Nexstar Media Group Inc (NXST) 2021 Q4 法說會逐字稿

Good day, everyone, and welcome to the Nexstar Media Group Fourth Quarter 2021 Results Conference Call. Today's call is being recorded. And now at this time, I'd like to turn the call over to Joe Jaffoni of Investor Relations. Please go ahead.

Thank you, April, and good morning, everyone. I'll just read the safe harbor language, and then we'll get right into the call and your questions. All statements and comments made by management during today's conference call, other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Nexstar cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during today's call.

For additional details on these risks and uncertainties, please see Nexstar's annual report and Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission or the 10-K for the December 31, 2021 year, which will be filed with the SEC on or about February 25, 2022 and Nexstar's subsequent filings -- public filings with the SEC.

Nexstar undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Thank you for your patience with that. And it's now my pleasure to turn the conference over to your host, Nexstar Chairman and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joseph, and good morning, everyone. Thank you very much for joining us today. Nexstar's 2021 fourth quarter financial results marked the end of an outstanding year for the company, as we achieved another record year with full year 2021 revenues exceeding what was also a record 2020, which, as you will recall, included record political revenues. In 2021, we grew revenues across each of core advertising, distribution and digital, demonstrating the strength of our business and also the recovery of the ad market.

Our fourth quarter and full year 2021 net revenue, adjusted EBITDA and free cash flow all exceeded consensus expectations. We are also pleased this morning to issue our guidance for average annual free cash flow for the 2022-2023 cycle of $1.4 billion annually, which again will be a record amount of cash flow for Nexstar.

Tom Carter, Nexstar's President and Chief Operating Officer; and Lee Ann Gliha, our CFO, are also here with me this morning. I'll start with a summary of recent highlights and developments, followed by Tom's operational review and Lee Ann's financial review, then we'll open for questions.

First, I'd like to comment that we're feeling good about the overall business environment. So far in Q1 2022, our core advertising is pacing ahead of 2019 levels, which is a real testament to the strength of our business and the economy, since our largest category, auto, while recovering, remains still somewhat challenged. Q1 '22 has benefited from the Olympics and Super Bowl as we are the second largest NBC affiliate group as well as early political and PAC spending in response to the upcoming Supreme Court nomination and other local and national political issues.

Local television advertising remains the gold standard for effective political campaigns because it has the biggest credible influence on voters. For 2022, we anticipate we will generate a record level of midterm net political revenue, eclipsing our pro forma 2018 midterm political revenue number of $383 million.

We also anticipate a recovery in the automotive category. As -- in addition, as Tom will cover later, we continue to see strength in the sports betting category, with new states legalizing online sports betting, including New York, Connecticut and Louisiana and most recently, Illinois, which is expected to come online in March, and we already have orders on the books.

Likewise, you can expect to see continued growth in our distribution revenue based on 2021 MVPD renewals and the annual escalators we have in all of our contracts. In 2022, we have contracts representing more than half of our subscribers up for renewal and repricing, which will benefit us in 2023. In 2021, we significantly expanded programming at News Nation at 13 hours of original news programming per weekday, and we completed the accretive acquisition of The Hill's digital political news platform, bringing synergies across multiple of our business lines.

From a financial perspective, we are the only cable news network to launch profitably. While our audience for News Nation is still modest, we are the fastest-growing cable news network and advertisers are validating our strategy and News Nation's unbiased content as we generate the same CPMs as our cable news network peers.

In the fourth quarter and throughout 2021, we continue to focus on leveraging Nexstar's industry-leading scale and content platform to drive near- and long-term growth while creating value for our customers, shareholders and communities. Over the course of the year, Nexstar launched multicast network Rewind TV, which together with Antenna TV, our other owned and operated network as well as our multicast services generate a combined 8 figures of annual adjusted EBITDA. In 2021, we deployed NEXTGEN TV in 17 markets, expanding our coverage to 29% of all U.S. television households, and we're on pace to launch additional stations to increase our reach to 50% of the U.S. population by the end of this year.

Nexstar is among the nation's largest holders of Spectrum, and we believe our scale and national reach will be critically important to cultivating demand for its use. What we're most excited about are the myriad new revenue opportunities that our Spectrum will represent. Consistent with our capital allocation priorities and focus on enhancing shareholder value, in January, our Board of Directors increased Nexstar's quarterly cash dividend by 29% to $90 -- I'm sorry, $0.90 per share per quarter. The double-digit increase in Nexstar's dividend for the ninth consecutive year, ongoing opportunistic share repurchases and our free cash flow growth will allow us to continue delivering industry-leading returns to our shareholders.

