Nexstar Media Group Inc (NXST) 2014 Q3 法說會逐字稿

Good day and welcome to Nexstar Broadcasting Group's 2014 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 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 obligation to update forward-looking statements reflective of changes in circumstances.

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

Thank you operator.

Good morning everyone and thank you for joining us on this Friday morning to review Nexstar's record third quarter financial results and our recently announced transactions. You will also hear from Tom Carter, our Chief Financial Officer, on the call today.

Operationally, Nexstar had an outstanding third quarter, led again by strong growth across all financial metrics. Nexstar's record third quarter net revenue drove our highest ever third quarter broadcast cash flow, adjusted EBITDA and free cash flow, all of which were ahead of consensus expectations.

Nexstar's financial performance reflects the ongoing benefits from our results, focused operating disciplines, our growing retransmission consent revenues, and our value-building acquisitions and integrations including the first full quarter of operations of five television stations in Colorado and Florida. In addition, we are realizing anticipated growth from the strategic expansion and diversification of our digital media operations and capabilities, including our accretive acquisitions earlier this year of Enterprise Technology Group and Internet Broadcasting Systems.

Year-to-date financial results are consistent with the expectations that we've reviewed on prior calls, and Nexstar remains on pace to generate record free cash flow in 2014 and in 2015 based on television ad revenue, including our strong political spending in our markets, contractual retransmission revenue growth and our quickly expanding digital media operations. At the same time and consistent with our strategic focus on identifying, executing and integrating accretive transactions, Nexstar remains opportunistic in selectively building the station portfolio for long-term growth.

In this regard, we recently announced a highly accretive transaction that upon completion will mark our entree into the Phoenix Arizona market, and this morning we announced a smaller accretive transaction that will represent our second owned station in Des Moines, Iowa. We expect to complete both of those transactions in early 2015. Earlier this week we announced that the FCC has approved the license transfer related to the seven stations soon to be acquired from Grant Company, we expect to close another significant pending transaction later this year, and taken together, all will meaningfully benefit our 2015 operating results and beyond.

The net result of our local focused operating initiatives and M&A activity is that Nexstar is generating substantial free cash flow growth, which is positioning the Company to continue to delever the balance sheet. Specifically pro forma for the completion of all announced transactions, we believe that Nexstar will generate free cash flow growth in excess of $365 million over the 2014 /2015 cycle. This translates to average pro forma free cash flow growth in excess of $6 per share in the 2014/2015 period.

By way of comparison over the 2012/2013 cycle, Nexstar generated approximately $165 million of reported free cash flow and pro forma free cash flow of about $265 million. So that $365 million in the 2014/2015 cycle represents pro forma free cash flow growth of in excess of 37%. With just the free cash flow generated from our current operations, we expect Nexstar's net leverage to decline into the low 4%s by the end of this calendar year.

Getting back to Q3, highlighting the strong leverage in our operating model, the 25.4% rise in third-quarter net revenue generated 37.5% growth in BCF and a 38.7% increase in adjusted EBITDA as well as an 80% rise in free cash flow. Third quarter television ad revenue inclusive of political advertising grew 17.5% as Nexstar's spot management and inventory management initiatives, including the allocation of inventory to political pack and issue advertisers, resulted in a newly 18-fold increase in political revenue in the third quarter. Our flat core and local national spot revenue made up the balance.

Remember we project long-term GDP like growth for core ad revenues and structured Nexstar's operating model to leverage our high-growth revenue sources including retrans, digital media, and political. And our third quarter financial growth again underscores this approach.

Reflecting our expanded platform and presence in states with high levels of political spending activity, the 2014 third-quarter political revenue rose by a robust 79.1% over comparable 2012 third quarter levels. With the tally now in for election spending, we are confident that 2014 fourth-quarter results will benefit from very healthy political revenue contributions. As I said, maximizing the political revenue opportunity was a focus for us in Q3, and we did succeed on that front benefiting from campaigns in several states, such as Arkansas, Louisiana, Idaho, -- I'm sorry -- Iowa and Colorado.

Looking at other categories of ad supported TV revenue, first our initiatives to bring new advertisers to television continue to build our long-term success as new to television ad revenue for Q3 was $7 million, which was 6.1% up over the prior year. Taking in consideration the political advertising inventory allocation, four of our top 10 categories in Q3 were up, four were slightly down and two finished flat. Nexstar's total gross revenue excluding political grew an impressive 12.5% in the third quarter. That represents a 59.2% rise in retransmission fee revenue to $40.7 million and 28.6% increase in our digital media revenue to $12.9 million.

Ongoing renewals of retransmission consent agreements combined with the growth of our digital publishing platform resulted in a 50.6% year-over-year increase in total third quarter retransmission fee and digital media revenue for a combined total of $53.7 million. These higher-margin revenue streams continued to diversify and complement our core television opportunities and accounted all in for 34% of our third-quarter net revenue. That was up from 21.8% in the 2012 third quarter during the last political cycle.

