Nexstar Media Group Inc (NXST) 2008 Q3 法說會逐字稿

Good day, and welcome to the Nexstar Broadcasting Group's 2008 third quarter conference call. Today's call is being recorded. All statements and comments made by management during this conference, 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 21-A of the Securities and Exchange Act of 1934.

The Company's future financial conditions and results of operations, as well as forward-looking statements, are subject to change. The forward-looking statements and comments made during the conference call are made only as of the date of today's conference call. Management will also be discussing non-GAAP information during this call. In compliance with Regulation G, reconciliation of this nonGAAP information to GAAP measurements are included in today's new announcement. The Company does not undertake any obligation to update forward-looking statements reflective of change in circumstances.

At this time, I'd like to turn the conference over to your host, Nexstar President and CEO, Mr. Perry Sook. Mr. Sook, please go ahead.

Thank you very much, Operator. Good morning, everyone. Matt Devine, our Chief Financial Officer, is on the call with me today. Thank you for joining us this morning to discuss Nexstar's 2008 third quarter operating results. After Matt and I complete our brief remarks, we'll open the call up for Q&A. During the third quarter, Nexstar and its stations continued to perform very well in the face of a challenging economy and a difficult advertising market. Nexstar's third quarter operating results include record revenue, BCF, and EBITDA, which reflect strong political contributions and significant e-media and retransmission consent revenue growth. Combined, these factors resulted in total net revenue growth of 9%, which demonstrates that we continue to outpace our industry. What's even more impressive in my view is that we posted these results in spite of the effects of Hurricane Ike, which disrupted the Operations of our Southeast Texas and Louisiana properties for much of the month of September.

Overall, Nexstar's nearly 10-fold increase in political revenue, 63% increase in e-media revenue, 38% increase in retransmission-consent revenue, and revenue contributions related to the 2008 Summer Olympics broadcasts, enabled Nexstar to overcome the impacts of the current economy, as well as certain acts of nature. In addition, our television stations are performing well from an audience perspective, with our leading local news programming being the foundation for our political revenue growth. Our stations are in great competitive shape, even during these trying times; and our local sales teams are doing a solid job of developing marketing solutions and partnerships with local businesses, and demonstrating how and why our platform delivers results. Furthermore, during the quarter we made considerable progress in strengthening and expanding our digital media platform, and our round two retransmission-consent negotiations progressed on plan with the announced DirecTV and AT&T agreements. Given the current environment, we're focused on controlling our costs while continuing to make strategic investments in our e-media platform and working to complete our required digital buildout.

Now let me review some of the third quarter highlights. New to television local direct billing totaled $3.7 million for the third quarter. Quarterly retransmission-consent revenues of 6.2 million were also nicely ahead of Q2 '08 levels of 4.5 million. E-media revenue of 2.7 million exceeded 1.6 million in the third quarter of 2007. Year-to-date, we've generated over 7.3 million of e-media revenue already, and that surpasses the 5.1 million recorded for the full year of 2007. For the full year of 2008, we fully expect to double last year's e-media total revenue. Our broadcast cash flow totaled 27.3 million in the third quarter of 2008, up 20% from 22.8 million in the third quarter of 2007. EBITDA grew 17.2% to 23.1 million, up from 19.7 million in the third quarter of 2007. As it relates to categories, our Top 10 category billing decreased 6%. Auto was down 11%, fast food down 5.3%. Four of our Top 10 categories were up year-over-year -- legal was up 16.6%, retail ahead 14%, telecom rising 11% and medical posting gains of roughly 3%.

During the quarter, our automotive spending comprised approximately 24 million of our core advertising, down from 25.8% in the third quarter of 2007. Factory and dealer group spending was down 18% in the quarter, deepening from a 15% decline in Q2; however, the bright spot in auto was that our local dealership advertising increased 5% in the third quarter. After Matt's financial review, I'll come back and run through our outlook and strategies that we believe will result in significant free cash flow in 2009. But for now, let me turn the call over to Matt Devine for additional detail on our Q3 financials. Matt?

