Nexstar Media Group, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Good day, everyone, and welcome to Nexstar Broadcasting Group's 2015 Fourth Quarter Conference Call. Today's call is being recorded. All statements and comments made by management during this conference call other than statements of historical fact may be deemed forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events. Forward-looking statements include information proceeded by, followed by or that includes the words guidance, beliefs, expects, anticipates, could or similar expressions. For these statements, Nexstar claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this communication concerning among other things, the ultimate outcome and benefits of any possible transaction between Nexstar and Media General and timing thereof and future financial performance including changes in net revenue, cash flow and operating expenses involve risk and uncertainties and are subject to change based on various important factors, including the timing to consummate the proposed transaction, the risks that are conditioned to closing of the proposed transaction may not be satisfied, and the transaction may not close. The risk that are regulatory approval that may be required for the proposed transaction if delayed, is not obtained or is obtained subject to conditions that are not anticipated, the impact of changes in national and regional economies, the ability to service and refinance our outstanding debt, successful integration of Media General, including achievement of synergies and cost reductions, pricing fluctuations in local and national advertising, future regulatory actions and conditions in television stations operating areas, competition from others in the broadcast television market, volatility and programming cost, the effect of governmental regulation of broadcasting, industry consolidation, technological developments and major world news events. Unless required by law, Nexstar undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed on today's call may not occur. You should not place undue reliance on these forward-looking statements which speak only as of the date of this release. For more details on factors that could affect these expectations, please see Media General's and Nexstar's filings with the Securities and Exchange Commission. The forward-looking statements and comments made during the conference call are made only as of the date of today's conference call. Management will also be discussing non-GAAP information during this call in compliance with Regulation G. 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, sir.

[Perry Sook:]

