Nexstar Media Group Inc (NXST) 2006 Q1 法說會逐字稿

Good day everyone. Welcome to this Nexstar first 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 fact 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. The Company's future financial condition 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.

Management will also be discussing non-GAAP information during this call. In compliance with Regulation G, reconciliations of this non-GAAP information to GAAP measurements are included in today's news announcement. The Company does not undertake any obligation to update forward-looking statements reflected of changes in circumstances. At this time, I would like to turn the call over to your host, Nexstar Chairman, President, and Chief Executive Officer, Perry Sook. Please go ahead, sir.

Thank you and good morning everyone. Thank you for joining us today as we review and discuss our 2006 first quarter operating results, recent developments in the Company and our expectations for Q2 of 2006. With me on the call today is Matt Devine, our Chief Financial Officer and our VP of finance, Shirley Green.

Financially, 2006 began strongly for Nexstar as we delivered record first quarter net revenue, broadcast cash flow, EBITDA, income from operations, and free cash flow, all OF which were ahead of the consensus estimates. Operationally, we benefited from the duopoly structures we have in over 60% of our market as well as from our emphasis on local sales and local news, which together allow us to command first or second revenue shares in almost 75% of our markets.

Importantly, in Q1 of '06, new local direct billing totaled $3.5 million for the Company and represented 9% of our total local billing including -- or rather indicating our continued emphasis on bringing new advertisers to our television stations. We also made progress during the quarter in reducing debt through prepayments while recently taking action to improve our position in northwest Arkansas and also to pursue other revenue opportunities in new media.

Matt and I will provide a bit more perspective on the results and then we'll open the floor to your Q & A.

Our reported net revenue for the first quarter of 2006 was $59.8 million which was nicely ahead of the range of 56 to 57 million that we provided in our guidance. And it was 12.2% over last year's first quarter. Upside came from the strength of the local economies in our markets, our new local billings which amounted to 3.5 million, political advertising of 1.8 million which rose by 1.5 million year-over-year, and our retransmission revenues both in the form of cash and ad buys which amounted to about $3 million for the quarter in total. Excluding our political advertising, our gross local and national revenue were up about 11.1%.

In addition to the '06/'05 comparisons which reflect the cyclicality inherent in the political advertising cycle, I would also like to point out that Nexstar's total net revenue in first quarter of 2006 was up over 10% compared with the first quarter of 2004 with [Bcf], EBITDA and free cash flow also showing substantial comparative gains.

As far as our category results for the first quarter, Nexstar saw gains in 16 of our top 25 ad categories year-over-year, which we feel is representative of both the strength of our local economies and the depth of advertising that we haven't seen in our Company in a while.

As expected, automotive spending decreased approximately 5% compared to the first quarter of 2005 primarily as a result of reduced overall dealer group and factory spending. However, we were able to overcome this somewhat through local sales efforts as spending across the station grouped by individual automotive dealers was up 8% during the quarter.

In addition, 8 of 12 foreign manufacturers increased their spending in the first quarter, led by Toyota's increase of nearly 25%, pushing Toyota to the number two position among all automotive advertisers in our group. Ford was the only domestic advertiser that posted a spending gain for the quarter -- domestic manufacturer I should say.

Fast food and restaurant spending continues to be our second-largest category. The sector increased approximately 12% in the first quarter which was a dramatic turnaround for the fourth quarter and all of 2005. Other notable gains came from the paid programming category as well as furniture, insurance, Telecom, cable, and the utility category. The medical, legal, banking, packaged goods, home electronics and soft drink categories were down in the quarter.

Our first quarter reported station direct operating expenses, SG&A and cash program expenses increased approximately 9% from 32.4 million in Q4 Q1 of '05 to 35.2 million in Q1 of '06. Corporate overhead rose to 3.2 million in Q1 of '06 from 3 million in the same period of 2005. However, the 2006 level included approximately $400,000 of non-cash stock option expense whereas the Q1 '05 number included no such charges. Next our generated first-quarter 2006 EBITDA of 16.6 million which was handsomely ahead of the street estimates.