Thanks, Perry. I'd like to review some of the key year-over-year Q3 and year-to-date line items on the Company's income statement and balance sheet. Before we do that, as we stated in this morning's press release, in the third quarter of 2008, Nexstar recorded an impairment charge as required by SFAS 142. The events that triggered the need for the impairment analysis at September 30 included a decline of the price of the Company's Class A common stock, the decline in overall economic conditions, and the decline in advertising revenue at some of the Company's television stations.

This testing resulted in a $48.5 million non-cash impairment charge in the third quarter, breaking down as follows: 27.8 million charged attributable to goodwill; and 19.7 million attributable to broadcast licenses. The remaining $1 million is charged to network affiliation agreements. I think we've seen impairment charges taken by most of the TV broadcasters at this point. For the quarter, total gross revenues of 78.8 million was up 15.2% versus the third quarter of '07. Net revenue of 70.3 million was up 9% versus the year ago quarter. Operating expenses, 58.4 million versus 56.1 million in the year ago quarter, up 4.1%. Broadcast cash flow of 27.3 million is up 19.7% in the year ago quarter. EBITDA of 23.1 million, up versus 19.7 million, up 17.3%. Gross local revenues, 42.4 million, compares favorably to 41.3 million in the year ago quarter. Gross national revenues of 16.4 is down 11.8% versus 18.6 million in the year ago third quarter. Gross political revenues of 7.8 versus 800,000 in the year ago third quarter. E-media revenues of 2.7 is up a $1 million versus 1.7 in the year ago third quarter.

Cash retransmission revenues of 3.9 compare favorably to 3.1 in the year ago third quarter. Total retrans revenues of 6.2 million in this year's third quarter versus last year's 4.5 million. Network comp was down 200,000 in the year ago -- compared with the year ago quarter to $900,000 this year; and trade and barter revenues were down also $200, 00 -- 4.3 million in this year's third quarter versus 4.5 million in last year's third quarter. The Company generated a 38.9% BCF margin in this year's third quarter, up from 35.3% in last year's third quarter. As Perry noted, the growth in political, retrans revenue, revenue derived from the e-media platform, along with about $4 million attributable to the Summer Olympics, overcame declines in national advertising, network comp and trade and barter. Nexstar's third quarter 2008 corporate overhead costs totaled $4.2 million and included $.5 million of non-cash employee stock option expense. On a year-to-date basis, $1.8 million has been expensed as non-cash stock option expense. Also during this quarter, we also incurred some additional one-time charges related to severance payments, to some terminated employees, and some increased professional fees. Free cash flow was $3.8 million in the third quarter of '08 compared with 6.6 million in the year ago quarter.

The decline primarily reflects planned one-time CapEx for digital TV upgrades, which amounted to approximately $10 million in this year's third quarter compared with approximately $3.5 million in the comparable period of 2007. Excluding the HDTV CapEx, free cash flow was $13.7 million for the quarter. Capital Expenditures for digital conversions were $13.5 million through the first nine months of the year, and the Company's total year-to-date CapEx spending through September 30, '08 is $18.1 million. With most of our spending on digital TV upgrades being completed this year, we will be well-positioned to generate free cash flow in 2009. The HDTV CapEx for 2008 will be under $30 million, or approximately $1 per outstanding share. During the first nine months of 2008, gross revenues came in at $229.2 million, up 4.9% compared to the first nine months of last year. Net revenue of $204.6 million was up 4.8% versus last year. Operating expenses of 176.8 million is up 5.7% versus the first nine months of last year. Broadcast cash flow came in at $77 million, up 9.5% compared to last year. EBITDA of $66 million compared favorably to last year -- it was up 8.2%.

Gross local revenue of $130 million is up 1% compared with last year. Gross national of $50.3 million is down 9% versus the first nine months of last year. Obviously, gross political revenue is up very nicely, 13.4 versus 2.5 million for the first nine months of last year. E-media revenues of 7.3 million compare very favorably to the $2.8 million we recorded in the first nine months of last year. Cash retrans of 10.5 is up 20.7% compared to $8.7 million in the first nine months of last year. Total retrans of 15.5 compare very favorably to the 12.6 million we posted in the first nine of last year. Network comp of 2.6 is down versus the 3.4 we recorded last year; and trade and barter of 13.3 this year is down versus the 15.2 we recorded in the first nine months of last year.