Thank you, operator, and thank you attorneys for the very lengthy and sterling introduction. Good morning, everyone. Thank you for joining us to review Nexstar's record 2015 fourth quarter and full year operating results. Today, we'll review our organic growth, our success in quickly integrating and realizing the upside from our completed accretive transactions, our recent M&A activity and other initiatives that we feel will drive continued free cash flow growth in 2016 and beyond; and as always, Tom Carter, our CFO, is here in the room and on the call with me today. First, to start, Nexstar generated record fourth quarter full year revenue, full year BCF, adjusted EBITDA and free cash flow, all of which exceeded consensus expectations. Nexstar's financial growth momentum again highlights the value of our disciplined approach to local sales, M&A integration and our focus on distribution, digital media and political revenue growth, combined with enterprise-wide cost management. Reflecting these factors for the full year 2015, Nexstar's actual free cash flow per share rose to approximately $6.80 a share, marking a 32% increase over the $5.15 of actual free cash flow per share in 2014. This, of course, was achieved despite a negative $51.6 million delta in annual political advertising for the year. With our significantly growing free cash flow, we returned over $2.34 per share to shareholders in 2015 through quarterly cash dividends and opportunistic share repurchases, while lowering our leverage ratio from the year-end 2014 level. Throughout 2015 and in the fourth quarter, we completed or entered into agreements for value-building accretive transactions to expand our operating base to 104 full power stations. Following the early 2015 closing of the CCA transaction and single station deals in Phoenix and Las Vegas, Nexstar entered into a definitive agreement in November to acquire the assets of three CBS and one NBC-affiliated television station in West Virginia for a total consideration of $130 million. As with all of our other M&A, this transaction is expected to be immediately accretive to Nexstar's free cash flow upon closing later this year. And as you know, we're operating the television stations now under a Time Brokerage Agreement, so the results are included in the results we put forth as well as our guidance for 2016 and 2017. We also in early 2016 completed the accretive acquisition of four CBS-affiliated television stations in North Dakota, which was announced in Q3. We followed our record 2015 operating results and platform building activity with last month's announcement that Nexstar entered into a definitive agreement to acquire Media General for $4.6 billion in a highly accretive cash and stock transaction. I'll talk in a moment about our newly initiated Nexstar-only free cash flow projections for 2016/2017, and why the addition of Media General assets is a phenomenal near and long-term growth opportunity for shareholders of both companies as we create an industry-leading provider of local news and content and local programming with over $500 million of annual average free cash flow. Let's do a quick review of the fourth quarter, and then I'll discuss our new guidance, our progress on the Media General transaction, and the high visibility we have for continued growth in 2016 and beyond. In Q4, all of our non-political revenue sources posted year-over-year increases with our focus on managing operations for current cash flow and future growth. We reported another period of record BCF, adjusted EBITDA and free cash flow as I mentioned. The successful integration of recently acquired stations, combined with the ongoing strategies that leverage our target localism content and local advertiser relationships, drove a 30.8% rise in net revenue, and that more than offset $27.5 million of year-over-year decline in political advertising. Excluding political ad revenue, fourth quarter gross revenue grew 52%, aided by core television ad revenue growth and significant increases in retrans consent and digital revenues. I'd note that overall revenue growth began to demonstrate the strategies that we undertook over the last few years to position Nexstar in key markets to maximize the political revenue opportunity. While political revenue declined 77.7% on a year-over-year basis, we actually did close to $8 million in fourth quarter political revenue or over five times what we did in Q4 of 2013. For example, we saw political ad strength in Louisiana as we benefited from the launch of a new local news product on our NBC and FOX stations in Baton Rouge, as well as our live origination of a Louisiana gubernatorial debate. In addition, our initiatives to bring new advertisers to TV continued to build on our long-term success on this front as new-to-television ad revenue for Q4 was $8.3 million, which accounted for 8.1% of Q4 local revenue. Nexstar's record fourth quarter television ad revenue was complemented by an 85% rise in retransmission fee revenue, and a 106% increase in digital media revenue as both revenue sources benefited from both organic growth, as well as our recent accretive acquisitions. Digital media revenue growth was driven by organic growth in our markets and contributions from LAKANA, our recently formed digital media services company and the mid-year accretive acquisition of Yashi, a leading online programmatic video platform with location-focused technology. We expect our long term distribution revenue growth to continue as we make further prospect – projects, I should say, in narrowing the disparity between the value we receive for our content and its viewership on the various distribution platforms in our markets. Following the late 2014 contract renewals representing about 40% of our MVPD subscribers, another approximate 45% of our subscribers were successfully renewed and re-priced in 2015. The benefit of our growing retransmission fee and digital media revenue streams is the diversification that increasingly is evident in our income statement. Total fourth quarter retransmission fee and digital media revenue continued to grow rapidly, rising 90.1% to a record $111 million, which represented nearly 45% of net revenue. By comparison, total fourth quarter retransmission fee and digital media revenue in 2013 comprised just 24.2% of net revenue in that fourth quarter, the previous non-political period. Fourth quarter 2015 free cash flow grew 5.7% over the record fourth quarter 2014 level, and by about 111% over the fourth quarter of 2013, the previous non-political period. This clearly highlights the long-term value being derived from our platform building, revenue diversification and cost management strategies. With full-year 2015 actual free cash flow per share of approximately $6.80, our strategies for growth and the enhancement of shareholder value remain on plan, and we will achieve our fifth consecutive year of record financial results in 2016. Nexstar's 2016 financial growth will reflect our expanded scale and new operating efficiencies and synergies related to recent and to-be-completed acquisitions, and the 2015 renewal of a significant number of retransmission consent agreements, as well as an expansion of our digital media initiatives and the return of the political cycle, as well as highly rated special event programming such as the Rio 2016 Summer Olympics. Reflecting all of these factors, we are initiating pro forma 2016-2017 free cash flow projection for the legacy Nexstar Company of approximately $250 million of average annual free cash flow or average annual pro forma free cash flow of approximately $8.15 per share per year. On a two-year basis, the $500 million of 2016-2017 free cash flow compares with the $368 million for the 2014-2015 cycle, which corresponds to growth of about 36%. With our long-term strategic focus on completing accretive transactions that expand our scale and free cash flow growth, we were pleased that our work throughout Q4 enabled us to reach a definitive agreement last month to acquire Media General. Upon closing the transaction, we will increase Nexstar's broadcast portfolio by approximately two-thirds, more than double our audience reach, and provide entrée into 15 new top 50 DMAs. We plan to rename the combined company Nexstar Media Group, and it will be one of the nation's largest providers of local news, entertainment, sports, lifestyle and network programming, and content also towards the (11

[Tom Carter:]

Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q4 income statement and balance sheet data, after which I'll provide an update on our capital structure. Net revenue for Q4 of 2015 was up 30.8% to $252.3 million over the same period in Q4 of 2014. Core revenue, local and national, was $144.1 million, up 33.1%, and local revenue have the same growth trajectory of 33.1%, up to $102.8 million. National revenue was $41.3 million, up approximately 33%. Political revenue was almost $8 million, which was down from the prior year, but please keep in mind, the prior year was an election year, and we're very pleased with the almost $8 million in political revenue in Q4 of 2015. Retransmission fee revenues were up 85% to almost $82 million, recognizing the acquisitions made at the beginning of 2015. Digital media revenue represented $29.3 million of total revenue, that was up over 100%. Most importantly, broadcast cash flow was up 10% to $104.6 million, adjusted EBITDA was up 9% to $93 million, and free cash flow was up to $69 million, which is 6% over. The $69 million represents the highest fourth quarter odd year of free cash flow in the company's history. On a same-station basis, net revenues were up 12%, exit political, core spot growth was basically flat for the quarter. Local spot revenue was up low single-digits. Retransmission fees were up on a same-station basis, approximately 40%, and digital media revenues were up 10% on a same property basis Q4 of 2015 over Q4 of 2014. Fourth quarter station direct operating expenses, net of trade expense and SG&A expenses rose 62.7% and 33.0%, respectively. These increases reflect higher variable cost relating to increased local and national revenues and the operating of recently acquired stations. Same-station broadcast fixed expenses were up approximately 2% in the quarter. Nexstar's fourth quarter corporate expenses were $11.6 million, inclusive of $2.9 million of non-cash comp. The $2.7 million increase in corporate expenses was consistent with our expectations and includes approximately $2.6 million in non-recurring expenses associated with professional fees and the recently announced transaction. For those of you with models, the full-year of 2015, we incurred approximately $5.4 million in transaction-related expenses. Corporate expenses in the year-ago fourth quarter were $8.9 million, which included $2.1 million of non-cash stock option expense, and $1.6 million of expenses related to legal and professional fees to alter and to restructure transactions and to address regulatory changes. For 2016 first quarter, we project corporate overhead will be approximately $13.5 million, while $3 million of that will represent non-cash stock comp, with the other $10.5 million being cash, including transaction-related expenses we will incur during the period. Turning to the balance sheet, I'll review key items as of 12/31/2015. Most notably, our total net leverage was 4.32 times versus the permitted leverage covenant of 6.75 times, and the first lien leverage was 1.94 times versus the covenant of 4 times. As it relates to the outstanding debt, as of 12/31 we had approximately $685 million of first lien debt and $792 million of senior unsecured bonds. At quarter and year-end, we had approximately $43 million in cash. So net debt for the quarter amounted to $1.0328 billion compared to $1.462 billion at September 30, where the decline is due to the building cash and reduction in our revolver borrowing. Q4 total interest expense amounted to $20.4 million compared to $16 million in the year-ago quarter and related to borrowings to fund the platform acquisitions over the last year. Similarly, cash interest expense rose to $19.4 million from $15.2 million related to our growth during that time. Looking at the current capital structure, Nexstar's weighted average cost of borrowings currently stands at approximately 5%. Nexstar's Q4 CapEx is $6.3 million compared to $6.5 million for the year-ago quarter (18

[Perry Sook:]

All right. Thank you very much, Tom. This June will mark Nexstar's 20-year anniversary. The company has been built through a disciplined approach to acquisitions, a focus on enhancing the operating results of the acquired stations and digital media properties, and an overarching commitment to localism. Consumers' brand awareness and purchasing decisions are every bit as strong, if not stronger locally, where businesses operate and transactions take place. Local diversified media companies like Nexstar are uniquely positioned to thrive in today's multi-platform world because we provide superior local content that is unique and relevant to each of the local communities we serve across the United States, while offering local businesses, advertisers and brands unparalleled 24x7 marketing opportunities across all screens and all devices. With our just-reported results, Nexstar's free cash flow has grown at a compound annual growth rate of approximately 37% from 2006 through 2015. As we move through the completion of the Media General acquisition, the annual free cash flow per share is expected to approximate $11.15 per share per year, with leverage declining, and all other things being equal, with that enterprise value shifting to the equity account. For Nexstar, the fourth quarter marked a strong end, what was already a record year of free cash flow. And as we're now benefiting from what are expected to be record levels of 2016 political advertising, the ongoing staggered renewal of our retransmission consent agreements and the completion of smaller transactions announced at the second half of 2015 all combined with the late Q3, early Q4 potential closing of Media General, we expect that we have excellent visibility on delivering and exceeding these free cash flow targets, and a clear path forward for the continued near and long term enhancement of shareholder value. With all of that said, I'd like to thank everyone for joining us today. Now, let's open the call for Q&A to address your specific areas of interest. Operator?

