Nexstar Media Group Inc (NXST) 2006 Q4 法說會逐字稿

Good day, everyone. Welcome to the Nexstar fourth 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 and Exchange Act of 1934. The Company's future financial conditions and results of operations, as well as a forward-looking comments made during this conference call, are made only as 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 reflective of changes in circumstances.

And 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, Kim. And good morning, everyone. Thank you for joining us today as we review and discuss our 2006 fourth quarter operating results and our initial expectations for 2007. Matt Devine, our Chief Financial Officer, is also here this morning.

To put it simply, Nexstar had an outstanding fourth quarter and I'm confident that our results and our growth, not only in 4Q but throughout 2006, were best of the industry. Our fourth quarter marked another period of record net revenue broadcast cash flow, EBITDA, free cash flow and income from operations. The impressive financial performance highlights the value of our core broadcasting strategies of building strong local news franchises, our ability to provide sales, news and other services for a second station in over 60% of our markets and our success in developing new ancillary revenue streams that are contributing to the operating results that we are achieving.

In addition to the record operating results during the quarter, we also significantly reduced our leverage and closed on an accretive acquisition that is complimentary to our existing Pennsylvania cluster. We also began the roll-out of our new media initiative, as we launched local market website portals as part of our strategy to expand the use of the Company's proprietary local content while developing additional revenue sources.

I like to tell our people, 'don't confuse what we do with how we do it.' And by that I mean to achieve success in this evolving age of multi-platform distribution and consumer opportunities, we must change the way that we think. What we do is that Nexstar provides advertising opportunities and solutions for local businesses and we provide local content to consumers. Broadcast television is just one of the ways in which we do what we do and our people are now understand this. Nexstar management is focused on expanding our opportunities through multi-platform growth and we believe that our fourth quarter and full year results demonstrate this.

Our reported net revenue for the fourth quarter of 2006 grew 23.9% to $77.2 million, which was well ahead of our guidance for 14% to 18.8% top line growth. Upside in Q4 came from a $15.8 million increase in political advertising compared to last year, and the ongoing benefits of retransmission consent revenue gains and gains in our core ad sales, particularly on the local side. New local direct billing totaled approximately $4.4 million during the quarter and this was 26% ahead of what we did in Q4 of '05. So we are very pleased with the success that we are realizing from our continued initiatives and focus on bringing new advertisers to the medium.

I also think we did a great job in driving yield from our inventory and we recorded record quarterly operating income, BCF and EBITDA margins. Our fourth quarter BCF, EBITDA and free cash flow increases, up 60%, 68% and a 133%, respectively, clearly highlight the significant leverage in our operating model, our ability to manage costs and the value of our portfolio diversification.

The mix of fourth quarter core revenue was 35% NBC, 25% CBS, 24% FOX, and 16% ABC. As far as category results, in the fourth quarter, in addition to the rise in political spending, six of our top ten core categories were up compared to the prior year, including paid programming, furniture, medical/health, insurance, telecom and entertainment. These gains overcame the decline in automotive which accounted for 22.4% of our core ad revenue in the fourth quarter of '06, compared with 24.5% in the fourth quarter of '05.

The first quarter of 2007 is going against '06 comps, which included approximately $4 million in Olympic revenue as well as $1.9 million of political advertising. And our forecast for basically flat net revenue begins to reflect our goal of overcoming the odd-even year effect through our revenue diversification efforts, including our retransmission consent agreement and our launch of new media platforms.

With all of that said, I will turn the call over to Matt Devine to provide some additional perspectives on our financials. Matt?

Thanks, Perry. I think you can see from this morning's release that Nexstar continues to outperform our industry, produce record-setting results, generate solid year-over-year gains and very importantly, reduce leverage. With respect to our P&L; net revenue for the quarter ended 12-31-06 grew 23.9% to $77.2 million, up from $62.3 million in the fourth quarter of last year. Broadcast cash flow rose 59.7% to $33.8 million in the fourth quarter of '06, compared with $21.1 million in the fourth quarter of last year.