Looking ahead with distribution agreements representing approximately 60% of Nexstar's MVPD subscribers to be renewed either at the end of 2013 or by 2014 year end and another 30% of our subscriber households up for renewal in 2015, we project visible ongoing revenue growth from this source in 2018 and beyond. Similarly our digital media revenue growth in the remainder of 2014 and 2015 will further benefit from our recent accretive acquisitions of Internet Broadcasting Systems and Enterprise Technology Group.

These strategic acquisitions and additions to Nexstar's existing digital platform have enabled us in the first nine months of 2014 to exceed 2013 full-year digital media revenues. And we have expanded Nexstar's digital business portfolio now to an over $50 million annual run rate of revenues. We continue to target $100 million of digital media revenue within the next several years and believe that we are successfully proceeding toward that goal.

As shareholders, free cash flow growth is our priority, and in the first three quarters of 2014 we generated a 72.7% year-over-year increase in free cash flow to $94.5 million or roughly $3.15 per share. If we want to take the political impact into consideration, our free cash flow of $94.5 million in the first nine months exceeds the level in the comparable 2012 period by 82%, and these are actual not pro forma numbers.

Before I turn the call over to Tom for further detail on our financials and our capital structure, I'd like to conclude by saying that we're ending 2014 in a very strong position. And we continue to see attractive potential acquisition targets in our pipeline. Our forward free cash flow visibility remains solid, and the recent news on our soon closing pending transactions is also a positive.

So with that I will turn the call over to Tom.

Thanks Perry and good morning everyone.

I will start with a review of Nexstar's Q3 income statement and balance sheet data, after which I will provide an update on our capital structure and details related to the pending transactions.

Our net revenue in Q3 of 2014 was up 25% over the same period in Q3 of 2013. Core revenue was down 1% to $91.4 million, local revenue was up 3.5% to $65.8 million, and national revenue was down to $25.6 million or 10.7%.

Political revenue as Perry mentioned before was up to $18.2 million, up over $1 million -- over 2013's third-quarter level of $1 million. Retransmission fees totaled $40.7 million, up 59%, and digital media revenues were $12.9 million, up 28.6%.

Most importantly our broadcast cash flow increased 37.5% to $66.1 million, adjusted EBITDA was up a like percentage to $57.4 million, and free cash flow was up 80% over the previous year's free cash flow to almost $39 million. On the same station basis, our net revenue was up 17.5%, local revenue was basically flat over the same period of the previous year, national revenue was down 11.9%, retransmission fee revenue was up almost 50%, digital media revenues were up 15.1%, broadcast cash flow and adjusted EBITDA on a same station basis were both up approximately 26%.

We feel good about the growth in our advertising revenue and even our local and national because of the high percentage of inventory that was dedicated to political during the quarter. With the focus on generating free cash flow, we remain disciplined in managing costs and addressing our capital structure leverage and cost of capital.

Third quarter station direct operating expenses net of trade expense and SG&A expenses rose 30.1% and 13.2% respectively. The increases reflect higher variable costs related to the increase in political ad revenues and the operation of the acquired station. On a same station basis, fixed costs excluding affiliation expenses and sales expenses were down 2.8% versus Q3 of 2013 as we continue to aggressively manage controllable expenses.

Nexstar's third-quarter corporate expenses were $8.7 million, which were slightly below what we projected and of which $6.8 million was cash corporate overhead. This compares to cash expenses of -- I'm sorry, of corporate expenses of $6.7 million a year ago, which included $600,000 of non-cash stock option expense. The increase reflects increased staffing and infrastructure to support our expanded platform, as well as a $1.3 million increase in non-cash stock comp expense.

Also during the quarter, we incurred $300,000 of unbudgeted corporate expenses relating to the legal and professional fees to alter and/or restructure transactions to address the recent regulatory changes. For Q4 of 2014, we project corporate overhead will be approximately $9 million inclusive of transaction expenses, but cash corporate overhead will remain at the $7 million to $7.5 million level.

Turning to the balance sheet, I will review a few key items as of 9/30 /2014. Net leverage as of that date was 4.82 times versus a permitted leverage covenant of 7.25, and first lien leverage was 2.34 times versus a 4.0 times covenant.

Nexstar's outstanding debt as of 9/30 consisted of first lien debt of approximately $562 million outstanding under the term loans and approximately $526 million outstanding under the 6.875% senior notes. Reflecting the refinancings over the last year and the previously mentioned ticking fees on the CCA financing commitment, our total interest expense in third quarter of 2014 declined to $15.5 million from $16.9 million for the same period in 2013. Likewise, cash interest expense also fell and was $14.9 million, compared to $16 million in the previous year.