And of course, we will continue to pursue M&A opportunistically to drive shareholder value as we've done for our almost 26-year history. Our M&A strategy is focused on leveraging our scale by acquiring businesses that are synergistic and enhance the value of our enterprise. As I'm fond of saying at Nexstar, we like to read the financials from the bottoms up. We apply that ethos to pretty much everything that we do, including our M&A.

In January, we released a new investor deck on our website, which I encourage you to review. The deck highlights the assets and scale of our business, the investment thesis for the company and how we plan to grow both in the short and long term. Nexstar is a scaled business with a significantly larger footprint than other broadcasters. We reach over 210 million people in the United States with our television signals and over 120 million monthly uniques with our digital assets, making us a top 10 digital news and information property. We also have a differentiated free cash flow focused model, which positions us well versus the larger diversified media interest. For those of you looking to invest in Nexstar, we think this could not be a better time.

We have excellent 3-year visibility on the business, with 2022 being a political year, 2023 benefiting from our expectation of increased retransmission revenue, as more than half of our distribution agreements will be up for renewal towards the back half of 2022. And in 2024, we have both a presidential collection year, and we will also have the benefit of the increased revenue from 2023 distribution agreement renewals. This solid expected financial performance will provide us with the financial flexibility to expand and pursue strategic organic growth initiatives as well as accretive M&A while supporting growing shareholder returns.

With all of that said, let me now turn the call over to Tom Carter for our operations review. Tom?

Thanks, Perry, and good morning, everyone. We're extremely proud of the consistent growth of our operating results throughout the pandemic, as well as the more than 12,000 members of the Nexstar Nation across the country who, while serving their local communities have consistently demonstrated their ability to offset challenges, putting Nexstar on a path for continued success and growth.

Operationally, Nexstar's strong 2021 rebound continued in the fourth quarter. Nexstar's net revenue of $1.25 billion topped consensus expectations and excluding political advertising revenue, net revenue increased 13.8% over the 2020 fourth quarter, reflecting our success in delivering continued strong growth across all of our nonpolitical revenue sources. Core television advertising revenue of $494 million increased 3.4% over the prior year's quarter as healthy demand from advertisers resulted in solid growth in 8 of Nexstar's top 10 advertising categories.

Q4 top gaming categories were entertainment, sports betting, medical health care, department stores and retail stores and telecom, offset by continued declines in auto and insurance. As we've done consistently for many quarters, Nexstar's local sales initiatives continue to deliver healthy levels of new business with our sales team generating new-to-television revenue of $37 million, marking an increase of 33% over the prior year's quarter.

In comparison to pre-COVID market environment of 2019, Q4 2021 levels were still slightly below Q4 2019 levels due in large part to decline in automotive. But if we take out the high and the low scores, excluding automotive, our weakest category and sports betting, our best-performing category over that time frame, 2021 fourth quarter core television advertising exceeded pro forma 2019 levels and with growth across a wide swath of our advertisers.

We expect Nexstar's positive ad trends to continue, and as you heard Perry say, are pacing that way in Q1 of '22. As mentioned, sports betting was a bright spot for us as it was a top 5 category in all of 2021 and in the fourth quarter. We continue to see strength in '22 in the category as new states such as New York, Connecticut and Louisiana have launched online sports betting in the fourth quarter of '21 and early in '22.

We anticipate a new law in Illinois allowing remote registration for online gambling, expected to take effect in early March to positively impact the online sports betting category through our stations in that state and our station in the neighboring -- neighboring Missouri, which has coverage in Illinois.

We are cautiously optimistic about this category given the continued spend we see in markets that we've been live in for a longer period of time, but we'll see how these sports book evolve their spending over a period of time. We do know that local television has been an effective way for sports books to increase their brand awareness and attract new players to their sites and apps.

The power of Nexstar's portfolio has also -- has been beneficial to us in capturing these sports dollars. For example, we're seeing significant dollars in Europe where, given the breadth of our assets, we reach the entire state. Overall, in Q4 '21, approximately 57% of our core advertising was from the services category and 43% from goods, including 16% from auto. Our concentration and services-based businesses has helped insulate Nexstar from exposure to categories with supply chain disruptions like automotive.