With all that said, I will turn the call over to Matt Devine to provide some additional perspective on our first-quarter financials. Matt?

Thanks, Perry. As you've heard, 2006 is developing in the positive manner we outlined on last quarter's call as we generated great year-over-year gains in every metric and set Q1 record results. Early indications reflect that Q2 is already shaping up very nicely in terms of continuing this momentum. And as we indicated, we are addressing the balance sheet and leverage and will continue throughout '06.

I am going to first review some key balance sheet accounts and then address some of the income statement items. Cash on hand at March 31 was $11.8 million compared with $13.5 million at 12/31/05. Our outstanding bank term loan was $342.8 million at March 31, '06, down from $347.7 million at 12/31/05. Our 7% notes totaled 197.5 million at the end of the first quarter, resulting in operating Company debt of $540.3 million at March 31, '06, down from $545.2 million at year-end '05.

Taking into effect the $11.8 million cash position, the net debt at the operating Company level was 528.5 million, down from 531.7 million at year-end '05, leverage at 3/31/06 as defined in our October '05 amended senior credit facilities fell to 7.8 times down from 8.3 times at year-end '05. The October '05 amended senior credit facility covenants provide for a total leverage covenant of 8 turns at March 31, '06; 7.75 turns through June 30th of '06; 7.5 turns through September 30 of this year and 7 turns through 12/31/2007.

At the holding company level, our 11.375% notes increased to $104.1 million at 3/31/06 from $101.3 million at 12/31/05. Thus total debt at the holding Company level was $644.5 million at 3/31/06 compared with $646.5 million at 12/31/05. We're on track to stay in compliance with our covenants which excludes the holding Company level indebtedness. And while we continue to make good headway on debt reduction this year, we are laser focused on bringing leverage down.

Our free cash flow, which we project will approximate $30 million this year, as well as proceeds from any asset disposition will be applied to reduce debt. We remain confident that we will comply with our current leverage covenant and project end of year leverage below six times. We believe we will stay under six times leverage through most of 2007 and possibly exceed six times in Q4 of '07 before we start seeing the even year revenue benefits in 2008 which will reduce our leverage further.

CapEx for the first quarter was $3 million and that compared to $2.9 million in Q1 of '05. We have about $48 million to spend on building out all of our remaining TV stations to full-power digital broadcasting and HD broadcasting capability over the next three years. For the remainder of 2006, we have budgeted about $19 million of additional CapEx, most of which is earmarked for DTV. Our first quarter 2006 corporate overhead costs were $3.2 million, which includes $400,000 of non-cash employee stock option expense in Q1.

As you'll recall, we adopted FAS 123R, the expensing of stock options, on January 1 of '06. On an annualized basis this year, we expect this amount to approximate $1.6 million or $0.06 per diluted share. In Q1 2005, corporate overhead totaled $3 million and did not include any employee stock option expense.

First-quarter 2006 EBITDA was a healthy $16.6 million or 29% ahead of last year. Free cash flow was $4.8 million or $0.17 per share for the 2006 first quarter compared with $100,000 in the quarter a year ago. Our guidance for the second quarter is net revenue of between $62.5 and $64 million or about 6.5 to 9% ahead of last year's second quarter.

Station operating expenses appear to be projected between 38.5 and 39.5 million which is 2.7% to 5.3% ahead of last year's second quarter. And corporate overhead is projected to run between $3.3 and $3.5 million. That concludes the financial review. I will now turn the call back to Perry for some final remarks before Q&A.

Thanks very much Matt. As we look back at Q1 and forward to the rest of the year, we see the continuation of several positive financial and operating trends for the Company. First of all, we expect strong continued gains in our core advertising and operating results driven by three primary factors -- our excellent local news programming, our success with consultative selling techniques that bring in new local advertisers to our business, and the strong local positions we established in our market.

In addition, Nexstar's focus on local ad sales and local news leadership in our markets are the primary factors in our expectations for continued leading revenue shares in most of our markets. We also will deliver attractive operating margins based on the duopoly structures we established in 17 of the 27 markets in which we operate.