Income from operations for the three months ended December 31, '06 totaled $18.9 million, compared with $6.9 million in the fourth quarter of last year. The Company generated a 43.7% BCF margin in the quarter versus a 33.9% BCF margin in the comparable quarter of last year.

$2.4 million of cash subscriber retransmission revenue was generated in the fourth quarter of 2006 versus $1 million in the fourth quarter of 2005. This incremental revenue more than offset the combined $296,000 decline in network comp and trade and barter in the year-over-year quarter.

Our fourth quarter 2006 corporate overhead costs were $4.5 million, which includes $300,000 of non-cash employee stock option expense. In the fourth quarter of last year, corporate overhead totaled $3.7 million and did not include any employee stock option expense. As you will recall, we adopted FAS 123, the expensing of stock options, on January 1 of this year. We recorded a total of $1.6 million or $0.06 per diluted share of employee stock option for the year.

Fourth quarter 2006 EBITDA was a record $29.3 million, or 67.9% ahead of last year. Free cash flow or income from operations plus D&A and broadcast rights, loss on asset disposal net and non-cash stock option expense, less payments for broadcast rights, cash interest expense, Cap Ex and net cash income taxes was $12.4 million or $0.44 a share for the fourth quarter of this year, compared to $5.3 million or $0.19 a share in the year ago quarter.

As far as full year results go, with record results in each quarter, 2006 on the whole -- 2006 on the whole was a record year. For 2006, net revenue rose 15.8% to $265.2 million. In addition, gross local and national advertising revenues increased by 6.4% in 2006 compared with 2005. Retransmission consent revenues, which consisted of cash subscription payments of $8.7 million and advertising spending of $5 million, totaled $13.7 million in 2006, compared with $2.8 million last year. You will recall earlier in 2006, we forecasted $12 million of total retransmission revenues for the year.

Income from operations in 2006 totaled $45.9 million, compared with $18.6 million in the same period of 2005. The Company recorded a basic and diluted net loss per share of $0.32 and $1.72 for the years ended 12-31-2006 and '05, respectively. Full year 2006 broadcast cash flow rose 37.6% to $103.1 million. EBITDA totaled $88.5 million for 2006, a 40% increase over 2005, while free cash flow rose 93.9% to $27.5 million in 2006, up from $14.2 million last year.

Some key balance sheet metrics. Cash on hand at 12-31-2006 was $11.2 million, compared with $13.5 million at 12-31-05.

Our outstanding bank term loan was $370.1 million, compared with $347.6 million at December 31, '05 and reflects the borrowings at the end of the year to complete the accretive acquisition of WTAJ and WLYH. Our 7% notes totaled $197.8 million at the end of the year, resulting in operating Company net debt of $556.7 million at year end.

As we promised, leverage continued to decline. We projected that the Company's total leverage of outstanding debt to EBITDA at the operating Company level would approach six times at year end. Leverage at year end, as defined in our October 2005 amended senior credit facilities, actually fell to 5.7 times, down from 6.7 times at the end of the third quarter of '06, and down from 8.3 times at year end '05. The October 2005 amended senior credit facility covenants provide for total leverage covenant of seven times through 12-31 of '07.

We believe that the 5.7 time leverage ratio at 12-31-06 warrants some notice, as it is inclusive of the borrowings to complete the WTAJ acquisition. Exclusive of closing adjustments, WTAJ was acquired for $55.8 million and had pro forma cash flow in '06 of $7.1 million. Although 2007 is a non-political year, I believe that with the addition of WTAJ, along with the retrans and new media contributions, we should end the year with leverage of about six times at the operating Company level. So we remain very comfortable with our ability to comply with our covenants.

At the holding Company level, our 11 and 3/8% notes total $113.2 million at 12-31-06, compared with $110.1 million at September 30 of '06. Thus total debt at the holding Company was $681.1 million at 12-31-06, compared with $646.5 million at December 31, '05. This represents leverage of 7.1 times at the hold co.

