Nexstar Media Group Inc (NXST) 2012 Q3 法說會逐字稿

Good day, and welcome to the Nexstar Broadcasting Group's 2012 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 fact 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 this 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 reconciliations of this non-GAAP information to GAAP measurements are included in today's news announcement.

The Company does not undertake any obligations to update forward-looking statements reflective of changes in circumstances.

At this time I would like to turn the conference over to your host, Nexstar President and CEO, Perry Sook. Please go ahead.

Thank you, Drew, and good morning, everyone. Thank you very much for joining us on this election day to review Nexstar's outstanding third quarter results and our recently announced transactions, the transactions that will drive our growth in 2013 and beyond. Tom Carter, our Chief Financial Officer is here in the room with me this morning.

As I said, operationally Nexstar has had an outstanding third quarter, with another record period led again by strong growth across all of our financial metrics. Nexstar generated record third quarter net revenue and with the operating leverage in our model the revenue increases resulted in our highest ever third quarter broadcast cash flow, adjusted EBITDA and free cash flow.

In addition to our operating successes, the Company has actively and opportunistically identified acquisition opportunities that adhere to our criteria for accretion and creating strong new local platforms, with our announced transactions now bringing us an additional five new duopoly markets to our existing totals.

The recently announced transactions further expand our scale by allowing us to more fully leverage our infrastructure, our operating disciplines, and our local market presence. The net result of these acquisitions is that Nexstar will generate far more free cash flow post-acquisition. We are not materially increasing leverage and we will be able to quickly de-lever over our first year of operating the new stations. As a matter of fact, we will generate sufficient incremental free cash flow for continued de-levering and other initiatives to build shareholder value.

In July we announced the acquisition of 12 Newport stations and their economic benefits to the Company, and consistent with our goals these acquisitions are accretive and not materially leveraging. Specifically, we expect the acquisitions previously announced to generate approximately $55 million in additional EBITDA to Nexstar in 2013, and free cash flow accretion in the first year of approximately 45% over the levels expected to be generated by Nexstar and Missions' existing operations.

Our recent work and the results of additional due diligence on the to be acquired stations reinforces our confidence in those anticipated synergies. We look forward to the benefit of the new stations throughout the coming year. We will finance the transaction and refinance our cap structure efficiently through the new $445 million senior secured credit facilities and the recently priced $250 million of 6-7/8% senior subordinated notes due 2020.

Tom will review our revised capital structure shortly, but our planned balance sheet changes are providing us with a lower cost of capital and additional flexibility, which allows us to more efficiently look at acquiring other stations and similarly accretive transactions.

We followed the Newport announcement with the announced sale of KBTV, our Fox TV and Bounce TV affiliate in Belmont, Port Arthur, Texas for $14 million, and we expect that sale to close near the end of this year. That was, again, an accretive deal as our seller's multiple on the station is in the mid to high teens.

We're very excited to be with you on this call this morning as yesterday we announced two additional accretive transactions that will further expand our operating platform and our free cash flow growth. We are acquiring KGPE, the CBS affiliate serving Fresno, California, and KGET and KKEY, the NBC Telemundo and CW affiliated station serving the Bakersfield, California market for Newport Television for $35.4 million plus any working capital adjustments applicable at the time of closing. These were some of the remaining stations in the Newport portfolio. We had looked at them earlier and when we analyzed the stations leading up to the July transaction, as the seller moved to finish divesting their station portfolio we were able to come to terms on these stations, these three stations in an attractive transaction that is substantially accretive to Nexstar.

In a separate deal also announced yesterday Nexstar also agreed to acquire WFF, the Fox affiliate serving Burlington, Vermont, and Mission Broadcasting agreed to acquire WBNY, the ABC affiliate in Burlington from Smith Media for a total of $17.1 million, also plus any working capital adjustments applicable at the time of closing.

Collectively the average sellers' multiple approximates 7.4 times average 2011, 2012 cash flow. The purchase price for the five stations is less than five times the average '11, '12 proforma projected cash flow under our ownership. The stations will realize additional retrans revenues as well as synergistic operating improvements under our ownership.