On the ratings front, our local news programs are rated number one or number two in three-quarters of our markets and about one-third of all of our advertising revenue is derived from the commercials we sell during and adjacent to our local news broadcast. Selling into this strength provides numerous opportunities to develop marketing partnerships and sales promotions that we tailor to our local business customers. Ratings drive revenue and I am happy to report that our stations are performing well.

Second, we'll benefit from the strength in political ad spending, which will be even more prevalent in the back half of 2006. Based on the political contests that are presently evident, we project heavy political spending in several markets expected to benefit our stations in New York, Pennsylvania, Arkansas, Illinois, Missouri, and Texas.

For example, we're now seeing fairly substantial political money flowing through the state of Illinois with the contested primary for governor. And with primaries occurring at different times during this election cycle, we will have continued healthy year-over-year contributions through the middle of the year and substantial revenue generation as we move closer to the general election in November.

Third, continued contributions from the recently committed retransmission consent agreements the Nexstar has negotiated will come in the form of cash ad spend and cash payments. The overall value of this initiative is now nearly $50 million over the life of these agreements.

Fourth, debt reduction and lowering interest expense are corporate priorities and we obviously made notable progress in Q1. I would like to point out that our goal of moving down to around six times by the end of 2006 on a covenant basis is based strictly on organic cash flow growth. And to reemphasize what Matt said, any asset sales would further delever the Company.

We have several plans for driving further gains. In addition to benefiting throughout '06 from our 2005 positioning such as our joint operating agreements in Rochester and our hub operations in Abilene and Little Rock, we will also see the arrangement in Fort Smith, Arkansas where we are selling KFTA to Mission as both a strategic and financial move for the Company.

First, to [diversify] that market which will now have an NBC affiliate and a full-power local Fox station as well as Primetime local news. This would give advertisers another avenue to reach the market and to spend with us, and we will make this change without incurring any net additional debt.

We also will devote time and investment starting later this month in developing our plans for realizing the value of our content and market position through new media initiatives. And I'm delighted that we have recruited a gentleman by the name of Rajiv Lulla to Nexstar from the CBS Radio Station Group. Clearly there is a large untapped opportunity we see for broadcasters like Nexstar who are important local market players.

While our overall goal is to launch new media strategies that can leverage the Company's content, there is a compelling reason for us to move quickly on this front as on-line ad spending is the fastest-growing advertising segment. We feel importantly local businesses are now seeking ad and promotion packages that can blanket a market or turn a prospect searching the Internet into a customer.

With an already strong presence in the midsize markets in which we broadcast, we feel Nexstar is uniquely positioned as a media entity that can leverage our station portals and our rich local content with both advertisers and consumers. With all that said, let's go to your Q&A to address your specific areas of interest.

(OPERATOR INSTRUCTIONS). Bishop Cheen, Wachovia.

It's Bishop Cheen, but that's okay. Perry, how are you doing there? Thank you for the color. Two questions. The guidance in Q2, can you give us the trade and barter expense so it will help us model? That's usually something missing I think.

Yes, Bishop, this is Matt. How are you doing? We'll see you in a few weeks.

Yes indeed. Looking forward to it.

(indiscernible) The trade and barter number for Q2 that we're projecting, Bishop, would be about $4.5 million.

Okay. And would that be -- it's usually pretty on-line the trade and barter from the prior year. So that would be similar to Q1 '05?

I thought you said Q2. I'm sorry.

I'm sorry to Q2 '05.

Yes, it should be very comparable.

Yes, okay. And in that, if I heard you [right clearly] which was a good metric, the 10% I think you said up of total net revenue versus Q1 '04, did that include retrans dollars in -- start to come in Q1 '06?

Yes, Bishop, that was an apples-to-apples comparison of net revenue for the two even year first quarters. And obviously, the '06 would include the retrans, which is part of the driver of that metric.

Right. So -- that helps that double-digit gain in there -- whatever metric.

Absolutely.

Okay. And also, that did have political versus political in there, correct?

Yes it did.

And then last insidious question. And I know you guys keep insisting the debt reduction is your top priority and -- can you give us any color on your four or five targeted stations that you would like to monetize with the best bids and structure possible of -- where you are in that process?