In addition, we expect that this should bode well for us in an inflationary environment where our customers have less near-term pressure on cost of goods sold. In addition, our overall fixed cost infrastructure should be beneficial as we have a top line that can grow with inflation. Fourth quarter distribution revenue of 16.6% from the prior year rose 16.6% from the prior year to approximately $616 million, reflecting the renewal of distribution agreements in 2020 on better terms.

We continue to have good visibility into our net economics with all 4 of our big 4 affiliations contracted through December of '22 and only our ABC affiliation agreement up at the end of that year. We expect continued retransmission growth reflecting contract renewals on better terms, representing a mid- to high single-digit percentage of subscribers in 2021 and more than half of our subscribers in 2022, resulting in a higher rate of growth from this revenue source in '23.

Q4 digital revenue increased 56.3% year-over-year to approximately $102 million with digital-adjusted EBITDA up substantially, over the prior year period. Our top line increase was driven by strong year-over-year growth in our local digital advertising revenue and agency services business and contributions from last year's acquisition of BestReviews and the full first quarter contribution from The Hill.

With the momentum of our audience development strategy and content, we expect growth in our digital revenue and cash flow going forward. Top line growth in our -- of our nonpolitical sources, combined with expense management, drove fourth quarter adjusted EBITDA and free cash flow before onetime-transaction-expenses of $499 million and $330 million, respectively. Nexstar generated a 39.8% adjusted EBITDA margin, and we converted approximately 66% of our adjusted EBITDA to free cash flow.

Before turning to Lee Ann, I'd like a moment to highlight our recent work and success on ESG initiatives, as I know this is an important topic to our Board communities, employees, shareholders and other constituents and stakeholders. The Board of Directors recently took an action from -- a positive action from a governance perspective by unanimously voting to recommend that shareholders approve an amendment to the corporate charter to eliminate the company's Class B and Class C common stock classes.

The Class A common stock has been the only class of shares outstanding since 2013, so this is a cleanup to bring the charter in lockstep with the practice to only have one class of voting stock, which is a good governance practice. Additionally, from a governance perspective, we expanded our commitment to fair and unbiased reporting by management, adding restrictions on our journalists' direct involvement in local state and national politics, Nexstar also formalized a policy prohibiting the Nexstar Political Action Committee from soliciting or accepting contributions from Nexstar journalists and news personnel. Having an unbiased and fair reporting process on all of our news products is a core tenet for Nexstar as evidenced by News Nation, The Hill and our local TV news.

Regarding human capital management, we have significantly increased our disclosure around workforce demographics via our September 2020 census, which was disclosed in last year's proxy. We anticipate updating this information in our '22 proxy in advance of this year's annual meeting. Also in '21, our workforce -- for our workforce, we established the Diversity and Inclusion Council and a mentorship program to support the success of these initiatives, in May of '21, we promoted Courtney Williams to the newly created position of Chief Diversity Officer, where she is responsible for leading the company's efforts to expand diversity in hiring, promotion and retention. Ms. Williams also serves as Chairperson of the Nexstar D&I Council.

2021 is the first year of a multiyear partnership Nexstar has with Feeding America, which -- combined cash and in-kind contributions totaled more than $1.6 million in its first year. The combined efforts led Feeding America to name Nexstar a leadership partner. From an environmental perspective, media and entertainment has been judged by SASB to not exhibit primary characteristics of the key types of climate change risk. Nexstar, however, is in the process of building systems to better track our current power consumption levels in order to thoughtfully map a plan for future usage reduction and an increase in sourcing of sustainable power.

Additionally, we continue to look for ways in which we can reduce our overall carbon footprint by becoming more efficient. Some of our current initiatives include replacing lighting and transmission equipment that consumes less power.

In summary, we're excited not only about the strength and results of our existing platform, but by the many organic and M&A growth and opportunities in front of us.

With that, it's my pleasure to turn the call over to Lee Ann for the financial review and update. Lee Ann?

Thank you, Tom, and good morning, everyone. The strong foundation of Nexstar's assets, operations and financial position enabled us to achieve strong Q4 and full year 2021 results and position us for a great start to 2022. As Tom mentioned, net revenue for the quarter declined 9.5% from the prior year quarter, reflecting the political comparison.

Excluding political, net revenue increased 13.8%. On a same-station basis, net revenue declined 12.6% and was up 8.9% excluding political. Same-station core revenues were up 2% for the quarter and 8.7% for the year, distribution revenue was up 15.8% for the quarter and 12.9% for the year, and digital revenue was up 4.4% for the quarter and 11.1% for the year.

