 10 to $11 million for the full year.

Leverage at June 30 as defined in our senior credit facilities was 6.8 times versus the covenant of 7.5 times at Q2 2005. Our operating company indebtedness was 552.4 million, less the 10.3 million of cash on hand, which is the allowable deduction under our senior credit facilities, yielded a net debt covenant calculations of approximately $542 million. The last 12-month EBITDA, calculated in accordance with our senior credit facilities, is $79.6 million at June 30, 2005. The covenant calculations exclude the holding company level indebtedness of $95.9 million.

As we disclosed on our last call in the second quarter of 2005, NEXSTAR recognized a loss on extinguishment of debt of $15.7 million related to the call premium on the 12% notes and the write-off of unamortized discounts on those notes, unamortized deferred financing costs and the write-off of debt financing costs on the senior credit facility along with transaction costs related to refinancing that senior credit facility as well. Our cash interest in the second quarter of 2005 was $8 million, approximately $2 million less than the cash interest in the first quarter of 2005, which was prior to our debt refinancing.

Our CapEx for the quarter was $4.2 million, which included $1.2 million of spending related to DTV. In the second quarter of 2005, we also recorded a loss on property held for sale related to the write-down of unoccupied buildings in two markets that were no longer utilized after NEXSTAR had consolidated station operations into a single building in each of those markets. Those properties are now listed and held for sale.

That concludes my review, and I will now turn the call back to Perry for some final remarks before Q&A.

Thank you, Bob. Our guidance for the third quarter is for net revenues to come in in the range of 52 to $53 million, which would represent a low-double-digit decline from the 59.9 million delivered in Q3 of 2004. Embedded in this guidance is a forecast of a mid-single-digit decline in our core business coupled with a decline in political spending of approximately 5.8 to $5.9 million for the quarter.

Given the current revenue pacing in our markets and the absence of over $23 million in political and Olympics-related revenue in the second half of this year, we now see full-year reported net revenue declining in the high-single-digit percentage range to approximately 220 to 225 million. Additionally, we anticipate direct station operating expenses, SG&A and cash program expenses will total approximately 147 to 150 million for the year, which includes approximately $20 million of trade and barter expense.

Looking forward to 2006, we have already begun marketing the Winter Olympics and the Super Bowl for the first quarter of next year, and have over $1 million on the books for those events as of today. We also look to benefit from nine governors' races and eight Senate races in 2006 and the return of the NFL to our 13 NBC affiliates, adding to our sales momentum in the new year.

With that, Bob, Shirley and I will be happy to answer any questions you have. James?

(Operator Instructions). Victor Miller, Bear Stearns.

Good morning. Thank you for taking the question. Actually, I have a couple here. First of all, on your guidance, you obviously have four new TV stations. What does the pro forma look like in terms of your core revenue without the four stations in the upcoming quarter? And Perry, could you then differentiate between what you are seeing in national and local trends so we can get a sense of what is contributing to the decline in the quarter?

Secondly, in your covenant, your leverage ratio is about 6.8 times, but it seems if you have the 542 net debt relatively by the end of the year or some level approaching that, given your guidance, you'll be at over 8.5 times leverage or something near that, which is clearly above the covenant. How do you plan to deal with that if that's the case?

And third, could you contrast the political environment in '06, Perry, with that in '04 to see whether you think this will be a better environment for you or a worse one in terms of how you did then? Thanks.

Thanks, Victor. I'll respond to the national versus local and political questions, and then let Bob responded regarding the covenants and any pro forma information that you might be looking for. As it relates to national versus local in both the second quarter and the third quarter, we anticipate national declines of several hundred basis points in excess of any local declines that we would see, which is to say that consistent with what I think you've probably heard from other operators, the national market continues to be weaker than our local market.

As it relates to political for 2006, as I mentioned, we have eight Senate races in 2006, many of those in market -- in states where we operate in multiple markets -- Indiana, New York, Pennsylvania and Texas. The other states are Maryland, Montana, Missouri, as well as West Virginia, which will affect our Hagerstown station. The nine gubernatorial races are in New York, Pennsylvania, Texas, Illinois, Arkansas, all of which we operate in multiple markets in those states, as well as Kansas, Maryland and Oklahoma, which will affect some of our border markets.