Turning to the balance sheet, cash on hand at September 30, '08 was $11.6 million, compares with 16.2 million at year-end '07. Our outstanding bank debt was $354 million at 9/30/08, compared with $356.7 million at year-end of '07. Our 7% notes totaled $198.2 million at September 30 of this year. Total leverage at September 30 '08 was 6.55 times. The October 2005 amended senior credit facility covenants provide for a total leverage covenant of 6.75 times through September 30 of this year. At the holding Company level, our fully accretive 11 3/8% notes, which became cash pay effective April 1 of this year, totaled $77.8 million at September 30 of '08, which reflects a redemption of $5.3 million of the notes in this September. Nexstar funded its principal payment with cash generated from operations. The $77.8 million outstanding notes are included in our total leverage calculation under our senior credit facility, as they are cash pay.

Our 12% senior subordinated pick notes issued on June 30 of this year amounted to $36.2 million at September 30 of '08 and are not included as outstanding, as these securities do not convert to cash pay until 2010. Thus, total net debt under our senior credit facility was $618.4 million at September 30, while actual total net debt outstanding was 654.6 million at September 30 '08. At year-end 2008, we are projecting total leverage, excluding our pick notes, to be slightly higher than six times. Our 6.75 total leverage covenant were reduced by a quarter turn on December 30 of this year and remain at 6.5 through June 30 of 2010. Our guidance for the fourth quarter is net revenue of 78 to $80 million compared with 71.6 million last year. Station operating expenses are forecast to be between 44 and $45 million compared with $43.4 million last year; and corporate overhead should range between 4.2 and $4.5 million compared with $4.1 million last year.

This concludes the financial review for the call; and if there are modeling questions, I'll be available in the office and we'll address them specifically. I'll now turn the call back to Perry for some final remarks before Q&A.

All right, thank you very much, Matt. Our 4Q guidance reflects the strong share of political revenue that we garnered in our markets. The Company's positioning in battleground states like Pennsylvania, Indiana and Missouri, and spending by candidates on several hotly-contested statewide races, this revenue is booked and the cash is in the bank. In fact, it's still coming in. There's a Congressional election in Shreveport in early December, and we're still booking political revenue in Louisiana. While we certainly did not anticipate anything near what occurred over the last few months in the general economy, we continued to advance our strategies for long-term revenue growth, and we are exercising disciplined expense management while preserving the strength of our ad sales and our local programming initiatives to drive digital revenue growth.

To this end, during Q3, we announced that we renegotiated a multi-year retransmission-consent agreement with DirecTV, as well as a completely new agreement to bring AT&T U-verse subscribers Nexstar's locally produced content, including our market leading local newscasts in both SD and HD. These new agreements extend our success in generating growing value from our station programming and validate the strength of our award-winning local content, local news, and leading national programming, while raising the bar for retransmission-consent consideration on a per-subscriber basis for the Company. These deals also represent further progress in driving meaningful incremental revenue from our round two retransmission-consent agreement negotiations, which will continue through 2009; and we will be generating high margin revenue growth from this source for the remainder of this year throughout 2009 and into 2010. Also, despite the overall challenging market conditions, we remain focused on our long-term strategy of identifying and pursuing accretive and deleveraging acquisitions.

Last month, we announced the acquisition of the assets of KWBF, the My Network TV affiliate serving Little Rock, Arkansas, for $4 million, a multiple of less than six times the last 12 months' pro forma cash flow. The proposed acquisition compliments our existing Little Rock station, KARK TV, our local NBC affiliate there; and upon completion, Little Rock will represent the 19th market where we provide services to more than one television station. Post-closing, our immediate strategies will focus on extracting financial synergies, leveraging our existing local sales team, leveraging our award-winning local news and e-media operations across both stations; and, under our ownership, KWBF will generate retransmission revenues for the first time. In addition, late last month we announced that as of January 1, 2009, KBTV in Beaumont, Texas will become a Fox affiliate, enabling Nexstar to broadcast our strong local news and other programming in time periods that meet local viewer preferences, while partnering with the strength of the Fox network programming. This will be a positive from a revenue perspective for Nexstar in 2009.