[Operator:]

Thank you. We'll go first to James Dix with Wedbush Securities.

[James G. Dix:]

Hey. Good morning, gentlemen. Just a couple of questions. First, any outlook for the first quarter in terms of core ad pacings, any signs of slowdown, or regional softness or strength that you'd like to call out? And then one more on advertising, do you happen to have a pro forma political number for the merged company that we could look back to in the prior presidential cycles of 2012-2013, something comparable to what you would be looking at and I guess in your 2016-2017 guidance? And then I have one follow up on the free cash flow outlook.

[Tom Carter:]

On the political number, I'll take that. I think we guided people on the Nexstar-only side to something north of $100 million with the recently announced acquisition. I think you could probably expect – I'll let Media General speak for themselves, but obviously, they have significantly more presence in Ohio and Florida in particular that's going to allow them a significantly greater amount of political advertising. I'll have to get with them and come up with any kind of a pro forma number from that perspective. And then, I would say, with regard to core advertising in the first quarter, I think we expect it to be up somewhere between 0% and 1% as we're moving into some political season as well. But I think that's consistent with where we've been over the course of the last several quarters.

[James G. Dix:]

Okay. Great. And just speaking for your own political, do you have any sense as to how the crowd out worked back in 2012, at least for your legacy stations? How we should be thinking about that? I know it gets a little noisy.

[Perry Sook:]

James, most of the political that we've seen in first quarter came into our Iowa stations and our Las Vegas stations. So we didn't own them back then, so we don't have a good history. I can tell you that the general managers of each of those stations, and I was with them yesterday in Washington D.C., did a tremendous job of following our policies and practices, and we feel in both Las Vegas and in Iowa, they maximized the opportunity. So I would say that the crowd-out is, these are primaries and caucuses, and it's not as severe as it will be in the fourth quarter. And I think we were wall-to-wall, but for a very short period of time, which usually you can work with advertisers to make everybody happy.

[James G. Dix:]

Okay. Great. And then just my follow-up, are there any main puts and takes to your free cash flow per share outlook? Obviously, you're going to have the financing impact on your costs, which I know you kind of have to sidestep given what you talked about. But any other important ones that you'd be thinking about kind of as you look at 2016-2017 in terms of your new outlook on free cash flow per share? Thanks.

[Tom Carter:]

Well, I would say, probably the biggest one that has historically been a variable, and I think we're doing a good job of wrestling that to the ground is our cash tax expense and NOL availabilities. We've done a lot of work on that over the last four or five weeks and feel very good about that. At the federal level, we're still working on the state level, but quite honestly, the state level is probably, I don't know, 10% or 15% of total cash taxes. So we've got the 85% to 90% solution baked, and the 10% to 15% is still kind of TBD. Our free cash flow does not assume retaining any state NOLs. So any state NOLs that are retained at Media General would be a upside to that. I think you hit on one point. We don't have a final financing structure in place. We continue to use the indicative rates that (28

[James G. Dix:]

Great. That's very helpful. Thank you.

[Operator:]

We'll go next to Aaron Watts with Deutsche Bank.

[Aaron L. Watts:]

Hey, guys. Thanks for taking the question. One follow-up on core advertising. Are you guys – how do you think about core advertising having hovered kind of in the low single-digits and around flat? It sounds like, for the next quarter as well. Is there anything that you think is within your capabilities to drive that higher, is that an industry issue? What are you seeing from advertisers in terms of your ability to get another dollar out of them and into your pockets?