Cap Ex for the fourth quarter was $7.6 million, and was $3.4 million in the year ago period. Most of the Company's capital expenditures are related to upgrading stations to full power digital broadcasting capabilities. We have about $34 million to spend on building out all of our remaining TV stations to full powered digital and HD broadcasting capabilities over the next two years. Total Cap Ex plan -- in 2006 was approximately $24.4 million. And we plan on Cap Ex spending in '07 of approximately $15 million, with a little more than half of this dedicated to HD.

Our guidance for the quarter is net revenue between $59 and $60.5 million, station operating expenses of between $40 and $41 million, and corporate overhead of between $3.3 and $3.6 million. That concludes the financial review.

I will now turn the call back to Perry for some final remarks before Q&A.

All right, thanks very much, Matt. As I touched earlier on the call, Nexstar is intent on the leading the evolution of the industry status quo and getting our team to work outside the box to leverage the value of our own core assets. This focus continues to create new opportunities for our shareholders, as evidenced by our 17 virtual duopolies, our leading the charge over two years ago in developing the retrans model that the industry has now embraced, and more recently, our taking of a measured and differentiated approach to new media that is delivering early success for us. Strategically, I think that Nexstar is at its best when we are pioneering these innovations. We were a consolidator of the mid-sized markets, we are a local news leader in a majority of our markets and we successfully develop new revenue streams.

Our retransmission consent negotiations yielded agreements from 150 cable providers, both satellite companies and all of the overbuilders in our markets. Now, since being launched late in '06, our new media initiatives are achieving early success and we are on track for a low to mid seven figure revenue contribution from this area in 2007, that we were confident will grow at an expedited pace over time.

In leveraging our platform, we see further upside on the retrans front, as we benefit not only from annual escalators but also from layering existing agreements into markets where the satellite companies are now initiating local-into-local service, but also from structuring new deals with the telcos as they begin offering service in our market and from our second round of negotiation with the cable operators. Our first deals were largely three years in length and were concluded in late '05. So by mid next year, we will be back in discussions about the value of local broadcast station programming carried on cable channels in our marketplaces. And we were confident that this high margin revenue stream will grow nicely as a result.

Our attention throughout 2007 will be on our new media initiatives. We are going far beyond typical local television station website with our efforts. And I think we have developed a viable community portal approach, where we can provide a community of communities, leveraging the assets of the television station. We are evolving our platform to a much higher level of sophistication with interact development and the ability to capture viewer-generated content, including video.

We developed over 35 different revenue modules and the transition of our TV station websites into community portals is progressing nicely throughout the first quarter of '07. We now have eight markets up with the entire platform scheduled to be done before the end of the second quarter. We have every confidence that local television will be the catalyst in a multimedia, multi-platform world. I believe we have the preferred programming across all screens; we have video, we're local, and we have television stations that are a always on, 24/7 megaphone that can drive people to all of our multi-platform offerings.

We were very disciplined in our acquisition approach and we were delighted to have completed the WTAJ acquisition at the end of fourth quarter. In our first acquisition in over two years, the transaction was both opportunistic and strategic, as well as accretive. It's a great addition to our existing cluster and we surround this market everywhere from Hagerstown to the south, Erie to the north, Wilkes-Barre/Scranton to the east. And the purchase price multiple, as Matt mentioned, was eight times the 2006 broadcast cash flow.

WTAJ is a top-ranked station in its marketplace in terms of audience share, revenue share, and produces a ton of local news content which we can leverage across multiple platforms. It's number one in every day part, where it competes in local news. Again, not only is the acquisition accretive and strategic, but from a Cap Ex perspective, the digital upgrade HD build-out is done, so there will be minimal Cap Ex required to maintain and grow this particular local market platform in the future.

Our success with innovation is serving us well and the results throughout 2006 and our initial outlook for 2007 underscore this and our goals to consistently deliver long-term growth and value for shareholders.

With that said, let's go to your questions and answers and address your specific areas of interest. Kim, I'll turn it back over to you.