As reflected by our year-over-year, year-to-date results, our e-media activities and momentum continue to benefit from strong usage trends and advertiser demand. Innovation on the part of our e-media team is also positioning us well for continued growth. We expect continued quarterly sequential growth in e-media revenue, with a full year run rate of our new products and features again in 2009. And next year, we'll be positioned to substantially increase our revenue from this source for a full-year basis. We reiterate our expectation that 2008 e-media revenue from retransmission-consent agreements and new media initiatives will account for approximately $30 million in total 2008 revenue, a 5% increase compared with our total contributions in 2007. We continue to evaluate additional opportunities to derive value from our content with other new and emerging technologies, and we will pursue those that are in the best interest of our viewers, users, and shareholders.

Notwithstanding the current market valuations, Nexstar consistently outperforms the industry by adhering to its core strategies for growth, building out our mid-market platform, producing leading local newscasts, developing new revenue streams and deleveraging. Our free cash flow in 2009 will certainly benefit from the completion of our digital conversions. That spending will total approximately $30 million this year. We expect that our ongoing approach to actively managing our station portfolio, developing new revenue streams, and focusing on our balance sheet and capital structure will continue to serve investors well. Of course, an indicator of any Company's confidence in its overall direction and prospects to prosper in a more normalized environment would be insider purchases. On this front, I personally made open market purchases of approximately 50,000 shares since September; and Matt, senior level management and some of our Board members have also been active in making share purchases throughout 2008. I'm also currently in the process of finalizing a new three-year employment agreement that will keep me here through my 15th year since founding the Company.

While I'm truly proud of the manner in which Nexstar has differentiated itself in the industry in its first 12 years, I am of a mind that the groundwork we have put into place over the last few years will produce a very bright future for the Company. Nexstar has been an industry pioneer on several fronts, and I look forward to continuing to build on our quadrupole play of opportunities in traditional media, subscription based revenue, our e-media platform, and our yet untapped digital and mobile media platforms. With all that being said, thank you for joining us, and let's now turn the call over to the Operator for Q&A to address your specific areas of interest. Operator?

Thank you. (OPERATOR INSTRUCTIONS). And our first question comes from the line of Bishop Sheen from Wachovia. Please proceed with your question.

Hi, Perry and Matt. Thanks for taking the question. Let me focus on the balance sheet. Clearly, you are 6.5 times covy as we get towards year-end -- that's the covenant EBITDA -- and it looks like you're going to clear it, and I think you already gave guidance on that -- low 6's. But as you get to '09, without the political, I guess the toss up here is whether all of the retrans, the e-media, the other things you are certainly putting in place including cost control, can replace the Olympic and the political, which were certainly higher margin revenue. Can you give us any color of your thinking about '09?

I will take a crack, and then I'll turn it over to Matt. We currently forecast substantial growth in both e-media revenues for 2009 and substantial growth in our retrans revenues for 2009 based on the status of contract discussions that are -- some of which have been concluded and some of which are in the mid stages. And we feel that those two revenue sources can basically backfill approximately 2/3 of the political revenue that we had this year. Now, we'll have political revenue next year -- probably 10-15% of what we end up this year with -- as we do in every odd numbered year. So we think we can backfill about 2/3 of that. All of that would lead to a high single digit, low double digit EBITDA decline; but from a free cash flow perspective next year, we'll have back approximately $30 million that we have spent on the digital conversion this year. So we're projecting that even under that scenario and a decline in core revenues that we'll have a substantial free cash flow component to use for debt reduction. And at this point -- all of which is to say, Bishop, at this point we do not foresee any covenant issues, as the covenant doesn't step down again until the end of second quarter 2010.

That's very helpful. One other follow-up. Since September, October, November, have you bought back any more debt or stock as a Company?

Yes, I'll take that, Perry. Bishop, we have. In this fourth quarter -- let me start it this way. We have a $10 million restricted payment basket that allows us to buy in any of our securities within any calendar year. As we mentioned in this call, we bought in some 11 3/8% notes, and we took the balance of that $10 million amount, which totaled about $4.8 million, and bought in some of our 7 % notes at about $0.60 on the dollar. So we retired about $8 million of those notes in this quarter, and that will also help us as we go into next year in terms of covenant compliance. Again, we'll have the ability of refreshing that basket on January 1 of 2009; and if the market conditions stay the way they are today, we'll be -- I think we'll be active again in undertaking those types of security buybacks.