Looking forward at the capital structure, the committed cost of financing for the remaining transactions is below 4%, which will reduce Nexstar's weighted average cost of borrowings to approximately 5% from the current levels of approximately 5.25%. With regard to that, also of note on October 31, we borrowed the remaining $147 million available on our term loan A in anticipation of closing on the Grant and CCA transactions.

We're in the process of amending our bank commitments to include Marshall broadcasting as a borrower, and that funding combined with our cash flow generated from a strong political season which just ended gives us adequate capital to close the remaining Grant and CCA transactions which again we expect to do at the end of this year. We also intend to finance the recently announced single station transactions in Phoenix and Des Moines through borrowings under our senior credit facilities or a combination of the borrowings and cash generated from operations.

Nexstar's Q3 CapEx of $4.8 million compared to $4.4 million in the previous year. Year-to-date CapEx of approximately $13.8 million, and for the full year, and we expect and are budgeting CapEx of approximately $20 million to $22 million for 2014 as we bring on board Grant and CCA. We believe our results again demonstrate we are successfully managing our broadcast and digital media M&A and integration activities, our top line fixed and variable costs and the balance sheet for cash while taking advantage of additional selective accretive acquisitions and other actions that can enhance shareholder value.

In two weeks, Nexstar will pay the fourth dividend since the payout was increased to $0.15 per quarter earlier this year. As those of you that have followed us over time, you know our intention is to review the dividend payout policy annually which suggests the board will take review of it later this year or early in 2015 in consideration of our significantly expanded free cash flow run rate and additional M&A opportunities and other capital requirements. At the present run rate of $0.60 per share annually, we are allocating approximately $18 million to annual dividend.

In summary, the free cash flow we're generated from our expanded platform is tracking consistent with our goals and expectations. And our balance sheet, capital structure and cost of capital are in great shape, and we're prepared to both complete the pending transactions while simultaneously reducing our year end 2014 leverage.

That concludes the financial review for the call. I will now turn it back over to Perry for some closing remarks before Q&A.

Okay. Great. Thank you Tom.

I'd like to conclude with a review of our recent M&A activity and the status of our other pending transactions. Last month as you know, Nexstar announced a definitive agreement to acquire KASW, the CW affiliate serving the Phoenix market, the 12th largest market in the US, for $68 million plus working capital. Pro forma for expected synergies including additional retransmission revenues, the purchase price for KASW is less than 5.5 times our average 14/15 pro forma projected cash flow.

In the first 12 months following the closing of the transaction, we expect the station to generate approximately $14 million ain broadcast cash flow, and the station is expected to provide free cash flow accretion in the first year of ownership of approximately $0.30 per share. In addition to the economic benefits, the acquisition further diversifies our station portfolio and presents another opportunity for the Company to leverage our intellectual capital and operating management disciplines.

The transaction provides an entree into the Phoenix market, which represents a natural complement to our existing operations in the southwestern region of the United States. As is our practice at acquired stations, we will inject Nexstar's brand of localism, including local programming and a local community orientation to this station, and on the business side will bolster the sales effort and benefit from efficiencies and operating disciplines, which we have successfully honed across the Nexstar platform.

This morning we also announced a smaller yet also highly accretive transaction. We entered into a definitive agreement to acquire KCWI, the CW affiliate in Des Moines Iowa for $3.5 million. When that station closes, it will complement a Nexstar owned duopoly with our ABC affiliate there.

This station will add proximally $1 million in incremental broadcast cash flow in its first year of operation. Both of these transactions, Phoenix and Des Moines, are subject to FCC approvals, but we expect them to close rather quickly given that KASW in Phoenix will represent our first station there and KCWI can be acquired by Nexstar under the current ownership rules.

So let me quickly now review the status of closing expectations for our other pending transactions as they will be strong drivers of our growth in 2015 and beyond. The seven TV stations and four markets from Grant Company as you know, the FCC approved the license transfer last Friday. We are moving to close this very shortly.

The license transfer to minority owned Marshall Broadcasting is an important step in fulfilling Nexstar's commitment to support broadcast station ownership by minority owned entities. This is also a key FCC initiative as you know. As a result Nexstar will lead the industry in incubating a new minority controlled entered into television broadcasting and also by bringing additional news, information and specialized programs to the markets in which NBG will operate.

The Grant stations increase Nexstar's exposure to political revenue especially in Virginia which will be a battleground state in 2016. The Grant acquisition also creates three new duopoly markets and adds approximately $18 million of additional EBITDA in the first full year of operations. The $87.5 million purchase price in aggregate is a low 5 times average pro forma two-year cash flow.