For the full year, Nexstar generated all-time high net revenue of $4.65 billion, up 3.3% over the prior year. This impressive revenue achievement was driven by record core advertising, distribution and digital revenue, which grew double digits over 2020 levels and fully offset the $462 million cyclical year-over-year decline in political advertising revenue. Excluding political, net revenue increased 15.3%.

Fourth quarter direct operating expenses, SG&A and trade expenses all increased, primarily as a result of higher core and digital advertising revenues as well as expenses from station and digital acquisitions, including a full quarter of expenses from The Hill. Total corporate expense was approximately $44 million, including noncash compensation expense of approximately $12 million. Fourth quarter CapEx was approximately $42 million. Spectrum repack CapEx totaled approximately $3 million, and we received $1.8 million of reimbursements from the FCC.

Fourth quarter total interest expense declined 6% to approximately $70 million. Cash interest expense was approximately $66 million and compared to $70.6 million last year due primarily to lower first lien borrowings and a lower interest rate. Fourth quarter operating cash taxes were $72.5 million.

We also recorded $17 million in distributions from equity investments relating to our 31% ownership in TV Food Network in the fourth quarter as that entity continues to produce strong results. For the full year, these distributions amounted to $239.5 million, up 7% over the prior year. Looking ahead, we project corporate overhead exclusive of stock comp and transaction cost to be approximately $35 million in the first quarter, and we expect corporate overhead in the $140 million area for the year.

Noncash comp is expected to be approximately $13 million for the quarter and $58 million for the full year, but will vary based on stock price and actual grants. Operating cash taxes are expected to be approximately $374 million to $386 million for the full year. Just to give you a little bit of color there, we use a 26.5% tax rate when calculating our estimated tax before onetime and other adjustments.

From a timing perspective, as multistate tax payment gets made in the first quarter, 2 payments are usually made in the second quarter with 1 in each of the third and fourth quarters. Cash tax should come in around 41 -- sorry, cash CapEx should come in around $41 million in the first quarter and $150 million for the full year. We typically spend more in CapEx in even numbered political years than nonpolitical years. We expect Nexstar's cash interest expense to be approximately $68 million for the first quarter and $300 million for the full year, reflecting current estimates for LIBOR and expectations for debt repayment.

Turning to the balance sheet. Nexstar's outstanding debt as of December 31, 2021, was $7.42 billion. Total net debt amounted to about $7.4 billion at year-end, down from $7.7 billion at December 31, 2020. Net debt for first lien covenant purposes is $4.6 billion. Our net first lien leverage -- first lien covenant ratio at December 31, 2021, was 2.3x, which is well below our first lien and only covenant of 4.25x. Our total net leverage for covenant purposes at quarter end was 3.7x. The slight increase over prior quarter is due to the fourth quarter political revenue from 2020 dropping out of the last 12 months' covenant EBITDA calculation.

We expect leverage to reduce by the end of 2022 due to combination of allocating a portion of our free cash flow to reduce indebtedness and increasing EBITDA, given our outlook for the year. For the full year, we've returned $655 million or 53% of our free cash flow to shareholders in 2021. The remaining of our free cash flow went to make acquisitions, fund CapEx and repay debt. As we move forward, we will continue to strategically deploy our cash in a manner that's consistent with our commitment to creating the highest shareholder value. For all the factors that -- enumerated by Perry and Tom earlier, we are excited about the prospects for 2022 and remain confident in our ability to enhance shareholder value and deliver on our new pro forma average annual free cash flow guidance of approximately $1.4 billion over the 2022, 2023 cycle.

A few notes on our 2022, 2023 free cash flow guidance before we open it up for questions. From an operating perspective, these figures take into consideration our current best estimates for growth in the core business. We've assumed no M&A or other onetime or unusual transactions in these figures. So free cash flow is redeployed in the form of debt repayment, dividends and share repurchases.

We've taken into consideration the rising interest rate environment in which we are in, which will impact our expected increase given our significant floating rate debt load. And that concludes the financial review for the call. I'll turn it over to the operator to open the line for questions.

(Operator Instructions)

We'll first hear from Steven Cahall of Wells Fargo.

I've got one each for Perry, Tom and Lee Ann. Maybe first, Perry, could you just provide us a little more color around the elimination of the B and C class shares. I always thought of those as maybe like a poison pill for times when the stock was down precipitously like in 2020. So does the elimination of that suggest that maybe there's a better M&A environment out there? We've seen the company transact today with both strategic and financial buyers. So any color on your thinking on the share class elimination would be great.