Sure, Bishop. Matt and I obviously attended NAB and we had our real estate broker jackets on with the for sale sign out, and had a number of conversations with prospective buyers which then caused station visits that have happened subsequent to that. We continue to work the process.

And obviously, the focus for us is on A, making a deal that is accretive to our shareholders and good for the Company, but B, being absolutely rock-solid knowing that deal is going to stick, meaning that the financing is there. There's no questions about the ability to close. So we're -- we continued to work through the process and spend a good percentage of our time on it. We just don't have anything that we're ready to report yet.

Fair enough. Thank you for the color.

Victor Miller, Bear Stearns.

First of all, Perry, on auto in general, it seems that GM historically has had the "GM station" in a market. And they're changing their strategy a little bit and kind of spreading the money around the market a little bit more. And that probably benefits some of be non GM market -- non GM deal stations, so could you talk about that dynamic and how that's playing out in terms of whether you are GM deal station or not whether that's going to benefit you?

And second, the expense growth in high single digits for the quarter -- could you go through that, how much of non cash comps in there, how much that is just related to the topline growing, what you might be doing? Because that's a level that we haven't seen in some time despite the fact that you did do very well on your EBITDA line. Thanks.

Sure. I will speak to the automotive appointments and let Matt speak on the expense side. First of all, we were not singularly the GM deal station in many of our markets. For a number of reasons that deal may or may not have been attractive in terms of the amount of inventory it would have taken up versus competitive cost per points in the marketplace. But I think I would agree with your assumption that GM's moved to kind of abandon that and spread the money around, I think is probably going to be a net positive for us since we were not the GM deal station in the bulk of our markets.

So again, on the automotive side, we were very pleased to see that the local dealer spending. And what we hear from Main Street is that dealers are working toward spending their way out of the doldrums here. And the dealer spending on individual dealer basis was collectively up 8% while our factory and domestic spending was down. But again, the Toyota -- I'm sorry; the foreign spending led by Toyota was up rather substantially.

And again, we did see double-digit increases from Ford in the quarter in our universe of stations which offset the declines, primarily from Dodge and from General Motors. We also think now the General Motors has their agency situation kind of rectified, that money will begin to low back to the stations. But actually, General Motors on a percentage basis for the quarter for us performed better than Dodge, for example, which was -- had the highest rate of decline.

We project that continued decline in the automotive sector through the first half of the year. We see -- have no reason to think that that sector will turnaround, although we would note that the rate of declines on a percentage basis are less this year than they were at this time last year.

Okay.

With that, I will turn over to Matt on the expense line. I will say just by way our introduction that when we were in the throes, the early throes of fighting our retransmission consent battles in Q1 of last year, obviously we did pull in the reins on spending on the affected stations to try and preserve the integrity of the bottom line. So to some extent, we're up against that -- that metric in terms of the comps year-over-year.

Also, there is no question with our push on new business development, making up 9% of our revenues that drives the commission line higher, we're paying at higher commission on new to television revenue generation without agency commission because obviously, we're generating 100-cent dollars as opposed to $0.85 dollars after commissions, but Matt, you probably have some additional color on that.

Yes, hi Victor. How are you doing? Good being with you in the last few weeks.

Me too. I liked it.

So did we. The cost of sales has gone up double-digits in the year-over-year quarter, obviously driven by the gain that we secured in local and national revenues. For example, our local sales commission is up 10 or 11% in the year-over-year quarter and our national rep commission is up probably 15 or 16%. In addition to those items, we've incurred some additional fees related to renewing our NBC, CBS affiliations in the quarter and that's a few hundred thousand dollars. We booked some additional health insurance costs and that's mainly what it is, Victor.

Okay. And then how are we looking for the rest of the year, Perry, your costs?

I think embedded in the guidance Matt issued we're looking in the 5% range. Some of those costs in the first quarter were kind of onetime annualized things, particularly at the [rated to] insurance, some -- where we increased some accruals and reserves and things like that. But I think that the guidance Matt issue was in the 3 to 5% a range, and I think we feel comfortable we'll come in a range.