Thank you. [OPERATOR INSTRUCTIONS] Our first question today is from Victor Miller from Bear Stearns.

Good morning, thanks for taking the question. Perry, could you talk a little bit about what you are seeing in the auto category for first quarter and second quarter?

Secondly, talk about -- philosophically, you have always been probably tighter than most companies on the expense line. Maybe talk about how you generally see that in '07? Thank you.

Sure. Victor, we saw a double-digit decline in automotive in the fourth quarter -- almost a double-digit decline. We were down about 8%. We were seeing similar results in the first quarter relating to the pacing and business on books. So that basically -- we contemplated no change in the fundamentals of the automotive business, at least through the first half of the year, which is -- we are envisioning, in our business plan, a probably high single-digit decline in automotive. Having said that, when I look at our revenue in the books for January and February, we were seeing single-digit increases in our core revenue over the prior year. And there are other -- there is other category strength that seems to be backfilling the weakness in automotive.

As it relates to operating expenses; other than investing in our new media initiative, the remainder of our station cash expenses will be basically flat to slightly down with 2006.

Thank you.

Moving on, we will take our next question from Bishop Cheen from Wachovia. I apologize, Just one moment. Mr. Cheen, please go ahead.

Hi, can you hear me? -- as the Verizon guy says.

We can hear you, caller.

Okay. That's great. Thanks for taking the question. Just a couple of things so I can get the modeling right. Let me billboard it -- they are quick questions. One, on the leverage adjustment; I think in your credit facility, again, you have some things that are carved out, so as we get to the six times goal for the end of the year, on an absolute level it's probably higher. Am I correct on that? Because you are defining it by the credit agreement.

Secondly, can you tell me what the availability is, as we enter the year on your credit agreement?

Third, in the existing retrans agreements that you will be renegotiating next year, are there escalators in -- any significant escalators that would make us think that the retrans for '07 and for '08 on the books could be higher?

And last, just give us any of your current thinking about potential asset sales.

Bishop, this is Matt. How are you?

I'm good. How are you, Matt?

Doing great. Let me see if I can hit all of these items and Perry can jump in where I leave some holes. As far as the credit facility, first of all, we have about $60 million available to us today under our credit facility. You're right to say that the way the banks define the calculation of EBITDA is slightly different than the way it appears on a GAAP basis, If you will. EBITDA isn't even a GAAP term. What basically what they do is they allow companies like us, as you know, Bishop, to not be penalized on non-cash type of operating expense items. So, for example, the $1.6 million in non-stock employee option expense does not count against us in terms of our leverage ratio. If I were to sum all of that up, and give you a swag dollar amount, I would say that that swag dollar amount is probably -- maybe $2 to $2.5 million that represents non-cash expenses that the bank gives all of us broadcasters grace on.

Thanks. That's very helpful. And then just retrans escalators and any thinking about asset sales?

Bishop, on retrans, there are annual escalators in our existing contracts that can be percentage increases, they can be $0.01 a sub, they go as high $0.05 a sub. There will be increases in the retrans revenue line this year. Also at this point, there are a half a dozen markets of ours where the satellite companies have not yet initiated local-into-local service, and as soon as they do and consumers take that service, we begin to flow per subscriber revenue from each of those markets. And every indication is that additional markets will be added here in 2007. We do have some contracts that are up in the middle of '08. And again, we think that they will be an opportunity to enhance our yield from those agreements through 2008. But the bulk of our agreements will end at the end of '08 and into '09 and that's when we think you can project a nice increase in that revenue line.

Great.

And as to asset sales, Matt and I confer on that on a regular basis. And all I can say is, he is in continuing discussions with various separate parties and as soon as we have something to announce, we will put it out there.

Thank you, Perry, thank you, Matt.

You're welcome, Bishop.

And moving on is [Jordan Turamo] from Brigade Capital.

Hi, how are you? One housekeeping thing; can you split up what is drawn on the revolver now or at year end? And what the term is outstanding? Just trying to understand the makeup here.

I will have to dig for a piece of paper, Jordan.