And then, Tom, what do you think happens to core ads this fall? Typically, we model in crowd out pushing core down in the midterm. It sounds like you might get auto back right around the time that political is there. So do you think the dealers are going to spend and pay those politically juice straights or will there be some crowd out?

And then finally, Lee Ann, I think you said you didn't join Nexstar to just pay the dividend and buy back stock. When you think about M&A, what are some of the things that you're looking for in the marketplace?

Well, that's a mouthful, Steve, but let me go ahead and get started here. The 3 class share structure was a vestige of when we were a controlled company with ABRY Partners. At one time, ABRY and I had B shares, which were 10 vote -- super vote shares, which we eliminated when ABRY exited their position in the company. So really just kind of cleaning that up and eliminating B and C class, C class shares were never issued.

But I think you're right, it does create a much more shareholder-friendly environment here that we have one class of stock, one share, one vote. And so you can make that what you will but it's really seen -- it was an action taken by us, we think, that will provide a shareholder-friendly result when shareholders vote on it in our annual meeting in June.

And Steve, just to follow up on that as well. It also makes Nexstar eligible for certain indices that exclude multi-share cast -- or multi-share class stock structures. We're not able to be included in some of those indices now. And after the action by the shareholders in June, we anticipate being -- we will be eligible, and we anticipate, hopefully being favorably viewed from that perspective.

With regard to your question on advertising, we do believe that auto will rebound to a degree in the back half of the year. And we'll be able to compete with a political heavy environment, we believe it will. But regardless, just the return of auto in general, whether it gets nominally excluded for a 6- or 8-week period in September and October or they have to push back to November or December. I think that everybody believes that there is a good degree of pent-up demand. And once inventory starts to flow, you'll see the dealers competitive juices (inaudible) and really want to push that inventory through their lot and off of their lot into consumers. So that's our thinking with regard to auto in the back half of the year. Lee Ann?

Yes. And with respect to M&A, Nexstar has done a ton of M&A over the history and that's created a lot of value for shareholders. And so I anticipate that we'll continue to do the same going forward. I think from our perspective of what we would look for, I mean, clearly, first, if we can do station M&A, that's our bread and butter. We know how to do that. That makes a lot -- creates a lot of value. We would continue to do that to the extent there are opportunities within the current regulatory framework. But then I think also we're going to just look for businesses that we can leverage using our scale and the platform that we have.

So that kind of pushes us towards more content-based businesses. You can look at what we've done in the past with respect to The Hill where now we can utilize that content on News Nation and other of our websites or, for example, BestReviews, where we were able to air commercials about BestReviews that help drive the traffic to the BestReviews' website. So those are the types of things that we'll think about. And as of -- we'll always be looking for what we can do to generate the best return for shareholders. Operator?

And next, we'll hear from Dan Kurnos of The Benchmark.

Great. Perry, everyman, there's a stroll down memory of late a few thousand percent to go. Just maybe one kind of complex multi-part question around retrans. As you guys think about the evolution of the market now, we've heard from Paramount talking about flat affiliate growth, and that's a combination of sort of more minimal step-ups on the growth side and also significantly, for you guys, no real step-ups on renewals on network comp or on the reverse side.

Clearly, we think that the broadcast -- broadcasters will be better on gross just given local news and how kind of the disparity between eyeballs in the bundle. But just help us think through sort of the net retrans guide embedded in your free cash flow? And also as these guys continue to put more and more dollars behind streaming and streaming content, how the evolution of their own premium bundle impacts that outlook?

Well, I think as it relates to step-ups. Obviously, that's driven by renewals. We have over 50% of our subs that will be repriced in 2022. Generally, all of that is in the back half of the year and primarily in the fourth quarter. So that is -- will be the biggest driver. Obviously, we have a lens into deals we just did at year-end 2021, coming, that have influenced 2022. And as I think I've said earlier, our view is that we're going to move the goalposts in terms of what we think our ultimate potential is in terms of growing these numbers on a per sub equivalent, even mitigated with a moderating level of sub attrition.

We now think that our potential is greater than we have historically. And as I think we've said in other calls, our retrans margin will always be north of 50% because of the makeup of our station portfolio when you look at our major markets, CW and MyNetwork stations in all -- in the top 10 markets, those are all CW, MyNetwork are independent stations, that literally have almost 100% margin on retrans and there are a lot of subs in those markets. And so just the basic makeup of our station group will allow us, we think, to produce net retrans margins, if you want to think about it that way, that will be superior to the peer group as far as the eye can see.