These transactions will result in Nexstar duopolies growing to 25 of the 41 markets in which we will operate and will expand to 71 the number of stations and related digital signals that Nexstar either owns or to which we provide sales and other services.

Looking at the totality of our announced transactions we expect the California and Vermont stations acquisitions to deliver approximately $10 million in additional EBITDA to Nexstar in the first year of operation, that's on top of the $55 million related to the previously announced Newport transactions. These additional station operations are expected to provide free cash flow accretion in the first year of approximately 10% on top of the 45% increase we identified related to the first Newport transaction.

Our focus is on sustained free cash flow growth and in this regard we like to remind everyone that since our 2003 IPO Nexstar has generated a 37% compound annual growth rate of free cash flow for the two-year cycle starting in 2003 and 2004, through the two-year cycle that just concluded with 2009, 2010, in which we generated a total of $79.6 million. Now the total for 2011, 2012 is expected to solidly exceed $100 million as we've already generated $86.1 million in 2011 and through the first nine months of 2012 alone.

Proforma for the first 12 station Newport deal, our 2011, 2012 free cash flow would be approximately $200 million. If we break that down to $100 million a year in average and consider our share base of 30.7 million diluted shares we're generating in excess of $3 in average proforma free cash flow per share. We also believe that the acquisition of the five stations announced last night will add approximately $0.25 per year on average to that amount.

The improving ad environment, including our 25% rise in same station Q3 auto ad spend and increases in four of our top five ad categories in Q3, combined with substantial increase in retrans revenue, continued growth of our e-Media operations and revenue, and record political revenues drove our record topline and free cash flow results for the Company.

Nexstar generated total third quarter net revenue of $89.9 million, a 20.2% rise from the year ago period, with the increases reflecting strong growth in local, national, political, retrans, and e-Media.

Nexstar's continued leadership in new business development and the strength of the auto and other key categories resulted in a 7.4% rise in third quarter local and national revenue, inclusive of a 3.2% third quarter increase in local, 18.4% rise in national, and that's even as we allocated additional inventory for the placement of $10.2 million in political advertising in Q3.

The 2012 third quarter marks our twelfth consecutive quarter of core television advertising revenue growth, and while political advertising activity remains very robust, Nexstar's gross revenue in the third quarter excluding political was a 10.8% increase.

Our Q3 core and political TV ad revenue growth was complemented by the 51.3% rise in retransmission fee revenue and our twenty-third consecutive quarter of e-Media revenue growth. In total our high margin non-television revenue ad streams grew by 38% year-over-year and accounted for almost 22% of 2012 third quarter net revenue.

Our operating leverage and our efficiencies continue to translate Nexstar's strong revenue growth into cash flow as BCF margins rose to 45.8% from 34.8% in the year ago period. We are benefitting from both scale and efficiencies, which will also be positive factors as we integrate the soon to be acquired stations.

Our continued focus on expense management and achieving further operating efficiencies resulted in record 2012 third quarter operating income of $23.6 million and free cash flow that grew almost fourfold to $19.8 million, bringing to $51.9 million the free cash flow total for the first nine months of 2012. By comparison this represents a 73% rise over the $29.9 million in free cash flow generated in the first nine months of 2010, which was the last comparable political quarter.

Looking another way at the two-year cycle run rate, Nexstar's existing operations have generated $116 million in free cash flow over the last eight quarters. That alone approximates $1.90 per share in free cash flow on a fully diluted basis and obviously we see this trailing eight-quarter run rate rising substantially as we progress through the fourth quarter and into next year.

When adjusting for the first Newport station acquisition we would have generated, as I said earlier, in excess of $3 per share and proforma free cash flow per share per year in the current 2011, 2012 two-year period.

For our Board and our Management free cash flow is our primary performance metric, and we believe our tangible success on this front, as well as our excellent prospects to extend and accelerate our positive advertising trends should be a principal point of interest to our capital markets.