The 19 stations and 10 markets from CCA, recall now that this is a result of an agreement announced in June with Marshall, we plan to transfer two stations in Shreveport and Odessa Midland to Marshall Broadcasting, which they will own and operate in conjunction with a JSA and SSA with a Nexstar's stations in those markets. Given the recent Grant approval, we anticipate that transfer approval from the FCC soon and we plan to close that transaction shortly thereafter again at the end of this year.

These stations will complement Nexstar's existing presence in Louisiana and Texas, and the transaction will add six new duopolies to the portfolio. We've identified in excess of $12.5 million of operating synergies that we will realize upon integration, the $270 million purchase price in aggregate is approximately 5.7 times two years average broadcast cash flow on a pro forma basis.

As part of the process we will be divesting one station in Evansville Indiana to Bayou City Broadcasting of Evansville, also a minority entrant into the ownership ranks of television. The definitive agreement with Bayou City for the sale of WEBD, the CBS and Fox affiliates in Evansville Indiana for a $26.85 million sales price, will close simultaneously with the rest of the CCA closing.

With significant and growing free cash flow, a declining weighted average cost of borrowings, a commitment to furthering the FCC goals of increasing minority television ownership diversity and our extended track record of success in integrating newly acquired acquisitions, Nexstar remains very well positioned to further consolidate the midsized markets, to pursue additional accretive transactions in the digital media space, as well as continue to lower our leverage while increasing returns of capital to shareholders.

In closing I'd like to thank Nexstar's 35,000 plus employees for their commitment to the Company, to our shareholders and to the local communities where we play a leading role in providing critical information news on the highest quality of local and network programming.

I'd also like to thank all of you for joining us today on the call, so now let's open the call to Q&A to address your specific areas of interest. Operator?

(Operator Instructions)

Aaron Watts, Deutsche Bank.

Good morning guys. I wanted to start out with the core business. I think you talked about how in the third quarter core local was flat on the same station and national was down around 12%. Can you maybe just talk about how that feels now in the fourth quarter post-election understanding that anything up until now probably was fairly noisy with all the political money?

Sure. Well, I mean first of all, we feel pretty good about the third quarter results given that we estimate in the quarter 6% to 8% of our revenue was taken up by political advertising. And so as you know, there's only a finite amount of inventory, and so it has to go somewhere. If political advertising is taking it, there is a certain crowding out and displacement.

I would tell you that in the month of October, almost 46% of our ad supported TV revenue came from political. The core though, if you look now at November and December which I think is the heart of your question, is on the same trajectory, actually a little better trajectory than the results we reported for third quarter with local pacing up low single-digit and national pacing down approximately in the same order of magnitude as you saw in third quarter.

That's helpful. And I know it's always a little difficult to pin this down for you, but national at this point -- any thoughts on what is keeping that a little bit sluggish?

Well, I think a lot has been said on other calls about automotive, and automotive is actually pacing better for us in the fourth quarter than it did in the third quarter at this point in time. But the automotive story can really be traced primarily to one account basically, which is Honda, which led to a change in strategy this year which led to a decrease in spot television ad spend. And if you follow the new car sales, it's also led to a loss of share in the new car sales market for Honda.

So I think I would probably expect another change in strategy in the not-too-distant future, but I don't think it is anything that is secular. I think it is cyclical. I think there's crowding out. There are people that will just avoid attempting to compete for inventory during September and October.

And again, if you look at the numbers on the other side of that, I think things look pretty good in the fourth quarter. We got five of our top 10 pacing up and five of our top 10 pacing slightly down, and that's a little better than the report card we just gave you for third quarter.

Okay. And one clarifier for you. The 4 times leverage -- net leverage you talked about for year end 2014, is that off a trailing 12 month number? And I guess second to that, incorporate the acquisitions that you plan on closing by year end?

It is a trailing 12 month number. It does include pro forma synergies in that number. It does not include Phoenix, honestly Des Moines is a rounding error from a magnitude perspective, but it does not include Phoenix.

And last one for me, appreciate you taking all these -- just a little bigger picture, CBS obviously pushing ahead with their over-the-top offering. I guess it wouldn't be too hard to imagine other networks plan to follow. Can you just talk about what that means for you and a partner to the networks and what upside there might be in the future from that? Thank you.

Sure. CBS's over-the-top offering has a streaming element that will include streaming the stations in the local markets. So right now there's streaming opportunity which comes as part of the $5.99 package includes 14 of their owned and operated stations. And if the CBS and Nexstar were to agree to launch this product in Rochester, New York or Champaign, Illinois, or Fresno, California, we would participate monetarily in that $5.99 offering.

Details still to be determined, but the fact that the streaming is of a local station, whether it be network or affiliate, I think that is an important differentiator to some other offerings out there. But the network and the affiliates will work in concert to make incremental revenue.

Great. Thanks.

Marci Ryvicker, Wells Fargo.