[Perry Sook:]

I think that we have said that, in our view, advertising kind of tracks GDP growth or contraction, and I think this is a pretty good proxy for that. I do – will tell you, because I listened to advertisers a week ago, and there are plenty of people distracted by the whole presidential nomination. They're not wanting to make any big bets until they have kind of some sense as to which way the wind's blowing, not just in advertising, but in investments in their business and things like that. So that is a bit of a distraction perhaps. But again, we kind of advertise that we believe that the core television ad spend will be a low single-digit grower, and it is a cyclical business. So depending, we'll either be at the high end of the range, low end of the range, depending on the quarter, the month and the year. But the double-digit growth will come from distribution, come from political, every even year over every (31

[Aaron L. Watts:]

Okay. No, that's helpful. And maybe that's a good segue to a question I've been asking some of your peers. I guess, as you think about the environment right now, financial markets have been choppy, some concerns around the economy. How do you think about those various revenue streams you just mentioned, and how they contribute to your revenue mix today versus the last recession, how Nexstar was positioned? And then maybe an angle for Tom, too, I think you said you're coming out – you'll come out of the transaction close at around 5.5 times leverage. How do you feel about that and your comfort level at that leverage level if the economy was to take a turn for the worse?

[Tom Carter:]

Well, first of all, with regard to the first question, I think we've been pretty clear, in 2007, which is arguably the last year before the previous – the recession of 2008 and 2009. Retrans revenue approximated 5% of our total revenues. This year, it'll approximate somewhere in the mid-30%, and those are contractual revenues. As I mentioned just a moment ago, on a same-station basis in the fourth quarter, those grew at a 40% rate over 2015 over 2014. We expect the same kind of growth on a dollar basis in 2016; obviously, you're growing off of a higher base, so the percentage levels aren't going to be as great. But that contractual revenue significantly changes the business profile of Nexstar and all broadcasters for that matter, into the fact that we have a multi-revenue platform now, whereas in 2007, retrans was a small portion, digital was in the early stages of its development and not a meaningful contributor to revenue. And yes, we do have expenses associated with the retrans revenue now that weren't in place in 2007. But the stability of that cash flow is paramount for our business model. And that then translates nicely into the second half of your question which is how do we feel about 5.5 times. We purposely went to 5.5 times and we kept it there in spite of some serious negotiations about additional cash compensation in the Media General merger. Because we're comfortable at that level, knowing that in the back half of 2016 we're going to deleverage not only from increased EBITDA due to political and to the retransmission revenue, but also, the actual free cash flow that we're going to generate in Q3 and Q4. And by the way, all of that money, regardless when the closing actually happens, remains in the companies because there are operating covenants that disallow basically any sort of meaningful cash drain on the company. So we're going to naturally deleverage, and we're going to naturally deleverage over the coming year in 2017 so that by the end of 2016 on a trailing 12-month basis, it will be approximately 4.5 times, and that will only go up slightly on a trailing 12-month basis in 2017 as we lose the substantial political. So it was very clear that Media General was a transformative transaction. These are the types of transactions that you keep as much powder dry as possible so that you can address the needs of the seller, which we believe we did, in an appropriate way with additional cash compensation and leverage capacity, but not so much, and the timing is right and our business model is right to rapidly deleverage, and that's what we're committed to doing.

[Aaron L. Watts:]

Helpful, Tom. Thank you.

[Operator:]

We'll go next to Marci Ryvicker with Wells Fargo.

[Marci L. Ryvicker:]

Hi. Apologies if I missed this. Can you dig in a little deeper on, like, auto and the markets where you may be more exposed to oil and talk about how those two things are trending?

[Perry Sook:]

Sure. Auto in the fourth quarter was basically flat with the fourth quarter 2014. Fast foods, second largest category, basically flat. Retail was, again, basically flat. Furniture and medical healthcare were both up double-digits for us. Up single-digits were attorneys and paying (36

[Tom Carter:]

I would say, just to focus on cable and telecom for a second, when we get into any kind of disputes with any MVPDs, one of their tactics obviously is to pull their advertising.

[Perry Sook:]

And as it relates to markets and this was asked earlier and I didn't address it, but we recently closed on the North Dakota stations, and one part of that DMA and this market is right in the middle of the Shell gas operation there. And it is one of the best performing stations in terms of growth over the prior year. The pullback has caused drilling and exploration to slowdown, but any well that was drilled is still pumping. So there's still aren't enough schools, and restaurants, and hotel rooms to handle what's there now, they're basically trying to catch up with what they need to serve the markets over there. And the same with Midland-Odessa, our stations there are performing just great. So we've not seen any downdraft, and we've looked around the company regionally, and we don't see any material differences by region of the country. Obviously, our CBS stations in the first quarter are performing well, because of the Super Bowl NBC is up against those numbers, but they'll have the Rio Olympics in third quarter. ABC has been kind of a stealth performer for us. Our ABC affiliates are doing very well as a group. FOX obviously has had some challenges. And CW, MyNetwork are basically what has (38

[Marci L. Ryvicker:]

Related to the deal you mentioned closing in late Q3 or late Q4, so I assume you're not going to submit a waiver to ask to close during the auction. I don't know if that's your intention.