In addition, as we manage the Company for free cash flow, Tom and his team have remained active in further reengineering the balance sheet during the first nine months of 2012 as we've reduced our net debt by nearly $30 million.

Tom will now provide further details on our financials, after which I'll come back to close the call with comments, and then open the call for your questions. Tom?

Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q3 income statement and balance sheet items, after which I'll provide an update on our capital structure and recently announced transactions.

Net revenue for the quarter was up 20.2%, as Perry mentioned, to $90 million for the quarter ending 9-30-2012. Core revenue grew 7.4% to $64.1 million. One metric I know a lot of people are interested in is our unaffected stations' core revenue growth for the quarter, and that came in at 5.5%.

Local revenue grew 3.2%, national revenue was up 18.4%, and political revenue obviously given the current environment was up over 450% to $10.2 million for the quarter. Retransmission fees were consistent with our previous two quarters of 2012 at $15.1 million, and that was a 51.3% increase over the same period the previous year. e-Media revenues grew 6.5% to $4.5 million.

Our broadcast cash flow was up almost 57% to $41 million. Our adjusted EBITDA was up 67% to $35.1 million and, as Perry mentioned, our free cash flow was $19.8 million for the quarter versus $5.2 million for the quarter of 2011 and a little over $10 million for the same quarter in 2010.

Nexstar's third quarter corporate expenses were $5.8 million or 15.6% ahead of a year ago. This was largely due to an increase that reflected in excess of $800,000 in professional fees in the quarter related to the station acquisition transactions and the completion of our strategic review.

Station direct operating expenses consisting of news, engineering, and programming, as well as the SG&A expenses at the station level, net of trade expense, were $42.2 million for the three months ending 9-30-12 compared to $40.4 million for the same period in 2011, an increase of $1.8 million or 4.5%. The increase largely reflects expenses for the Evansville station acquisition added in Q4 of '11 and higher variable costs related to the significant rise in national, local and political revenues during the quarter.

Now I'll turn a bit to the balance sheet and review some key items for September 30, 2012. Following significant reductions in total net debt over the last few years and reflecting the strong cash flows generated in 2012, as well as the strong increase we see in coming years, we continue to take actions to reduce leverage and reformulate the debt capital structure of the Company.

We recently priced an offering of $250 million of 6-7/8% senior notes due 2020, which will largely be used to fund our cash tender offer and consent solicitation with respect to the remaining $3.9 million of the senior subordinated notes, as well as $112.6 million of the senior subordinated PIK notes, both due 2014. The remaining funds above those needed to redeem those two issuances will be used to repay a portion of our first lien term loan, which will be refunded under the new credit facilities expected to close concurrent with the acquisition of the 12 Newport stations later this year.

The net affect of our recent refinancings and the activities that are going to be associated with the Newport acquisition will result in an expected reduction in our weighted average cost of debt from approximately 7.4% to less than 7% post-acquisition for those properties and the new credit facility.

Our total leverage at September 30, 2012 was 4.79 times versus the permitted leverage covenant of 7.5 and our first lien leverage was 1.4 times versus the 2.5 covenant.

Nexstar's outstanding debt at September 30th, 2012 consisted of $33 million outstanding under our credit facility, our revolving credit facility, and $147 million outstanding under the first lien term loan. The second lien notes were outstanding at $319.1 million and, as I mentioned before, the two series of the 7% subnotes were $3.9 million and $112.2 million. All of this total up to $615.2 million, down from $440.4 million at yearend '11, and we had $12.2 million of cash on the balance sheet at quarter end.

The debt balances at September 30th include borrowings to fund $28.5 million in escrow deposits for the 12 Newport station acquisitions. When factoring in that deposit net debt has declined by nearly $60 million since the end of 2011.

Total interest expense for the quarter was $12.4 million compared to $13.1 million for the same period in 2011. Cash interest expense for Q3 '12 was 11.7 versus 12.3 for 2011, as our debt levels and our average cost of debt continued to decline.

Nexstar's Q3 CapEx of $3.8 million is about flat on a year-over-year basis, and we're on track for our full 2012 budgeted CapEx of approximately $16 million to $17 million, which reflects our initiatives to continue to accelerate HD local originations.