Thanks. I have two questions. The first, how much visibility do you have in your net retrans, and is there any way you can frame up the growth here for as much visibility as you have? That's the first question. And then the second question is for the Grants -- the FCC approval, did you have to do anything with your financial guarantees? Are there still JSAs involved in this deal?

I will answer the second question first and then turn it to Tom. There is still a JSA in the deal with Grant, with Marshall. And there is still a financial guarantee. So the answer to both questions is yes.

With regard to net retrans, we have projected out through 2017, and we see significant growth in net retrans through that date. Keep in mind we have one network affiliation negotiation currently ongoing with NBC. We don't have any at the end of next year.

So our runway through 2016, once the NBC deal is done, is known. And then the only projections we have to make are affiliate costs for 2017 which really only change as it relates to Fox.

So we feel highly confident that our net retrans will continue to grow, and not surprisingly, the net retrans margin will decline, but we are not concerned about the margin. We are concerned about the net dollars, and that will grow significantly between now and year end 2017.

Thank you very much.

Davis Hebert, Wells Fargo Securities.

Hi. Good morning everyone. Thanks for taking the questions. Tom, you walked through some of the capital needs. I believe you said it was a $147 million delay draw on the term loans?

Yes. That's now on our balance sheet. Currently we have over $250 million on our balance sheet.

Okay. So is there any other funding needs, cash or revolver that you anticipate for the remaining acquisitions that you frame that up?

Well, again, we've got Grant and CCA done. We've got Des Moines done. And depending on the timing -- we're back into this timing thing on Phoenix depending on when Phoenix happens. If it happens earlier in Q1 there will be a slight funding need. If it happens in the back half of Q1, we will be able to finance it on our own. But we see other opportunities out there in the not-too-distant future that will I think clarify our thinking with regard to additional capital raises.

But right now Grant and CCA and Des Moines are done. But honestly, it's already on our balance sheet combined with the $105 million revolver which is totally unfunded. We got the ability to do that, and important in that math is a $27 million divestiture in Evansville which will close concurrent with CCA because of DOJ restrictions.

So our funding is strong, and then the only question is when does Phoenix close and does that create a $25 million or a $30 million need, or if it's delayed slightly, will free cash flow our way into that as well. Is that responsive?

Yes. That's very helpful. And on M&A, Perry, you talked about different stages happening over time. And you mentioned some opportunities are out there.

Just curious, where do you think in the M&A and consolidation front do you think we are? Is it -- do you think we will see further strategic -- large strategic transactions?

Yes. I think that the universe of people that do what we do that are not owned by the networks -- that universe has shrunk from 35 to 40 companies in 2011 to 16 to 20 companies now currently. So with every transformative transaction, that resets the stage for remaining potential of transformative transactions. But there are really only a couple of companies that are capped out vis-a-vis the FCC ownership limitation of 39% that cannot make acquisitions in this space.

I think everybody else is probably talking to everybody else, and some of those conversations are at the first date and some of them are a little bit more advanced than that. But I think you will see continuing discussions about scale.

We think it's important to be important. And so we will participate in those conversations. As well as there continues to remain a relatively steady parade of smaller one-off, two-off type acquisition opportunities that we fully vet and investigate every one of those here.

Okay. Interesting. I last question for me, Greenhill report incentive auction, I noticed the auction's been delayed to 2016, but what is your initial reaction to some of the valuations? Do you feel like they're optimistic and there's still a lot left to play out here?

The short answer would be yes. I mean, we obviously looked at them, and at this point I told our Board we should take them with a grain of salt because as you, there have been follow-on conversations with the FCC as to specific valuations of specific stations in those markets. What the Greenhill report put out was a valuation on a median basis for any station in a given DMA.

And so it gets a little bit more linear in terms of the station's value, the need for repacking and adjacent markets that it could affect that potential number of other participants. And so those numbers have already started to come down some as a result of those conversations.

And as you know, the way that FCC will run the auction, okay -- who is in at $100 million? Who still stays in a $90 million? Who is still in at $85 million, and when nobody's left, they add a dollar to that, and that is the price at which they would likely transact.

So the Greenhill numbers are the highest numbers you're ever going to see, and we would expect them to go down. But there's just a whole lot that needs to play out before we can make it a proper evaluation. But obviously we will look at it. And if some of those valuations are worth substantially more at the end of the day than the operating business, then we will take a serious look at it.

Okay. Thank you very much.

Tracy Young, Evercore.

Yes. I've got two questions and then one follow-up. If you were to strip out the Hoak acquisitions, is there any way to say what core was for Q3? Was is still down 1? And then did you give political for Q4? Thanks.

Well Tracy, the same stations strips out Hoak. So that's a good number. And I think we're comfortable saying that political for the entire year will be in the $64 million area.

So you can back in -- I'm not sure just looking at political for the nine months is what? 29? So that gives you 35 for the year, for the fourth quarter?