Thank you, Matt. Thank you, Perry.

You're welcome.

Our next question comes from the line of Edward Atorino from Benchmark. Please proceed with your question.

Matt, would you just repeat, you bought in 4 million, 4.8 of the 11 3/8 and 4 million of the 7, or 8 million of the 7?

We bought in 5.2 million of the 11 3/8, Ed; and with the 4.8 remaining, okay, we bought in approximately 8 million face value of the 7's.

Okay, so 13.2 total.

That's correct.

All right, would you -- I'm a little confused. Are you projecting 30 million from e-media in '09? Did I hear that right?

No. We're projecting that this year, taken together, retrans and e-media would equate to about $30 million.

Oh, okay, I've got you.

(Inaudible) 2008.

And both of those ramp up in '09?

Rather substantially, yes.

And I guess the key word now is how the pacings look going out of '08 and into '09. Other broadcasters have been seeing some pretty stiff down trends. Are you seeing same thing?

To be quite frank, Ed, we really haven't started to look at 2009 pacings. We won't really start to do that until the end of the month. There's simply not enough revenue on the books for the next quarter to make any kind of value judgments. But suffice it to say, we're anticipating similar trajectory in our core revenues that we've seen in the third quarter, which was down approximately 4%. Be down a little bit more than that in the fourth quarter because the displacement of political. And so we're not anticipating a change. You know, we think the first quarter is going to be tough and it will get sequentially a little easier throughout the remainder of 2009. Ex-political, we think the core business will start to improve probably in the second half, if not in the second quarter; but we're anticipating a pretty rugged first quarter, and we're prepared for it.

Okay.

(OPERATOR INSTRUCTIONS). And our next question comes from the line of Barry Lucas from Gabelli & Company. Please proceed with your question.

Thank you. Good morning, Perry and Matt. A couple of quick items. Political in 4Q, most of it is in the bank --do we have a good handle on what that's going to amount to, Perry?

Yes. It's in excess of $19 million for the fourth quarter --

Okay.

-- on the books as of today.

Great. And you just want to refresh our memories in terms of where CapEx can go from the 25, $30 million level this year to where it's going to drop in 2009?

Sure. We'll post a number in the low 30s for this year, and it will be a number of 10 or less in 2009.

Okay. That's helpful, And I think Ed was asking about '09 pacings. What are you seeing in terms of any color you can provide on either categories or geographies in 4Q so far?

Well, we're seeing core business down for us, a high single digit -- not double digit as others have reported -- but a high single digit, approaching double digit for our core business. But again, with retrans and e-media and political, obviously our guidance is for a net revenue increase of high single to low double digits for the fourth quarter. And as we sit here on the tenth of November, we have a pretty good handle on certainly the political. We have a good handle on our core business as it looks through the end of the year, where I think we can count on both hands the numbers of million dollars we plan and anticipate writing between now and the end of the year. So it is -- again, our pacings and trajectory are in the same direction as the peer group, but I don't think have been quite to the magnitude of the percentages -- certainly percentage declines that others have indicated.

Great, thank you.

(OPERATOR INSTRUCTIONS). And we have a follow-up question from Mr. Edward Atorino from Benchmark. Please proceed with your question.

Review the CapEx plans for '09 again, and how are the details on this basket work? What amounts go in there and any restrictions on it?

I'll take that, Perry. The CapEx for '09 will be a number of less than $10 million, Ed, and that's really primarily maintenance CapEx. It's possible that a million or two that we've got earmarked to pay this year related to HDTV buildout will fall into January, just because there's only a limited number of vendors, et cetera. But aside from that, you can look at a maintenance CapEx number of somewhere around 8 to $10 million. What was the other item that you asked about, Ed?

On this basket, how does it sort of work, and do you have any restrictions on what you can do with it?

Yes, in our credit agreement, if our leverage, okay, is above five turns -- we have a $10 million basket that allows us to buy in any of our securities. And so assuming that our leverage is not below five turns next year, we would have access to it -- a fresh $10 million basket.