And that is probably, with the exception of sales commission which we are happy to pay if we're driving revenues, I think that is probably a good metric to think about through the balance of the year.

Jonathan Jacoby, Banc of America Securities.

Good morning. Thanks for taking the questions and I do apologize. I joined late here and you may have touched on some of these. The first question is, I'm just -- I am a little unsure what the strategic reason behind KFTA's sale from one sort of side of your [arm] to the other side. Is there any strategic or financial benefit to it? Right, because you can still have the same debt, I just have a hard time understanding that.

Second question, on the -- I look at Q2 expenses, it seems to be a little bit higher than I would have anticipated. Is some of this related to any of the new initiatives you're doing in new media? And then lastly, can you walk through sort of what the incremental benefit from these retrans benefits that you're getting in terms of -- versus what you were getting, because you were getting paid off the satellite radio operators. Did you take the 50, sort of what the total incremental dollars are?

Sure. Let me start with the KFTA situation. This was an opportunity for us to literally create a second set of advertising avails in the marketplace without acquiring another station, in that this station had operated -- the two stations that we purchased in northwest Arkansas initially basically operated as satellites of one another, distributing the signal around marketplace.

We're going to use digital multiplexing to basically do the same thing, so we will have full power stations on both sides of the market both the Fort Smith and the Fayetteville/Bentonville northwest Arkansas side of the marketplace that will be our distribution mechanism to the cable head-ends and to the satellite companies, full-power high definition digital signals. So that will be an upgraded service.

But the market was previously served by a low-power Fox station that did not do local news, and we convinced the folks at Fox that in combination with Mission Broadcasting, that Mission could provide a full-power Fox affiliate to the marketplace with local news provided by Nexstar. As you know, in this market there are not sufficient voices that would allow Nexstar to program a separate station.

So we basically are selling the station to Mission in an arm's-length transaction. The price was determined by an independent appraisal. We will then use the proceeds that Mission pays us for the [stick] to pay down debt, so it will be net debt neutral. But it basically gives us another set of inventory in the market to sell complementary to our NBC, so it will be creating another JSA/SSA relationship which will allow us to drive an economic benefit from this second station in the marketplace. When it was operated in a satellite relationship, there was no ancillary economic benefit.

So we thought it was a good strategic and financial move for the Company and an important bet on one of the fastest-growing markets in the country, being in the northwest Arkansas MSA, obviously which is all things Wal-Mart, being a very strategic move for us. And a bet on a fast-growing market and an opportunity to have another set of advertising avails to sell to the advertisers. Okay? On the expense side, I can let Matt speak to that.

The only thing I could really offer up to you on expense side, you -- one of the specifics you asked about was related to new media. And we have just as you know, we have hired a guy to come join us. He hasn't reported to work yet, but he's joining us in the middle of the quarter and there'll be some expenses related to Rajiv Lulla helping us figure our way into those initiatives.

In my judgment, Jonathan, that's going to be immaterial. So I don't want to mislead you on that. There is additional expenses that are related to the booking of non-cash employee stock options, which are now running a little over $400,000 a quarter. So that will be in here. That may not have made its way into a previous model that you had. And again, I am hoping that our cost of sales, if you will, continue to climb the way it did in Q1.

On your question of the incremental nature of the retrans revenue, we reported $3 million in total retrans connected revenue in the first quarter of this year. That's compared to $0.5 million in 2005. And obviously, as we were in a pitched battle with the cable operators, we received very little cable advertising for the year of 2005. So I think that looking at it 3 million versus 0.5 million will help you get your incremental number.

[Jon Cornright], Sandler Capital.

Couple of things. One real quick numbers question, what was network comp in the quarter, year-over-year and what do you think it will be this year year-over-year?

Jon, this is Matt. How are you doing? Network comp in the quarter was a little over $1 million and that's probably going to be about what it is per quarter this year.

And last year?

Last year network comp was a little under $2 million a quarter.

So it's basically 4 versus 8 type of thing?

That is a good comparison.

Secondly, Perry, if you take -- this is kind of a touchy-feely question. If you take out some of these cross currents that are always there -- political, Olympics, retransmission up, network comp down, what are we really trending at in advertising? Is it flattish? Is it low single digits? Is it mid single digits? What's the going trend that you feel?