We believe our results again demonstrate we are successfully managing the topline, fixed and variable costs, and the balance sheet for cash, and remain focused on further actions that can enhance value and we expect to continue to deploy free cash flow for debt reduction.

Proforma for the completion of the announced acquisitions, our capital structure will be comprised of the recently issued $250 million 6-7/8% senior notes due 2020, $325 million of the 8-7/8% senior secured notes, second lien notes due 2017, and borrowings under our new credit facilities and revolving credit facility, which are expected to provide total capacity of approximately $445 million.

We look forward to the completion of the Newport station acquisitions later this quarter and the California and Vermont stations in Q1 of '13, which will expand to 71 the number of stations and related digital signals that Nexstar either owns or provide sales and other services to, and remain highly confident that our expanded platform will allow us in the short term, after completing the transactions, to significantly reduce our leverage ratio while allowing for other potential return of capital to shareholders.

That concludes the financial review for the call, and I'll turn it back over to Perry for some closing remarks before Q&A.

All right, well, thank you very much, Tom. I think that it's evident that our outstanding Q3 financials are the direct result of a disciplined approach to the operation of our core television operations and a success in driving additional value from our local content and relationships.

I'm also proud to say that the people working in this Company are performing and executing at a very high level on a daily basis.

Our announced transactions over the last several months will bring further diversification and scale to our operations and bring a clear path of the creation of future value, while simultaneously positioning us to very materially further address our debt and leverage.

Everyone can go back and look at our development and how we've refined our operating and financial focus and diversified over time, as well as our long-term growth plan and delivery that all confirm that Nexstar is on the right path to continue to grow our enterprise value.

The organization is energized by the planned addition of 17 stations over the coming months and we believe that the capital markets are beginning to recognize that our acquisition and operating plans combined with prudent management of our capital structure is a great formula for sustained long-term growth and appreciation of value to shareholders.

We have funded our platform, built out since the IPO, without materially altering our diluted share count, which stands at about 30.7 million shares, and the free cash flow per share figures I quoted earlier on this call we believe remain impressive in light of our current valuation.

With 2012 almost in the bank and the visibility on 2013 growth drivers Tom and I are confident that our free cash flow growth trajectory will remain among the most impressive in our industry or any industry.

Again, I'd like to thank you all for joining us this morning, and now let's open the call for Q&A to address your specific areas of interest. I'll turn the call back over to Drew.

(Operator Instructions)

And we'll take our first question from Aaron Watts with Deutsche Bank.

Good morning, guys.

Good morning, Aaron.

Never a dull moment, keeping us on our toes here. Let me ask you a couple quick clarifier questions, if I could? Tom, just with the recently announced acquisition from last night, am I right in saying that's going to be funded through the new credit facility, whether it's a revolver draw or that term loan?

Yes, and if you also want to think about it this way, remember when we went out with the bond deal, what was it, two weeks ago now, almost two weeks ago now, we originally went out with $200 million and upsized it by $50 million. Well, these acquisitions are a little over $52 million, so you can kind of think about it that way, as well.

Okay, okay, that makes sense. And, Perry, I thought you said -- I think you said that $55 million of EBITDA coming in in 2013 from the initial Newport acquisition, did you say or I might have missed it, for these five stations what they're going to contribute in 2013 to EBITDA?

Yes, it's an incremental -- assuming we own them for the entire year and they'll probably close in the end of first quarter, but on a proforma basis for the full year of '13 it would be an incremental $10 million of EBITDA.

Okay, got it. And these stations, I think at least the California ones I was -- that's a new State for you guys, was it just an attractive price, allowed you to expand the footprint? How did these stations kind of come onto the radar?

Again, our criterion is accretive acquisitions and markets where we can inherit new duopolies or with a fairly clear path to creating additional duopolies, all of these met the test. It was also a somewhat opportunistic acquisition in that there was a deal for the stations and that fell through due to the buyer's inability to obtain financing on a timely basis, and as we oftentimes say we may not be the highest price but we can get to the finish line, and that came into play in this situation.