All right. And then beyond that, your indication of year end '07 leverage being six times, and then you clarified a little bit with Bishop's question, indicates you don't seem to expect much erosion in '07 BCF or EBITDA versus '06. And I just want to -- obviously, you have the acquisition and retrans, is it just that you have -- an new media, is that what's going on? You did $62 million of EBITDA in '05, and I'm not sure that's comparable. I want to understand what kind of drop we can be expecting kind of '07 versus '06, obviously given it's non-political?

Sure, Jordan. First of all, the only addition is that the WTAJ acquisition from '05 to '07. But our job is not really to tell investors what revenue is not returning in an odd year. Our job is to be in a position -- when you ask, did you grow the revenues this year over last year, is to be in a position to say yes every time. And that's why we have worked so hard to establish the distribution-based revenue stream and why we are working incredibly hard to establish a bonafied new revenue stream and a revenue stream from our new media platform. Literally, when you look at '07 versus '05, you are going to see, in our view, pretty substantial increases, the bulk of which driven organically by retrans and by new media, offset by a slight decline in network compensation and trade and barter revenue. The bulk of that growth is manufactured growth from our new revenue streams.

Okay. So again, just looking at the leverage number you threw out there, you don't expect the kind of volatility that you have in the past, not even close, it seems like from -- versus the up and downs of year's past, political and non-political.

That's correct, Jordan. By the way, that information you asked about, how much was drawn on the revolver; it's about $38 million drawn on a $99.5 million revolver.

Right. And the term is where, now?

$332 million is what it looks like.

All right.Thank you.

You're welcome.

We will take our next question from David Bank from RBC Capital Markets.

Good morning. This is Ryan in for David. Thanks for taking the question. Just was wondering, given that the presidential election process has gotten started a lot earlier this time around relative to past elections, are you seeing any impact in the first quarter? And how would you expect that to impact your political in 2007? Thanks.

Sure, that's a good question. I can confidently tell you that we have political on the books for the first quarter already. It's a six figure amount. In addition to the issue advertising and political advertising from presidential candidates that is starting to play out. We also have gubernatorial races in Kentucky and Louisiana that will impact our Evansville and Shreveport and Monroe stations in 2007. There is also a significant possibility that Texas and Illinois will move their 2008 primaries from mid year to earlier in the year -- as early as the first week of February. We think if that happens, the political spend in the literally -- probably after Labor Day of 2007, will probably be beyond what we would typically experience as odd year over odd year growth.

And as we look ahead toward 2008, we have ten U.S. senate races in '08 versus eight in 2006, plus the overlay of the presidential. We will have the 36 house races that we have every two years. And then on a gubernatorial basis in '08, we will have governor races in Indiana, Missouri, West Virginia, which will impact our Hagerstown station, and Montana. So I think that from our perspective, even internally, we would probably bet the over on the political projection that we have developed for ourselves. And given the early evidence -- would indicate that this probably will be an odd year political spend unlike any other odd year in the past.

Great. Thanks very much.

Moving on, we have a question from Edward Atorino from Benchmark.

I was going to ask about the political. I also have a question -- could you sort of review what retransmission deals are up in '07, if any? Also, you want to go into what is going on regarding the phone companies?

Sure. We have no retransmission agreements of any consequence that are up in 2007. And I'm sorry, what was -- ?

You mentioned the phone companies. Talk about what's going on with the phone companies. Is this sort of an '08, '09 new stream? Or could something develop there sooner?

We have been contacted by one of the phone companies that is attempting -- or planned entry into one of our markets in 2007. But I think you are right. As far as the phone company contribution to our retrans revenue stream, it will be probably an '08 event before it begins a significant contributor.

Thanks very much.

[OPERATOR INSTRUCTIONS] We will take a question from Lance Vitanza from Concordia.

Hi, thanks for taking the call. The first question I had is; in the Q4 data, do you include the operations of WTAJ?

No, we don't, Lance.

Okay. So then we should see, all else equal -- then we'll see a little bit of a little bump going forward. That will be picked up in -- starting January one, I guess.