[Perry Sook:]

I don't know that I would assume that. Vince and I and our camp (40

[Marci L. Ryvicker:]

Okay. And then, my last question, the NBC affiliation with WHAG, any comment you have there.

[Perry Sook:]

Only in that it's – this has been something that was done as part of our NBC renewal back in 2014. It's NBC's desire to have one affiliation per market. They have O&O in Washington. So we've been – the only reason we came out now is because we're marketing our charter advertising packages to advertisers under the new format. We'll be expanding our local news to 50 hours a week, and we'll be doing geo-specific newscast for West Virginia, the I-270 Corridor in Northern Virginia. And marketing goes with advertiser specifics for those content verticals. So we're moving into that. We're making little bit more noise about it, now, as we are closer to launch on July 1. What I will tell you is that, if you look at the amount of money that we make from NBC programming, just as a case in point, we made more money with our early morning newscast and our cut-ins in The Today Show than we did in primetime, obviously because there is another (43

[Tom Carter:]

And I think the key is, it's not as though we lost the affiliation to another station, this affiliation was just – it's a different duck and that it had two affiliates, NBC affiliates and one DMA, and obviously we knew 18 months ago that this was going to happen and have been preparing for it accordingly.

[Perry Sook:]

And on the – even though it's a station in the Washington D.C. (43

[Marci L. Ryvicker:]

Got it. Thank you both so much.

[Operator:]

We'll go next to Kyle Evans with Stephens.

[Kyle Evans:]

Thanks. Tom, you clarified the MEG NOLs in an earlier question. Can you give us a look into the Nexstar cash tax assumptions as it relates to the free cash flow guidance?

[Tom Carter:]

Sure. Not exactly sure how you want me to answer that, but we have sufficient NOLs of a magnitude, in that our 2016 cash taxes are – we are cash tax payer in 2016. I would tell you that most of that is alternative minimum tax and state taxes. I want to say our effective tax rate in 2016 is in the mid-teens. It goes up on a Nexstar standalone basis not insubstantially in 2017 to something in below 30%s (45

[Kyle Evans:]

Got you.

[Tom Carter:]

And then most of the Nexstar entity NOLs, that some do exist after 2017, but it's not a meaningful amount.

[Kyle Evans:]

Okay. One quick follow up, on digital in the third quarter, you reported some weakness in the programmatic piece of that business. Has that cleared up? How did Yashi perform in fourth quarter, and could you give us, please, kind of an outlook for digital 2016-2017? Thanks.

[Perry Sook:]

Sure. The programmatic business continues to be kind of choppy. We had a record month in the month of December for us, and in a fourth quarter that was the mother of all quarters. So it performed very well for us. But it is – I mean, they book revenue by the day there. This is a very primitive hand-to-hand combat kind of a business. But their revenue in the fourth quarter was as advertised. And as I said, the all-time record month was December for the company. I think we've said on legacy Nexstar, the $89 million of revenue we did this year approximates a $100 million run rate. And I would tell that LAKANA and Yashi taking together about a third of that – LAKANA and Yashi are each a third of that, and then, our local ad site revenue is the other third, and that's kind of how it breaks down. But we see the double-digit growth in all three of those channels continuing uninterrupted through 2016.

[Tom Carter:]

I would also just point one thing out. Yashi does have some seasonality to their business and that the fourth quarter is the heavy advertising around the holidays. So their revenue pattern is more closely tied to that which we see in broadcasting and the Q1 is a right quarter for them of the four quarters. So we're anticipating good results out of Yashi. LAKANA is very strong, and the station websites continue to be strong going forward. And we continue to reiterate our overall low teens kind of guidance for digital revenue growth.

[Kyle Evans:]

Thank you.

[Operator:]

We'll go next to John Janedis with Jefferies.

[John Janedis:]

Hi. Thanks. Can you talk about the potential non-retrans related revenue synergy, related to the deal? I know there's been a focus on the corporate, the retrans and cost, but I was wondering to what extent either digital or scale in the footprint could be revenue contributors.