Yes. Okay. And then --

I was going to say the only other thing I would say there is keep in mind -- the body is still moving because we have a runoff election in Louisiana which is going to be -- it's an important market -- important state for us. So there may be some upside to that number, but that -- the $64 million includes our expectations for Louisiana through now and out through December 6.

Perry, did you want to add anything else?

I think that says it all.

Okay. Cool. And then in terms of CapEx, Tom you had mentioned the $20 million to $22 million number for this year. Is that similar to what you expect for next year?

Yes. I would think so. A lot of that includes -- it's been back-end loaded because we've been waiting on Grant and CCA.

So some of that may spill over into early 2015, but yes. I would say $20 million plus a little bit for 2015. But obviously our run rate maintenance CapEx is significantly below that.

Okay. Thank you very much.

James Dix, Wedbush Securities.

Thanks very much. Good morning gentlemen. Just two questions I guess just following up a little bit on Tracy's about political. Is your sense that the crowd out for the 4Q political is going to be in the range of what you've been seeing in 3Q or is it potentially a little bit different just as we are thinking about that for the fourth quarter core business.

It's more impactful, James, in October because the [$35 million] area that Tom guided you to was really spread over five weeks and a couple of days where the third quarter political revenue was spread out across three months. So I mean -- not at all atypical of what we were expecting.

And in fact we budgeted core revenue to be down in October because as I said, 46% of our ad supported revenue in the quarter -- or am sorry in the month of October was from political. So it didn't take up 46% of the inventory because it generally comes at a premium, but it obviously took up some. And our team did a masterful job of managing core revenue in October to a low single-digit decline over the prior year which was almost on top of what we budgeted.

So political met our expectations, and we were able to accommodate it with the inventory that we had. And then our core revenue as I said was at expectations which was, we budgeted down in October and we budgeted up in November and December. And we're pacing to those numbers now.

Okay. Great. That's very helpful. I guess my second one was just on the broader dynamics in the core ad market. So clearly we continue to see different trends in local versus national.

So I'd be curious if you could give us a pretty good color on advertising that you get from those who are new to TV. How do you see the share shifts playing out in the local market separately from the national? Where do you think the potential is versus local media competitors as well as new digital ones on the local side to be picking up share? Where are the biggest buckets for you to go after?

And then I just guess conversely who do you think your stiffest competitors are for share especially on the national side? Thanks.

Well, we are right now at about 75/25 local to national in our core revenue, 75% coming local. Obviously we put a premium on business development in the Company and commission it at a higher rate and we report on it every quarter because new business was approximately 10% of our total local in the third quarter. So it is a part of the Company's DNA and a part of the foundation of this business.

So national as you know, the way national comes it's -- I've got this much money for the market, and it usually ends up being a reverse commodities auction, so how low can you go to get the business? Consequently then when there's an inventory shift like for a heavy political market, national is the first to go. So I think there's some of those dynamics that play out as well.

I will tell you that in the local marketplaces, there is a continuing secular rotation out of printed material, and that money goes somewhere. And broadcast has been the primary beneficiary, and local television has been the primary beneficiary of broadcast.

I don't think that story is done yet. And we see that continuing to play out in our markets in both display and classified advertising out of newspaper, declines in direct mail as well as directories. And we think both our on-air and digital platforms are beneficiaries of that.

In the local marketplaces, in our local marketplaces, we feel that we have the superior distribution platform -- we are a reach medium. If you really want to get people into your furniture store you buy ads on TV because more people watch those than use any other form of media And that gets complemented by a more targeted approach with our digital assets.

So we feel we are without peer, but I will tell you in the local marketplaces, the guy that owns the business standing next to the cash register, the best idea wins. And so that's why we continue to challenge our people to know more about their clients' needs than about the ratings of our business and then be able to deliver campaigns and platforms that serve the customers' business because ideas are the currency, not Nielsen.

Great. Thank you very much, Perry.

John Janedis, Jefferies

Thank you. Hey Tom, your cost containment on the fixed cost side look really solid. Can you speak a little more to the components and as the next deals close, can the declines improve directionally? Or if not, is this some run rate maybe for the next couple of quarters?

Well, as we take on new properties, clearly there are cost takeouts involved there. One big contributor to the decline is our syndicated programming costs. First of all, we are using less of it, and that which we use we're paying less for. Again, keep in mind the dynamics in our markets where there are fewer stations for some of this syndicated programming to find a home, and so we use that to our advantage to negotiate hard.

The rest is just continuing to tighten down the screws specifically on new acquisitions with regard to overall cost. We identify certain costs on the way in, but that's not all we do. And we then -- once they are in the fold and operating under Nexstar management for a period of time, we continue to chip away at some of the more ingrained costs and the institutionalized costs in some of those markets.