It's hard to quantify. Our Olympic revenue was between $4 and $5 million. And we think that probably a third to half of that was incremental because it displaces late news, it displaces ER, it displaces all of that. So even if you lay -- took $2 million off of the topline 11% growth, we still showed kind of high single digit growth year-over-year.

So -- and if you look at the guidance for second quarter, it's in that 7, 6.5 to 9, 7 to 9 range. So I think that we're kind of in that kind of an environment and that may be higher than you hear reported from our peer group. But again, we're against comps in markets where we fought the retrans battle, so those were kind of artificially depressed numbers for 2005. But you know, I still think we're probably in a mid to high single digit environment right now.

And the gratifying thing for us is to look at the categories and for fast food to be up 12% and 16 of our 25 categories to be up substantially, you know Telecom was up 90% in the quarter, insurance 60%, medical up 18% and -- so strength kind of right on down. The grocery stores up 23% for the quarter and obviously, cable advertising was up 62% for the quarter. We see kind of a breadth of advertising, but I think it probably all equates, as we feel it in our universe right now, kind of a mid to high single digit organic kind of growth situation.

You said the political in the quarter -- I missed that -- was what?

Jon, political in the quarter was 1.8 million.

Versus?

Versus about 300,000 last year.

Let's see -- just give me a minute here. If political was up 1.5 million, right? And you said Olympics was up -- the incremental was up maybe 2, and the retransmission increment was -- including advertising, was like 2.5, I don't see much advertising growth. I got 5 -- I got $6 million in those three items -- Olympics, elections, and the incremental retrans, that is $6 million and you were up 6.5 million for the quarter.

I don't know that I have a good answer for that, Jon. I think from our perspective, all of those things add into the total. And we do see underlying growth and strength in categories that add-in to these totals. But obviously, the retrans for us was a calculated -- you've also got to take the $2 million -- $1 million in net comp that was down -- (multiple speakers) so you got to add that back in. So we -- I would still maintain we are in a mid single digit ad growth environment for our Company.

Okay. Thanks for your help.

(OPERATOR INSTRUCTIONS). David Bank, RBC Capital Markets.

A couple of questions. I guess the first one was can you talk about the political -- I'm sorry, the retrans consent number? Is that a pretty good run rate you think for 2Q, the incremental 2.5 or does it ramp up through the quarter? And do you expect to see more or less I guess during 2Q? And the second question is, can you talk a little bit about a year ago in 1Q and 2Q, how much do you think [polling] -- going dark on a bunch of those cable stations or cable systems, how much do you it cost you a year ago in terms of advertising?

David, this is Matt. How are you doing? Related to retrans, I think the $2 million in cash comp that we received in Q1 of this year, you can straight line that for each of the four quarters of this year. And I think that the $1 million in ad spend, which may or may not have been here to that degree previously, there's some discussion about is that really incremental or not, that is included in our local number. And I think that's a fine run rate as well for that part of the equation.

Okay. And the second question?

Yes, a year ago, it's hard to tell. The only way we can really come up with a number, David, is to say okay, pace these stations and percent of budget [of] percent of final against other like stations, like NBC stations or CBS stations or stations in these size markets. And for the year, we estimated somewhere in the neighborhood of about $4 million of revenue that was probably forgone due to the retrans ad revenue.

We'll never know what people's intentions were, but if you just take -- try and plot the universes and say okay, if these achieved the same percentage last year that non-affected stations did, what's the delta? And it's about $4 million, so -- and then obviously, toward the end of the year, we had weather affecting several of our stations in Texas and Louisiana from Hurricanes Katrina and Rita. And probably toward the end of the year we would estimate that impact to be at least $1 million of ad revenue that was lost.

Got it. Okay thanks guys.

At this time I'd like to turn the call back over to Mr. Sook for any additional or closing remarks.

Thank you all for joining us for our Q1 report. I appreciate your time and interest and attendance today and we will look forward to talking to you about Q2 probably in late July or early August. Thank you.

Once again that does conclude today's conference. You may now disconnect.