Okay, got it. And, Perry, would you say in terms of the M&A environment out there looking forward do you still have books coming across your desk, do you think there's going to be more opportunities?

In a word, yes. We have a couple of books on our desk at this point we're evaluating. But, again, we've set a fairly high bar for ourselves in terms of the accretive nature which will make us very disciplined and opportunistic in what we can pay. So we're working on a couple of things now, but I wouldn't at this point want to handicap the outcome.

Okay, and last one on the acquisition, Tom, just I think you had told us before you feel comfortable you can get the leverage to well below five times by the end of 2013 -- on a kind of proforma basis, at least for the initial Newport buy, does this announcement yesterday impact that kind of feeling, at all?

No, we think it's very similar. Quite honestly, to Perry's point, the acquisition multiples of these five stations are slightly better than the acquisition multiple of the first Newport transaction, simply because these were opportunistic in terms of us being able to have a higher profile and a better potential for closing relative to some of the competitors that they were looking at. So I would say these are slightly better from an accretive and from a leverage perspective than the first one.

Okay, and a last one for me, I appreciate you taking these -- maybe it's now the big day, November 6th, can you maybe just broadly speak about how the core environment feels for the rest of November, December, and then maybe even into next year, if you have that visibility, relative to how it's felt kind of year-to-date so far as much as you can with all the political noise? Thanks.

Sure. Well, let me give you just a little visibility on political. I'm pleased to report that our political revenue, which is in the bank as of this morning, will come in at the high end of our guidance range of mid 40s, so we're very pleased at our performance and delivery there. I look at our top 10 and our top 15 categories and they're pacing ahead of where we had business on the books for the prior year.

And similar to what I think you've probably heard from some other of our peers that have reported, if I look at the pacing compared to the prior year on our core revenue, November is better than October and that's probably logical due to crowding out of political, but December is better than November by a not inconsequential margin. So if these trends hold it looks like we will finish the year strong on a core revenue basis, and we think that paints a very good foundation on core revenue growth for 2013.

Great. Thanks, guys.

And we'll take our next question from Robert Niewijk with Katana Capital.

Hi, there. I have a question about your station sale. Obviously, you guys are extremely good at M&A and you've been creating lots of value and you are going to create lots of value, but I still don't understand, I'm just curious, how are you able to sell something at a mid teens multiple when you're buying it at a seven multiple? And related to that is the buyer of that station getting a lower buyer's multiple? And, if so, what's creating the spread for them?

Yes, in a word, we think the buyer's multiple will be a mid single-digit multiple of broadcast cash flow because the buyer is associated with an in-market buyer in Belmont, and that's why it was a win for both parties. We were able to get the price that we wanted and the buyer will be in at a multiple that is roughly leveraged neutral and roughly accretive neutral to them, to double-up in Belmont, Texas.

That makes sense. Thank you.

Sure.

And we will take our next question from Barry Lucas with Gabelli & Company.

Thanks, and good morning. I've got several this morning, Perry. Could you just maybe flesh-out the comments that you made about November, December? Is core actually pacing up for November and December or is there so much displacement that you're actually going to be negative on a core basis?

No, core is pacing up in November and it's pacing up more in December over the prior year.

Okay, that's what I thought I heard, just wanted to make sure. And maybe you could just refresh my memory in terms of what's coming up in retrans portion of the footprint that comes up for renewal or how should we think about retrans for '13?

Sure. Well, two things. First of all, the 130 odd agreements that we completed last year as of 12-31 all have escalators so there'll be an increase in those as of 1-1-13. In terms of new agreements that we will negotiate there are approximately a dozen, none of them with more than 100,000 subscribers, so it is almost like taking a year off in terms of retrans negotiations because our big -- we had a big lump, as you know, at the end of 2011, we've got another sizable portion at the end of '13, but this is kind of a saddle year for us in terms of renewals. So there are a dozen agreements, none of them are major agreements to us in the scheme of things.

Okay, helpful. And the national category was particularly strong, overshadowing the gate in local. Is that largely national auto or what else was contributing to the very robust number there?