We are very pleased with that. We have been very fortunate and managed very hard our medical expenses. Our medical costs are not expected to go up significantly next year. We just had a meeting on that yesterday, so we are very pleased with what we've been able to bring and continue to implement on Nexstar stations as well as the new stations.

That's helpful, thanks. And maybe separately, understanding your average market size, is there any evidence that the softness we're seeing at both the cable and TV networks has led to some of the national spot money moving up the network?

No. I think that that was the case back in the '80s where it went network, scatter, spot. I think now if you're looking at national money, it goes network, scatter, national cable, barter syndication. And if there's any left over, we might have that conversation.

It's more of a psychology thing, John, I think that people read the papers. And oh well -- networks are doing well. The upfront was big. Then I probably have to load my money in too.

But I think the certain softness that others have spoken about that, quite frankly, we are not seeing to the degree that others have, I think a lot of it's a confidence issue. I would expect now with the results of the election being in, that there's slightly more optimism about government and the economy than there was a week or so ago.

And I would expect that you could potentially see a slight acceleration of the trajectory of advertising revenues as people begin to look at next year and begin to see hopefully constructive things happen in Washington. And that gives them a little more confidence about their business and their economy.

And beyond that I think it becomes somewhat situational. You've got markets that are finally out of the drought business. You've got markets that are into fracking business in a big way. And it's provided additional GDP. And so it's the sum of all of those things, but I think the point is that there are a lot of ingredients that go into baking that cake.

Thanks Perry. Maybe one last one on M&A if you don't mind. Given the size of the Phoenix market, is this a signal that you can be more opportunistic maybe given less competition for assets and maybe look at larger markets where the financials make sense?

John, yes. I would say we have never not looked at larger markets. We look at everything. But we're still going to be very disciplined in the way we acquire.

I would say the Phoenix acquisition was a combination of a motivated seller that had to sell as a condition of their DOJ release and FCC approvals and the fact that yes, some of the other folks that you would usually expect to show up in that conversation don't have room under the national ownership cap. So I guess the short answer to your original question is yes.

Great. Thank you.

(Operator Instructions)

Edward Atorino, Benchmark.

Yes. Could you talk a little bit about what CBS is doing and what they're thinking and how you plan all that? Is this something -- a lot of money for you -- a little money for you? Nothing?

I was just at a conference in New York and spent some time with Les, and I think that -- the CBS over-the-top offering is targeted primarily at the 10 million homes in the country that don't take a pay service that may want library product or other things and the super fans of the network of that would like to have the streaming capability and be able to see their shows everywhere.

So the way I would look at it is Netflix after five years and a lots of banging the pots and pans together to create noise has got maybe 7 million or 8 million subscribers. So I think a CBS only product necessarily might be less than that, but I think the revenue was incremental, and they are not -- this is not an exclusive product. So if an MVPD would like to participate in the offering and with CBS, I'm sure that can be arranged.

And I think the important thing again is it's an over-the-top product, but in a local affiliate market, the over-the-top product would be delivered through the affiliate. And the affiliate would participate in that revenue. And so I think that that is a model that maintains an ecosystem and keeps all of participants happy. And I applaud CBS for their thoughtfulness on this.

There's no cost to you. Right?

About $10,000 in capital. And then a monthly [think back] cost, but again, neither is significant.

Okay. Thanks.

Barry Lucas, Gabelli & Company.

Thanks very much and good morning. I have a housekeeping for Tom and maybe two strategic for Perry.

So Tom just to go back to the balance sheet, with just about $1.1 billion of total debt at 9/30, you add $350 million. So the delay draw is not in there, so we got to add about roughly $350 million for Grant, CCA --

Closer to -- I would say it's closer to $300 million in total needs. Keep in mind that $357 million I think is the number. We have $35 million in [positives], we're selling stations for approximately $29 million.

Right.

And then we generated significant amounts of free cash flow when you add to the $147 million that we borrowed. So the net borrowings to conclude CCA and Grant will be approximately $225 million.

Okay. That's sounds good again. So that's the year end figure that we are pointing to is somewhere around $1.3 billion.

Correct.

In total debt. Okay. Perry, you touched a little bit or Tom was talking a little bit about syndicated programming cost declining.

Maybe you could expand a little bit on content creation. Certainly Sinclair made a little bit of a splash in sports and some other areas and Scripps has a couple of syndicated shows out there; Meredith is doing the same. So how do you about content creation particularly given the number of stations you have where you could spread a meaningful amount of costs around the brick base?

Sure. I think we have chosen to make our content creation hyper local. In that if we had additional hours to local programming, it is truly going to be local programming and not some national programming that has maybe local cut-ins or whatever.

So we still think the highest and best use of that time is a local. And we now produce in excess of 68,000 hours a year of local news. That's about 1,400 hours a week, and that's before we close on Grant and CCA. And the additional Des Moines station and Phoenix and anything else that might be in the pipeline.