Okay. And you can do whatever you want with that, I guess? Or is that earmarked for debt?

Yes, whether it's debt or equity securities, yes.

Okay, got you. Okay. Thanks.

You're welcome.

And we have a follow-up question from Mr. Bishop Sheen from Wachovia. Please proceed with your question.

Thanks, Matt. You've been so giving, I wanted to push the envelope. I think you have yet one more carve out in the covenant definition. Aside from not including the 12% picks, which you're picking, and netting out the cash, is there something else that's netted out to get you to the 6.55 times?

Yes, there's a couple of little things in there, Bishop. For example, at non-cash employee stock option expense, okay, it would get added back to our EBITDA.

Got it. And LTM, was that also running around? I think you said 5 million, but I can't remember if that was nine months or LTM, non-cash?

Yes, LTM, that number -- I'm going to be off a little bit -- but LTM in that number is going to be close to $2.5 million. I think I said it was 1.8 for the nine months of this year, Bishop. There are other minor things in there also, my friend. You know, the difference between trade revenue and trade expense, okay, will get factored into that calculation. That's normally an immaterial difference.

Right. So when I do my math, I'm like two to three decimals off with the covenant 6.55 base, and that's kind of the way it should be, right?

Yes, that's correct.

All right, I was just testing the new math. Thank you, Matt.

You're welcome, Bishop.

And we have a follow-up question from the line of Barry Lucas from Gabelli & Company. Please proceed with your question.

Perry, a little bit more general question looking at the stock prices of the group -- a bunch of them are under a dollar. How do you see this group evolving, and how do we get out from under the current constraints -- if there is a way out -- to see some higher stock prices or some appreciation here?

That's a great question, Barry, and I wish I had an answer. I know that -- not speaking for Matt -- but when he and I have discussed this in the past, we look at these kind of valuations as great buying opportunities for ourselves. And I guess -- I thought it was a great buy at $3 in September, so I think it's a much better buy the -- Nexstar stock. I think that the opinion toward the sector has been overblown and oversold. I think that 2009 will be tough economic times; but then again, so were 2001, 1999, 1991, and everybody seems to be of the mind of "Oh, but this time it's different." Well, I don't think it is. I mean, as long as we're making cash registers ring in local marketplaces -- our automotive dealer spending in the third quarter was up 5%. That's a testament to our local salesforce having relationships and developing ideas that work on our platform, and I think that needs to be our focus.

I think TV has this quadrupole play that I spoke about at the end of our -- my remarks, where we've got the revenue streams from subscription -- which is retrans -- we've got our core ad growth,we've got e-media; and then we have this whole digital mobile mineral rights that we just haven't quite figured out how to drill to yet. And again, with our branded relationship in each of our local marketplaces, everybody knows who our TV stations are, both the buyer and the seller of product. And I think that the more and more -- like on our e-media platform -- that we can get in the way of transactions like we are right now, we see that being a growing opportunity for our business beyond just 30-second spots on the advertising. So I think that again, the pendulum always seems to swing too far in either direction, and it's probably never as bad as we think it is. But it's also probably never as good as we thought it was. So I -- we're just going to stay the course and be disciplined. We think that this creates potential buying opportunities, whether it's within our securities or to expand the platform on the cheap, and we will continue to try and grow.

We have been reporting every quarter sequentially over the year prior for the last two years record revenue for that quarter, and we see that continuing here in the fourth quarter; and we look to, again, take advantage of those opportunities as we build the platform -- continue to build the platform -- out opportunistically and strategically in the months and years ahead. But again, I don't expect that you can add up this basket of stocks and get change back from your 20. I don't think that will last for forever; but I do think it's a buying opportunity in the here and now for those that have the courage of their convictions, and certainly the management of this Company does and has been putting their money where their mouth is.

Great. Thanks.

And Mr. Sook, there are no further questions at this time. I will turn the call back over to yourself.

Well, all right. Thank you very much for joining us this morning, everyone. We look forward to reporting our Q4 results in three months time and giving you a better color and picture and guidance for 2009. Thanks again.

Ladies and Gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.