I guess, Perry, maybe just more in terms of the net retrans dollar growth. Would you say now just given the change in sort of the landscape, that you are more confident or, saying, equivalently confident in kind of the prior stated net retrans guide or outlook?

Probably more confident because our negotiations with the networks, they realize that we pay for exclusivity and local distribution. We monetize their content through local ad sales and through local distribution vis-a-vis retrans revenue dollars. And the less and less exclusive that content becomes, the less and less appetite we have to pay increasing premiums for it.

So -- and I think the networks realize that because their asks are much more moderate in terms of reverse compensation than they have been historically. So we feel -- again, scale matters when you're the largest affiliate group for CBS, #2 for NBC, #3 for ABC, #1 for FOX, #1 for CW, #1 for MyNetwork. It's important to be important because then the conversations, I think, become a lot more business focused and less emotional and that's quite frankly, the way we prefer it.

And next, we'll hear from Aaron Watts of Deutsche Bank.

One quick follow-up on auto. I know you described the category as challenged still. How would you goalpost, is it flattish, up a little bit, down a little bit, but still lagging kind of the rest of the verticals you mentioned. Can you give any more granularity around that?

Well, if I look at our fourth quarter results, it was not a high bar of performance in 2021, but it was the best quarter of the year in terms of the least percent down to the prior year. And I think it continues on here in 2022, we still project it to be down versus the prior year. And it's anecdotal by nameplate. You saw a lot of KIA ads in the Super Bowl and you can extrapolate that to growth in our automotive categories in the foreign.

And so I think that, obviously, it's supply chain related. And to a certain extent, the way people are buying cars is a little different than it was in the past. I read a stat last week that literally more than 25% of the cars that are being shipped to dealers have already been sold because of the backlog. People go on, they can't find it on a lot, what's available, what's on a truck, what's on a ship coming here and maybe I'll put down $1,000 to reserve that.

So we do think though that as time goes on and with the age of vehicles on the road, with new models being introduced, there is still a desire for a showroom experience, notwithstanding the problems that some of these delivered to your door companies have had with title and other things like that. So will it ever be 30% of our ad support again? No, I don't think so. But will it be north of 20%? Yes. Is it now? No, just barely below that.

So I think you'll see continued improvement in auto as the year goes on. But we think it will be kind of a back half of the year event before we start to see improving trends in the category, although it's kind of flatlined at a level we're not happy with right now, but we're not really seeing wholesale declines in Tier 1, 2 or 3 spending at this point from kind of the bar that was established in 2021.

That's helpful, Perry. And based on the discussions you're having, do you feel that auto as a category for local TV can get back to pre-pandemic levels? Or has some of that maybe leaked towards digital or other outlets?

Yes, I don't think it's leaked. I think it will be -- (inaudible) making a lot of money right now, and they're going to have to spend some of that for to get back to pre-pandemic levels. And again, the car buying experience, as I just said, maybe has changed in some quarters that is less reliant on showroom. But do we think it will go back to pre-pandemic 2019 levels? Yes, that's possible, I think. Will it get back to 2015 levels, yes, maybe not. So I think it is possible it gets back there. Now I'm not going to forecast whether that's a '22 event or a '23 event, but I think that it's that kind of a horizon that we'd be looking at.

Okay. Great. And one last one for me, maybe pointed towards Lee Ann. I've asked this of you all in the past, but I wanted to refresh on your thoughts around leverage. And based on your capital allocation policies, whether leverage is likely to trend up or down over the medium term from here. And it seems like you could push towards investment-grade credit metrics if you desired, is that a goal that's appealing for the company?

Yes. Thank you. I think from our perspective, we'll probably continue to pay down a little bit of debt and our leverage will continue to decline as a result of the combination of that repayment and then also just our expectations for increases in EBITDA. I think to get to investment grade, we would have to pay down a lot more debt or allocate more capital to that and not necessarily sure that the benefit of being investment grade in terms of the lower potential interest rate that we could get, is that meaningful vis-a-vis where else we can redeploy that capital either in the form of accretive M&A or share repurchases or the like.

So I don't think that being an investment-grade company is necessarily something that we are targeting to accomplish in the medium term -- the near or medium term.

Jim Goss of Barrington Research.

I was wondering if you can comment on the changing in blend of core advertising categories. It is good to hear that auto is improving. I wonder if you might also compare the value of new and emerging categories versus those that may have faded. And I know you mentioned gaming, in particular, is one that's getting more important. Could you -- in that context, can you also discuss whether the MLB labor action is an opportunity or a risk?