So again we think the highest and best use of our time and resources is local and not trying to create some national franchise that we can deliver locally because we think people are really at the end of the day only care about something that affects them locally. So our focus will be to continue to do more local news, local sports, local lifestyle type programming that are market specific and not some national brand that we try and tailor to a local marketplace.

Great. And I want to come back, maybe take a different cut at John's question and Phoenix. Given the lack of success of another broadcaster in standalone CWs and there does not appear to be an opportunity to [duopolize] that market,. So was it merely opportunistic that you had a seller that really had to sell and you can make it work on the purchase price number? Or was Jamie Kellner right?

Yes. Well, it was an opportunistic acquisition, but if you look at the history of the station where it was -- almost shoveled from owner to owner over the last couple of years, to try and make other things in the market work, at one point earlier this year the station was down to two salespeople. So obviously we looked at that and said there will be five times that many sales people the day after we close and a lot more emphasis on local programming, local news cut-in, all kinds of things that we can do to tailor to make the station local and not just a CW and Two and a Half Men video jukebox.

Now everybody that has touched that station has had other stations and bigger fish to fry in the market place, but for us this will be our only fish. And I think that we see substantial operational upside to a transaction that we were able to pro forma to a highly accretive multiple that will deliver just on the pro forma before the operational upside kicks in $0.30 a share free cash flow.

And we have had a great deal of success with a standalone CW in Jacksonville, Florida that we bought from another operator to whom CW was not core. And we've added things like indoor arena football games -- a local music show on Saturday night and Sunday nights on the weekends and all kinds of local programming there.

And our cash flow there at the time of acquisition to where it was this year -- and again as CW does not get a lot of political nor was there a tremendous amount of political in Florida in Jacksonville. But our cash flow is a 4 times of what we inherited. And so you run the same play in Phoenix and you pick up two or three share points of revenue by creating developmental projects and opportunities for local advertisers, overlay your retrans contracts, hub the station out of an existing master control hub, reduce those -- eliminate those expenses it's -- I can point to the page in our playbook where that's what we do.

And the fact that it's in Phoenix doesn't faze us. Doesn't -- the folks who oversee that station for us, Brian Jones -- used to run the duopoly here in Dallas which is a larger market yet than that.

So there's nothing about it that we don't like, and again it was opportunistic. And so we saw the opportunity to create an accretive acquisition with substantial free cash flow accretion on the way in to something that we think we can operate to more than what it is over time.

Great. Thanks for the commentary.

You're welcome.

John Huh, Wells Fargo Securities.

Hey guys. I just wanted to clarify, that JSA SSA you have with Grant -- is that a straight up JSA SSA that you can fully consolidate the financials over the foreseeable future and sell more than 15% of the ad time? I only ask because there was some press that would suggest otherwise. Thanks.

Are you asking if it's a variable interest entity?

Yes. Essentially yes.

We expect it to be yes.

Got it. Thank you.

Michael Kupinski, Noble Financial.

Thank you. I just have a clarification on -- you mentioned that you had five ad categories up and five ad categories down in the top 10 categories. I was wondering -- and you get some specifics about auto.

I was wondering on the weak advertising categories if the tone of the business is improving as you go into the fourth-quarter for some of those as well. And specifically if you could talk about the retail category which I think has been soft for most broadcasters.

And especially a question mark why because consumer confidence is so strong and so forth. Do you have any thoughts on some of your other key categories in the tone of the business going into the fourth quarter?

Sure. You asked about retail. We are sitting right now at a low teens pace positive to the prior year on the retail category. So that's certainly not -- certainly would indicate to me that there's confidence in retail in our portfolio.

Furniture and attorneys, medical healthcare and auto are all up in the low single digits, and our accounts that are down in the -- are all down in the low to mid single-digits. So I would say -- and again comparing this report card to the third quarter report card, we got more categories pacing up than we did in the third quarter. And the trajectory of the increases -- percentages are higher, and the down percentages are lower than they were in third.

And again this is a pace report. This is not a final analysis, and we still have two months yet to go in the quarter. But again I think that our business in the third and fourth quarter obviously is laying out exactly as we had planned. I mean, we hit our budgeted political number. And so I think we were thoughtful when we laid out our approach to the year and core growth on -- in the low single digits and the drivers were going to be retrans, digital, and political. And everything's playing out exactly as -- there are no surprises here.

That's terrific. Thank you. That's all I have.

We have no further questions in the queue at this time. I will turn the conference back over to our presenters for any additional or closing remarks.

Great. Well thank you very much everyone for joining us. We look forward to reporting on our fourth-quarter results in early 2015 and look forward to talking to you again. Thanks.

Ladies and gentlemen that does conclude today's conference. Thank you all for joining.