It's somewhat technical in that Gulf States Toyota, which heretofore bought in the southwest as a local account moved to an agency that places the business nationally, so we don't transfer the history on our pacing report, so it's basically up against zero dollars nationally and conversely drags down the local pace to a low single-digit number of growth because the account just moved from category. That's why we report on the core revenue, which is kind of all things being equal.

Barry, we focus kind of on the core because it takes out any of those account shifts.

Okay, that's very helpful to distinguish that and differentiate it, Tom, appreciate it. Bigger picture, Perry, you've been active in the M&A market, as has [Lynn] and [Sinclair], and so what is the shape of the broadcast industry going to look like, not in 2013 but '15, '16, how many major players? What's your footprint going to look like? What's your household reach going to amount to and that sort of thing, if you could address that?

Well, we think that the industry will continue to consolidate. It's very inefficient outside of the top operators, top 10 markets maybe, where you've got three dozen companies that are local contents producers and national distribution partners, and we think that the TV industry really ought to be probably 10 to 12 major companies that you and others would follow the four national content producers and six to eight distribution partners that are substantial in size, probably 20% or better of U.S. coverage, properly capitalized which would then render a billion dollar market cap, equity market cap.

And we think that that's kind of what we're driving for. Our vision would be to build a company with an excess of a billion dollars in revenue and capitalize it properly, and we think if done so that would yield a billion dollar market cap on $400 million plus of EBITDA.

With all of these recently announced acquisitions on a proforma basis we're about 70% of the way there to a billion dollars in revenue. And, again, I'm not so much concerned with how big we are, but how valuable we can be. And so we'll never get out over our skis just for the sake of scale, but we do think that scale matters when negotiating with NPBDs, when negotiating with networks, when negotiating for programming, equipment, and just when you can leverage the infrastructure in terms of employee benefits and training opportunities, things like that. The best and the brightest then want to come to work for those companies. So we are driven to grow, but growth is a mechanism to grow value for shareholders, which is really how we keep score.

Great. One last one, if I may? I'll toss it out, just a little inquiry about the NPRM and the FCC and how do you see spectrum issues playing out and are you a seller of spectrum?

We have, I mean we, obviously, would keep, take an open mind and look at the value proposition. I have a sense, though, that for us to get kind of an average per pop valuation and in theory split half of that with the government because they're going to have to be able to mark-up spectrum to sell in an auction to satisfy the government aims, we don't see in the vast majority of our markets where that value proposition would be worth as much, at let alone more than the EBITDA value at current multiples of our television station portfolio.

So I think it would be a stretch for us to participate in any spectrum auction. I think there are those that will, there have been some speculators out there that have bought real estate in the hopes that they can resell it. I think that they'll ante in, whether there'll be enough spectrum anteed at the end of the day to create an auction is an open point, but I think everyone will look at it and take their measure of it and decide if there is value creation to do that. But I think that anyone that's making money with their commercial television operations is probably going to be hard-pressed to derive more value from selling their spectrum into an auction, and for all intents and purposes going out of business.

Great. Thanks so much for the response, Perry.

Thank you, Barry.

(Operator Instructions)

It appears there are no further questions at this time. Mr. Sook, I would like to turn the conference back over to you for any additional or closing remarks.

All right. Well, thank you very much, Drew, and thank you all for joining us here this morning. a reminder that the first round of acquisitions that were announced back a couple of months ago will be closing. The Nexstar acquired stations will close on December the 1st. The recently announced stations, the five station acquisition announced yesterday we expect to close probably end of the first quarter, but certainly in the first half of 2013. We look forward to integrating those into our operations. We look forward to the additional free cash flow accretion and value creation that these stations will generate.

So we look forward to joining you not long after the first of the year to give you a final report on our Q4 results and the integration of our recently acquired stations. Thank you, everyone, for joining us. Please go vote, and have a great day.

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation.

Good day and welcome to the Nexstar Broadcasting Group's 2012 second-quarter conference call. Today's call is being recorded.