So all of these races were contested four years ago in 2002. However, I think that to be conservative in our guidance, we would not suggest that the political will reach the 2002 levels, but we do think that somewhere in the neighborhood of our 2004 levels because of the number of statewide races would be a fair assessment as to political for prospects for 2006.

With that, I will let Bob answer your questions regarding the potential covenant issues and any of the pro forma information you were looking for.

Thanks, Perry. With respect to covenants, you did mention net debt currently at $542 million. First of all, free cash flow generated in the second half of the year will be used to pay down outstanding indebtedness.

It's still very early with respect to our outlook and visibility into the fourth quarter and how those results will play out. Additionally, we continue to have ongoing discussions with parties regarding asset dispositions and any proceeds from those dispositions would also go towards paying down debt. And lastly, we have spoken with members of our bank group, with whom we have long-term relationships, and we feel comfortable that if the need arises, we can reach a satisfactory resolution with our bank group.

As to your question with respect to pro forma versus Q3 of 2004, the 59.9 million was reported results. Pro forma Q3 2004 net revenues were $61.3 million, and versus our guidance, that would yield a low- to mid-double-digit decline versus the pro forma results of 2004.

Jonathan Jacoby, Banc of America.

A few questions here as well, but starting from like a macro 30,000-foot picture, we are seeing this, as you mention, with a bunch of other television operators. But the national weakness, do you think this is sort of a near-term issue, or is this a longer-term concern that national advertisers are just now looking for other ways to advertise? Maybe they are shifting some monies to network, but just other types of advertising mediums rather than local TV?

And secondly, you might have done this and I apologize if you have -- can you update us on the MSO battle that you are having with Cox and Cable One? And lastly, you mention that some of your auto guys pushed money from June into July. Are the trends looking a little better, and there's some level of conservatism, or are things just -- there's really no pickup overall? Thanks.

Thanks, Jonathan. With respect to automotive at this point for the third quarter, while we don't really give guidance by specific categories on the visibility, it's still early to make a precise call for the third quarter, we do forecast that the rate of the decline in automotive, while we do forecast there will most likely be a decline in automotive spending in the third quarter, will be substantially less than it was in the second quarter. And some of that is the result of money that moved from Q2 to Q3, but also just the trends, particularly among the individual dealers as we aggregate that information, are slightly improving.

And I think that, you know, if you look at the national declines, they are really driven by three categories -- the automotive, which is our largest category as an industry, was down. Telcom was down a lot, as were movies and entertainment. Everything else is kind of in a bandwidth of plus a single digit, minus a single digit -- the usual ebb and flow and churn of advertising.

I would like to think this kind of second- and third-quarter period will be kind of the bottom of the trough and that momentum -- sales momentum will cyclically return and increase as we move toward the last quarter of this year ex-political, and we do think that there will be a number of reasons for core revenue growth in 2006, although it's way too early to forecast.

As it relates to cable, Jonathan, there's really no news to report on the cable front with Cox and Cable One. However, we are in discussions with two of our top 10 MSOs who have asked for proposals from us, fully knowing what those proposals would be, and those discussions are perhaps more constructive than the discussions with Cox and Cable One.

As it stands, we also are in discussions with our satellite providers regarding potential enhanced payments in markets where cable is not an option for subscribers, and hopefully those will bear fruit as well. But there's really no change in the cable front other than advertisers that stayed away early on, not knowing what would be the result of the dispute, have seen that life goes on, business is transacted, and we are gaining back advertisers who initially may have shied away from the controversy. As they see in the ratings books in November -- I'm sorry, February and May, that there are rating points to be bought in the marketplace and there are viewers to be had and business to be transacted. So, no real change in our existing dispute markets with Cable One and Cox, but perhaps more constructive conversations with other top 10 MSOs, but no news to report.

Bishop Sheen, Wachovia Securities.

Tell me if you would, Bob, your availability now under your bank covenants -- actual availability as per the covenant.

Actual availability under the covenants at the end of Q2 would allow us to draw somewhere around $50 million under our revolver, Bishop. However, there are currently no plans that would require us to draw under that revolver, and as I mentioned earlier in the call, we look to be a net payer of debt and reduce leverage as we go forward.

And then on the asset monetization front, I mean, clearly there are certain non-strategic stations that you could sell, and I won't go into mentioning the markets. We've discussed it before. But do you have any other below the rate or assets such as towers that you own that you could sell and lease back that you would be willing to entertain proposals for?