Sure. Well, just if I look at our fourth quarter top 10 categories, we mentioned that gaming and sports betting lottery, just all gambling taken together was up about 25% over Q4 of '21, but retail was up 31%; and home repair, manufacturing, up 21%; Medical healthcare, up 24%; attorneys, the commercials, we all love to hate, up 12% over the prior year.

So 8 of our top 10 categories were up over the prior year. And 5 of those 8 were up double digits and not in significant double digits. Really, we have no exposure to speak of to Major League Baseball. That's more of an RSN issue. I mean the games that air on Fox, but that's network programming, they'll will be replaced with other network programming. So it's really not an issue to us to speak of from a financial point of view. So I think that's kind of our take on both the sports betting and also Major League Baseball. As a fan, I'd like to see them play, but that's going to be up to others.

All right. And I'll let one more go for a moment. I was wondering with the efforts on ATSC 3.0 getting up to 50%. I'm wondering if the early efforts provide any input to judge the revenue and profit potential that might emerge as the rollout continues. Is it too early to tell anything or are you getting any glimpses of the financial value?

Yes, it is, Jim. A couple of things I'll say about that is that we think you've got to build the toll road before you can charge people to drive on it. And all we're really doing now is activating 3.0 signals. It's not really a 4K viewing experience. It's a pass-through of an up-converted HD signal. But it's basically to light the light in the TV, which will hopefully increase awareness and adoption and help the technology be more fully distributed.

We are involved in a test with Scripps in Michigan, which I think I've mentioned before, where Scripps has a station in Detroit. We have stations in Lansing, Michigan and Grand Rapids, Michigan, and both a Hollywood studio and an OEM are interested in driving a car across the state of Michigan and seeing what kind of an in-car viewing experience that is of either 3D navigation or sets in, in the headrest, facing the back seat. And so there is interest in the technology. There's interest in potential use cases, but we've got to have a much more robust footprint of ATSC 3 signals. And again, you don't need to be broadcasting a 4K picture to take advantage of the ATSC 3.0 spectrum and signal utilization.

So the business case might come even sooner down the road than any 4K viewing experience, might for local consumers because of the way the transition has to take place. We don't have a second stick that we can develop into 3.0 like we did with analog to digital and then 1 day turn all the other ones off right now. We have lighthouses for 3.0 signals and 1.0 signals during a transition. The transition is voluntary. So it won't be a big bang in transition. It will be done kind of on a regional, maybe even market-by-market basis. So it's hard, but it's not impossible.

But again, we agree with BIA Kelsey that Spectrum revenue or rental or high-speed data transmission revenue could one day rival what retrans is to the industry today. And so that's why we are leaning forward. I will note that we have had some conversations with Scripps because with their portfolio of ion stations. They -- and we now have an unduplicated reach of almost 92% of U.S. television households. And so we're talking about getting together to discuss ways we could work together to further advance the business case of ATSC 3.0. So look for more to come on that as 2022 rolls on.

And next, we'll hear from Craig Huber of Huber Research Partners.

Tom, I wanted to ask you, your retrans subs, I think in the last quarter, you said it was down 4% to 5% on a trailing 12-month basis. How is that number this quarter, please?

Again, it continues that same trajectory improvement over 2020. And we believe that the fourth quarter was better than the average for the entire year, which was a mid- to high 4% number for this year and a mid- to high 5% number for 2020. So the trend has stabilized and is positive from our perspective.

Okay. And my next question, I think in the last few conference calls, you guys have talked about your net retrans for the year, your expectations for 2022 up mid- to high single digits. Does that still hold in your mind?

On net retrans, yes, mid- to high single digits.

Okay. And then I wanted to ask you guys. When you think about your small versus large markets, you think about the different regions around the country that you have your TV stations. Is there a material difference in the ad revenue performance? I'm just trying to get a -- hear a gauge from you guys about how the local economy, so there's a significant difference out there in your various markets.

If there was a difference, I think it's virtually disappeared, I mean, at this point. Obviously, the densely populated major markets are -- have been a little slower to reopen than obviously, markets in Texas or medium and smaller markets that are more socially distanced. So the -- from our perspective, the major impact, I think, in ad revenue has been the introduction of sports betting into communities where it hadn't been before. That's probably the biggest catalyst.