That's correct, Lance.

Can you break out the local and national ad sales in the -- for the full year? Do you have that available?

I do. And I will be happy to give that to you, though we typically don't. Local revenue for full year '06 totaled a little over $164 million. And gross national revenue totaled about $71.6 million.

And those are both ex-political, correct?

That's correct.

And those are gross, right?

Yes, those are gross, they are ex-political. So the local number would have been up about 8% year-over-year and the national about 3%.

Okay, that's terrific. What about network comp, do you have that as well?

I sure do. But again, we don't typically do this, Lance. Yes, network comp for the year was $4.2 million versus $6.6 last year.

Okay. Thank you. And then my question regarding the numbers -- and I think I read in the release that local plus national was up six some-odd percent, which is really, I think, very encouraging. Do you think you can maintain that pace, more or less, into '07?

Well, I tell you that -- certainly if I look at January, local was up in that range, national lagging a little bit behind. But we issued guidance, which is fairly flattish for the year -- I'm sorry, for the first quarter. And that does take into effect our distribution revenue stream, slight decline -- much less of a decline in network comp in '07 over '06 versus '06 and '05, and trade and barter revenue. As we continue to skinny that down, we'll probably decline on both the revenue and the expense side. We are seeing single-digit organic growth in the portfolio on the add-spend side and that will be enhanced by the other revenue streams that will comprise our net revenue number, with the exception of net comp and trade and barter, as I mentioned.

Terrific. And last question, could you repeat what you said -- on the new media side, I think you said a low to mid seven figure -- and I lost the rest. Was that a revenue number for '07 or -- ?

Yes.

And then -- okay, great. Thanks very much.

You're welcome.

And I have no further questions at this time. [OPERATOR INSTRUCTIONS] We will take a follow-up question from Lance Vitanza from Concordia.

Just one follow-up on the telco TV deals. I heard you, you said you really aren't looking for much until '08 there. But so I'm clear; do you actually have deals in place with them and it's just a question of how long it takes them to ramp up their subscribers? Or do you need to go out and negotiate deals with them?

We do not have deals. They have literally just approached us in one market, at this point, where they plan to roll out service in 2008. Our intent would be to, as we have done with the MSOs and the satellite providers, is to develop a master agreement that would cover that market and all future markets. So it would basically be a templated revenue add as they entered markets and started to build up a subscriber base.

I want to say that some other broadcasters have taken that approach. Have you consciously made the decision to hold off on having these conversations with them? Or is this -- just wasn't important because they weren't in your markets?

Well, I will just say that we have never taken the first deal offered by the satellite, the cable or the telephone companies. So we have a very nice business in each of our markets. And we feel that they do not have a complete business without our signals in these local markets and our local content. So we are not moving fast to make a deal for the sake of making a deal to putting out a press release. We want to make sure that these are good deals. In the case of the satellite companies, we negotiated for six months before we made a deal and -- because we wanted to get a deal that was to our liking. I think our cable negotiations have been very well-publicized. We will take the same path. We are in discussions. There is a bid and an ask spread that we would expect would close or the telephone company would have a decidedly inferior offering for the local consumers in the marketplace. We will continue on a deliberate pace, just like we have with cable and satellite thus far.

You probably saw the announcement today, Lynn announced a deal with Cox. Have you heard anything -- just any kind of scuttlebutt -- on what that deal might look like?

No, have I not.

Thanks, guys.

And there are no further questions in the queue. Mr. Sook, I will turn the conference back over to you for additional or closing remarks.

All right, Kim. Thank you very much. Thanks to everyone for joining us today. And we look forward to reporting in a couple of months our first quarter results, as further evidence of our aim and ambition to grow revenues in the face of the political and Olympic absence in an odd year, as our goal is to try to eliminate, over time, any reference to odd-even year comparisons and to grow our revenue in every year that we do business. We thank you very much for joining us and look forward to talking to further down the road in 2007.

And that does conclude our conference call today. Thank you all for your participation.