I've not been a fan of those kinds of deals. We inherited power leases in some of our acquisitions, and that would certainly not be an avenue that we would have much interest in exploring. We do own in all of the legacy NEXSTAR stations, we own all but one of our towers, so those are assets of ours. Those are income-producing assets for us, but not things we would be interested in monetizing, nor do I think we will have to.

And last, just a little more color on your expectations of in the back half of this year of the crucial auto spending. It seems like all the automakers are going to advertise to let us know what fabulous discounts we can all have. I mean, how do you think that's going to play out in terms of the auto spend, up, down or neutral?

Well, it's just one man's opinion at this point. I have several friends who own auto dealerships who would've told me that the employee pricing incentive was not really a boon to their business. They moved more units, but they made the same amount of money because they were making much less given that incentive on the individual vehicles, which I think was the reason there was no substantial pickup in advertising around the employee incentive programs.

From where we sit right now with business on the books, as I said, while we reported a high-single-digit decline in automotive for the category, I would tell you that our internal perspective is that that number will be less than half of that percentage decline in the third quarter, but I think we would still be conservative or realistic in forecasting a decline in automotive spending as we sit here on August 2 for Q3.

Q4 is impossible to call. The industry is still on track to put out more than 17 million new vehicles, and I think that would bode for spending along the lines of historic levels. What the mix of that spending will be is anyone's guess, and as I said, at this point we have very little this visibility for the fourth quarter. I think the saving grace is that there will be approximately $18 million of inventory that was taken up by political advertisers in the back half of the year that will be available for sale, and assuming the demand is there, that should naturally help us to increase ad spend and availability from our core advertisers.

Right. And any companion color on when national is going to cure itself or feel a little bit better?

Really don't know. I would tell you that if you look at the telecom category, a lot of spending I think has been frozen because of the merger activity. Whether there will be pushes for market share from the newly constituted companies down the road is anyone's guess. I would assume that there would be. The movie category is one that is volatile, that has been down, but it also just as quickly could turn upward. I guess what I would tell you, Bishop, is I really don't really have much visibility, but I think embedded in our guidance for the back half of the year, we are -- and for the full year assumes that there would be no change in the tenor that's been set in the first half of the year primarily for both local and national.

(Operator Instructions). Sean Butson, Legg Mason Wood Walker.

Good morning, everybody. Just back on the -- I don't want to kill the auto category, Perry, in terms of talking about it, but just curious as related to the employee discount programs, did you see some increased advertising from the manufacturers, but not so from the dealers? I think I may have caught that from your remarks. I just wanted to check.

And then secondly, you had offered an estimate in the first quarter for how much you thought you were missing from advertisers related to the Retrans deal. Do you have an estimate in the second quarter as well? Thanks.

Answering your last question first, there's really no hard data on that because there was no advertising really of consequence that was canceled in the second quarter, and so now we are into what are advertisers' intentions. I can tell you that we tracked the advertisers in the first quarter that were missing or stayed away due to dispute in our core markets. And, you know, I look at the replacement advertising and the new account developments, you know, everywhere from San Angelo to Shreveport to Joplin. One of those three markets that I just mentioned has made their local revenue budget for the months of July and August here.

So, we see advertisers that were afraid of the unknown, now that the unknown is known in terms of ratings book performance, coming back and doing business with us and we have obviously incented our sellers in those markets for a substantial new business push, which has helped to replace some of that advertising. So, I guess the best I can tell you is that the new normal is becoming more normal every week that we are in business and in this dispute.

As it relates to the automotive, I think I mentioned that both automotive dealer group spending was down as well as automotive dealer spending, and so I would tell you that we did not see much incremental revenue in Q2 around the employee discount program, certainly no incremental revenue that I could track of any consequence from the individual dealers and not a lot from the factory associations and factory dealer associations as well. As you can see by my comments, it's kind of a mixed bag in terms of who's up and who's down. Primarily more of the foreign nameplates showed increases, and with the exception of GM and Jeep, most of the domestic nameplates showed decreases in ad spend in our universe.

Okay, and then just lastly, do you have the local and national revenue amounts for the second quarter? I may have -- were those in the press release and I missed them, or do you have them?

Gross local and national were approximately 56.9 million for the quarter. Broken out separately, that was about 38.9 on the local side and 18 million on the national side.