But I think at this point, with major metropolitan areas like D.C. and others, eliminating mass mandates and restrictions on restaurants and things like that. I think it's -- we don't notice a significant difference market by market, and there are multiple factors that go into -- multiple ingredients that go into baking that cake in every market. Our individual performance and other things like that. But I don't know that you would see statistically meaningful variances if we sort by affiliation, if we sort by geography, if we sort by market size, so I don't think there's really much to see there.

And then I think I heard you guys say you were expecting your core TV ad revenue up in the first quarter year-over-year. I assume that sort of means up low-single digits, if maybe you could touch on that. But more importantly, I would love to hear your thoughts on the higher inflation rates out there, the outlook for higher interest rates. What you've sort of thought is there, what that means to your core ad revenues as the year plays out? Is it a positive, negative or sort of neutral in your mind to the overall percent change?

Well, historically, inflation has been a friend to our business because it gives us some ability to cover for pricing power and pricing increases. So I don't think of this inflation as a bad thing. I can tell you that when Lee Ann and Tom and I were developing the free cash flow guidance, which we gave, we absolutely incorporated a higher interest rate environment that may not be, at this point, fully recognized by everybody's estimate on The Street, but we certainly have taken that into account through '22 and '23, and I think we're being conservative into where we might end up in terms of interest rates there.

And Craig, with regard to our first quarter revenues, I do believe we think it's up. I don't think we characterize a percentage or a range for that at this point. But yes, we do believe that it will be an improvement.

(Operator Instructions)

We'll now hear from Alan Gould of Loop Capital.

I've got 3. First, in terms of M&A, you did say content related. Just wondering what your appetite is for general entertainment versus news where you focus most of your efforts on. Second, in sports gaming. Just wondering, it may be a little bit early to tell, but what you're seeing in retention spending in states after that initial big launch. And I do realize there's big states like Texas and California that haven't launched. And third, on the fixed versus floating rate on your interest expense, I know that keeping everything floating, it certainly worked well for you. Is there any thoughts that maybe you might want to fix the interest rates given the proposed interest rate increases?

Yes, go ahead.

Okay. So on the -- maybe just taking from the bottom up, the fixed versus floating rate. We don't have -- it's not all floating. We have -- it's like 65%, 70% of our debt load is floating with the rest fixed. I think we're obviously keeping an eye on what the capital markets are doing.

I don't know that right now is the ideal time to do a fixed rate deal, but your point is something that we definitely take into consideration as we think about our capital structure going forward. With respect to, I think, the sports betting continuation, it's such a new market. I know you appreciate this. It's just -- it's hard to sort of give you kind of like really good year-on-year numbers.

I will say that we do -- we have had some markets that have been legal for a period of time that have really, really hung in there and done really well. We've had some markets that have declined as time has passed on. So it's really been a little bit of a mix. And I think we still feel good about the business on a go-forward basis as we're seeing new states launch.

The pace for first quarter in sports betting is still double-digit positive, and some of that's new markets, some of that is existing markets. Where sports betting has been a category for 6 months or more, it's usually a top 3 category in terms of ad revenue support. And as Lee Ann says, the category is so new that we haven't had much time to establish a trend line there.

And it's arguable as we sit here in Dallas, Texas, whether Texas will ever approve sports betting, which is why the largest casino in North America is a mile over the state line in Oklahoma. And so that's why we think this will be primarily a local state-by-state kind of an advertising category because it's -- we don't think it is necessarily going to be legal in all 50 states. And I have to -- some time has passed, so could you repeat the first question that you asked because I've forgotten what the subject matter was.

Sure, Perry. It's M&A. I know you said content related is what you're probably looking at, given the station caps. And just wondering what your appetite might be for general entertainment versus what's historically been a little bit more of a news-oriented focus on the company?

Sure. Well, I think of it a little differently. I think we built the company with local content, which is primarily our local news. We created national content with our national cable news network. We had political content with The Hill. And so I think the things that you would see us add would be complementary to those. So what are the big category holes or areas there, sports and weather come to mind that complement what we have already.

I don't think you'll see us compete with Netflix for writers and producers to produce scripted-entertainment programming. But obviously, we air a fair amount of scripted entertainment programming vis-a-vis our syndication and network relationships. So I think there's obviously a desire to have some control of your own destiny there. But at the end of the day, it's not going to be the focal point for the company. Could it be complementary to what our core competencies are, we'll see as time plays on.

Operator, anyone else with a question?

And it appears there are no further questions at this time.

All right. Well, thank you all for joining us today. We're off to a great start in Q1 of 2022. We look forward to reporting those results to you in early May, and thank you very much for joining us today.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.