[Tom Carter:]

Well, definitely, I would say, there are those potentials. It's very difficult to quantify what we have. The way we define synergies, quite honestly, is contractual revenue and identifiable cost takeouts and expense reductions. Are there potential revenue synergies? Yes, both regionally as well as nationally. From a digital perspective, we do have companies that do essentially the same thing. So, there will be some potential there. But in terms of overall revenue synergies, all of the overlapped markets and any revenue synergies from duopoly creations, there won't be any because we're trying to make it as easy for a regulatory approval as possible. So are there revenue synergies? Yes. Is it too early to quantify? Yes.

[John Janedis:]

Thank you.

[Operator:]

We'll go next to Jim Goss with Barrington Research.

[James Charles Goss:]

Thanks. I have a couple here. One is, if Trump wins the nomination, will it negatively impact your political revenues? You've shown a propensity to not spend much money now, but maybe that changes in a general election.

[Perry Sook:]

Hard to predict. At this point, we're exceeding our political revenue budget for the first quarter. And that's because of candidate and advocacy advertising. So I think money will be spent. He hasn't spent as much. He has spent some money, but I think everyone else is spending to compete, and there's this whole democratic race that's going on that is we're generating a fair amount of revenue from as well. So I don't think that there will be a negative effect because once it becomes a nationwide campaign post convention, money will need to be spent to win. So we don't see that as any kind of a negative potential as in sub-political number. We're still very confident with our (50

[James Charles Goss:]

Okay. Another one, a separate issue, iHeart, on its call, just quoted some stats indicating that it's TV reach was now about 85% and 73% among millennials. I'm wondering your reaction to that. And do you see any more effective pushback by MVPDs on retrans demands given this sort of trend, as well as consolidation within the MVPD area, specifically Charter, Time Warner Cable coming together?

[Perry Sook:]

Sure. I would say in terms of broadcast television, we've always used kind of an 85% penetration estimate. So that number is not new to use. In fact that millennials are less, I don't think that's new to anybody either. They either can't afford cable or are out and about rather than watching TV. And I think those things change generationally as people get older and they use media for different things. So I don't think you can draw any inferences from that. I look at the alternative. So I'm not sure that there's anything there to see. And I forget the second part of your question, Jim.

[James Charles Goss:]

I was just thinking if there's any further consolidation in the cable space, specifically Time Warner Cable and Charter coming together, maybe that's a non-event. Time Warner Cable has been striking deals right along the way, moving up to a closing, but do you think that has any impact on how high retrans can go at some stage?

[Perry Sook:]

One of our business tenets is that continued consolidation of the MVPD universe will drive continued consolidation both of local station groups and of national cable networks because the negotiations do become all about scale. And that is one of the things that's driving this merger with Media General is that this brings us to the top of the scale from a local ownership perspective. And I still think, as I've said, that the broadcast channels are the most watched in the bundle, and we generate 35% of the viewing in aggregate in an MVPD home. We get about 12.5% of the consideration in aggregate from the bundle. So we've still got a long way to go until we're close to parity, and I think everybody realizes that. But these are all tough negotiations. But you know what? They've been tough negotiations since 2003, and we had a recent interruption of service with one MVPD. That was the first time that that had happened for us in 10 years since 2005 while renewing approximately 1,200 MVPD agreements along the way. So there'll be sharp elbows negotiations, I'm sure, along the way. Scale will matter on the margin. And so that's why we believe our company needs to be at scale to continue to lead the way in terms of the revenue side of the equation.

[James Charles Goss:]

Okay. And Perry, one last thing. Are there any particular digital efforts within Media General that are not in Nexstar that you think can be generalized within the broader platform once the deal is done?

[Perry Sook:]

Sure. There are some pieces that each company provides that the other company doesn't have. For example, HYFN, which is a social media company inside of Media General. We don't really have a social element to our product offering. Conversely, the Media General folks can benefit from what we have with Kixer (53

[James Charles Goss:]

All right. Great. Thanks very much.

[Perry Sook:]

Thank you.

[Operator:]

We'll go next to Barry Lucas with Gabelli & Company.

[Barry L. Lucas:]

Thank you, and good morning. Just a couple more on retrains. You were good enough to provide renewals over the last two years. Maybe you could just extend that to what proportion of the legacy business would renew in 2016 and 2017.