David Bank, RBC Capital.

Good morning. Thanks, guys. Two questions. The first one is, Perry, as you talk about -- or as we think about how the performance of the local news is important to continuing to attract the political dollars as you move closer to 2006, have there been any movements in either direction on the ratings in terms of your local news product over the -- in the last book in terms of what you're seeing going forward?

And second of all, a little bit further out, and it probably won't hit you as quickly as some of the big markets, but I was wondering if you had any thoughts as the telcos sort of seem to be making some progress in terms of going into the cable business, do you get the sense that they will be willing to negotiate pretty quickly in terms of per sub fees for carriage of local TV, and where do you see all that developing versus the MSOs?

Yes, David, I think that while we expect it will probably be 18 months to three years before the telcos have reached our market space -- and that may not be universally because we obviously have a concentration here in Texas, where SBC and Verizon are kind of in a footrace to offer these services locally and while they are contesting. My business here in the Dallas-Fort Worth BMA adjacent to us are Wichita Falls and Abilene, and I think it's only a matter of time before they branch out.

But we've had no substantive discussions with any of the telcos at this point. But it is certainly my understanding given their public statements that they understand the need to be in partnership with broadcasters and have developed subscription payments as part of their business model. So I fully would expect that they, along with the DBS companies, the wireless companies and the overbuilders, would be paying for content -- local content and local broadcast service as part of their offerings to consumers.

And David, you'll have to help me. I forgot the first part of your question.

First part of the question was just in terms of ratings performance on the local news franchise, have you seen any movement in any direction on the last book or two, and how do you see things developing in terms of the next book?

I think probably most notably in two of our larger markets, in Springfield, Missouri and in Little Rock, Arkansas, the main numbers that I had the chance to see were -- showed some pretty substantial increases for our stations in those markets. Obviously, rating point growth there is worth more to the Company than in many of the smaller markets. And I would say, though, across the group, we have maintained our ratings positions in every markets, and in fact are contesting number three to number two in a couple of markets. But we have not lost ratings position in terms of rank of our newscasts in any markets over the last two books that I've had a chance to see.

Dennis Liebowitz, Axview (ph) Partners.

I had two questions. One, if some of the money from the second quarter spills into the third, what accounts for the fact that you're projecting organic growth to be worse in the current quarter? Also, are there opportunities for further refinancings over the next year?

Dennis, I will speak to the -- the amount of automotive spending that moved from Q2 to Q3 is not going to be enough to move the needle on the category to positive, and I just look at the pacings as we sit here on the second day of August, and knowing July and having a pretty good handle on August and an informed opinion on September, that I think it's prudent for us to forecast a single-digit decline in our core revenue for the third quarter.

And again, my personal belief is that I think that this will most likely be the bottom of the barrel in the cycle in terms of core business before it starts to improve as we move into the fourth quarter and 2006. Obviously, the political number is bigger in Q3 and in Q4, bigger than that, but in terms of the core fundamental business, I would like to believe that the third quarter will be the low ebb in the cycle.

I will let Bob speak to the second half of your question.

Dennis, with respect to any refinancing opportunities, we just completed a bank refinancing as well as a bond refinancing right at the end of the first quarter, early second quarter this year. The next structure of debt that will be available for refinancing are the 11 3/8 senior discount notes. First call date on those notes is in 2008. However, some amount of those notes, up to 35%, could be clawed back with proceeds from an equity offering. But, at this point in time, I don't foresee an additional debt refinancing in the near-term.

And that's the only way in which you can claw back any, is equity?

That's correct.

Andrew Finkelstein, Lehman Brothers.

A couple of questions. Perry, you mentioned your audience share at least for news sounds like it's stable to maybe gaining in a few markets. Could you translate that maybe over to revenue share, how you guys are doing? Or maybe more importantly on the local side, but how you are doing against the competitors -- your performance of the market.

Sure, Andrew. At this point, for the second quarter, we only have four markets that have audits that have come in. Some of our markets are not audited. Some of our markets are audited only every six months. Some are audited on a 90-day delay. But we have four markets, and we gained share in two and basically held share in the other two. So there was no loss of revenue share, but gains in two of the four markets, for which we have data. And obviously as more of those numbers roll in, more facts will be known. But we are not forecasting that we have lost revenue share along the way. What we are forecasting is the market growth less than we had originally anticipated for the year, being the components that add up to the guidance that we've given.

Okay and then, I mean, just following up on the local side. Other guys -- and I think even in your press release, you mentioned obviously looking for new revenue sources I'm sure on the local side, new channels. Can you talk about any progress there, bringing new advertisers to television -- anything happening on the local side to improve those situations?

Sure. As I mentioned in our release and my comments, we generated in excess of $3.3 million of new to television, new direct local billing in the quarter, which is kind of equal to an all-time high for the group. Against this backdrop, I think that shows how hard our folks have been working to unearth new business and introduce new advertisers to television.

We have a number of Internet-related initiatives underway, which I really haven't talked about because they haven't borne any fruit, but we are attempting to access Internet sales channels using our television stations as the ultimate portals that they are and attempting to drive people, various couponing initiatives, as well as both textual Web and streaming video opportunities for sponsors. But those again are in the early stages of a rollout throughout the group, and the revenue at this point is not meaningful, but those are additional sales channels we're attempting to develop and access.

Just one other quick question. Just, Perry, you mentioned on the political side that you didn't think you could match that bigger number you did in '02, and something closer maybe to the '04 cycle. But I would imagine that you're going to lose some of the national presidential election dollars that came in in the '04 year. Do you plan on offsetting that with additional leases on the local -- on the state level? Is that (multiple speakers)

Yes, that's the short answer to your question. There are more contested statewide and local races in '06 than there were in '04. All politics is local. I think the reason that it would be not prudent to forecast spending in 2006 equal to the last off-year, even-year off-presidential election even year of '02 is we had Tony Sanchez and Tom Golisano, billionaires in Texas and New York, that were running for office. There were rumors that one or both may enter the race again, but you know, the stars were kind of aligned in terms of their spending in our sweet spot, so until more is known, I would be hesitant to be that aggressive with any political projections for 2006.

Victor Miller, Bear Stearns.

Perry, obviously there's been some speculation in the marketplace that the MS property and the MS sale is going quite well. So as you look at what you've got potentially, how are you looking at what you might be able to sell, or how many markets are you exploring? Can you give us any more details on the level of cash flow you're exploring selling? Can you give us any sense of how that might go and what scale we're talking about? Thanks.

Yes. I think obviously without being ultra-specific, and again I can't handicap what potential buyers will do, but we have identified somewhere between two and five markets that we would deem our station operations in those markets to be non-strategic. They are smaller markets, the cash flow there less than $3 million and probably more closer to $2.5 million, and potential sale proceeds in excess of $30 million when and if those deals -- if they were all to come to pass.

Now, it could be as little as one or if the buyers are not financially qualified, and we may not sell anything here in the short term, but we're certainly -- we have more than one property that are listed with brokers and that are available for sale. Books have gone out -- NDAs. We have had due diligence visits. We're active in the process of trying to monetize at substantially accretive multiples some of our assets that we would deem to be non-strategic.

And I'm spending zero time on acquisitions and substantial time on attempting to monetize some of these assets. We think the best thing we can do to improve the Company's stock price for our shareholders is to reduce debt and contribute that value to the equity side of the balance sheet. And that is our primary focus here over the next 18 to 24 months.

Perry, given the type of market you're talking about and the cash rate you talked about, obviously it doesn't seem like your list would include Hagerstown, which doesn't seem strategic either. Could you talk about how you are viewing that asset?

We have substantially improved our operations and cash flow in Hagerstown and we've got a very strong general manager running the station there. We have had conversations with whom we would deem to be the strategic buyers for that station -- Baltimore and Washington group operators, but at this point, at a level that it would take to be an accretive disposition for us, those strategic buyers have not shown that level of interest. So we will continue to happily own and operate Hagerstown, as it has become a substantial cash flow contributor to the Company, I think with some pretty bright opportunities for us in the future.

Bishops Sheen, Wachovia Securities.

Actually, as you would expect, my good friend Victor already covered it on Hagerstown. So I have nothing further to ask you.

And there are no further questions at this time. I will turn the conference over to Mr. Sook for any additional closing remarks.

Thank you all for joining us today and we look forward to talking about our third-quarter results and increasing visibility towards the fourth quarter and the end of the year on our third-quarter conference call later on this year. Thanks and goodbye.

That concludes today's conference call. We thank you for your participation and have a nice day.