[Tom Carter:]

Sure. The 2016 renewals will be somewhere around 42% and the low 40%. There is one mid-year of substance, a top seven or so renewal. And then in 2017, the renewals are slightly less. I don't have the exact number there right now. I'll try and get it for you.

[Barry L. Lucas:]

Okay, Tom. Thanks. And if you kind of wrap this up, and just sticking with the legacy Nexstar level of confidence to maintain double-digit growth in net retrans looking out.

[Tom Carter:]

Very high. Two-word answer.

[Barry L. Lucas:]

Okay, Tom. You want to quantify it?

[Tom Carter:]

I thought you quantified the double-digit growth.

[Barry L. Lucas:]

Okay. I did.

[Tom Carter:]

Yes.

[Barry L. Lucas:]

Thank you.

[Operator:]

We'll go next to Tracy Young with Evercore ISI.

[Tracy Young:]

Yes. Just following up on the subs, were there any major deals that came up at the end of the year for 2015, just so we know?

[Tom Carter:]

You mean other than Cox?

[Tracy Young:]

That came up at year-end?

[Tom Carter:]

That came up at year-end, got extended through – you're talking 2015, right?

[Tracy Young:]

Correct. I just want to make sure we don't have any surprises, or we have a sense of how things will grow in terms of retrans revenue this year.

[Tom Carter:]

Well, Cox was a large one, and that obviously wasn't done until late January, but it was made retroactive through January 1st.

[Tracy Young:]

Okay. Thanks. And then, in terms of digital, obviously, you're getting close to that $100 million run rate for revenues. Can you give us some sense of margins, or do you think you might be able to break that out going forward for digital? Thanks.

[Tom Carter:]

Well, on a third-party revenue basis, which is basically LAKANA and Yashi, that's somewhere in the probably high-teens to 20% kind of margin business. And then, the stations which is a third is higher than that from a contribution perspective. That's a little bit of just an accounting issue because obviously we don't allocate news expense within the station to the station websites for content creation, they kind of get the benefit of that. But that would be on a contribution margin, probably without full allocations, probably somewhere in the 30% to 40%, and then, depending on allocations less than that.

[Tracy Young:]

Okay. Great. Thank you.

[Operator:]

We'll go to Davis Hebert with Wells Fargo.

[Davis Hebert:]

Hi. Thanks for squeezing me in. I just want to go back to leverage for a moment. You talked generally about it, maybe I could drill down a little bit. You mentioned 4.5 times by year-end which is an LTM number. The 5.5 times you've talked about is a 2015-2016 average. So I'm just asking, is that the year-end number for 2016 or should we expect that 5.5 times to migrate lower as the year progress? And then, I don't want to reach too much here, but if you could talk about 2016-2017, how you see that glide path looking on a two-year average basis.

[Tom Carter:]

Well, Davis, it sounds like you want me to fill out your spreadsheet for you. But the 2015-2016 5.5 times is at close. That will go down on a 2015-2016 average basis by year-end 2016 because we anticipate substantial free cash flow generation in the fourth quarter of 2016 to be applied against the quantum of debt. Having said that, I'm sure I could probably come up with the 2016-2017 leverage number. I just haven't done the math.

[Davis Hebert:]

Okay. That's helpful. Just on the difference between deal close and year end. And then second question and last question, Media General announced a deal with Nielsen, a long-term deal. So I just wanted to ask collectively between you and Media General how you're approaching audience measurement.

[Perry Sook:]

Well, the deal, I mean, we knew about the deal in December. It was not publicized until January, and it's a three-year deal. I'm not sure I can say that long term. And so it was within their purview to do that to do that, and we're fine with that. We have placed a pretty good-sized bet on Rentrak/comScore. But again, and I just gave this speech when I was speaking with a bunch of students in Washington, the vast majority of our local clients don't care about ratings, they care about, is there more money in my cash register after I ran the advertising than there was before. So it's not really a necessary tool to conduct the business on a day-to-day basis in medium-sized and smaller markets. So I'm not sure that we have a difference in philosophy. The three years of Nielsen exposure will give us an opportunity to evaluate whether that's a value add for the stations, or whether it's just increasing our cost of doing business with no real benefit. And so we'll address that as time goes on. I just wanted also to mention on the leverage calculation. The reason we haven't been specific on 2017 is because we don't know what's going to happen in the spectrum auction. So basically any numbers that we're walking around with here, whether it's guidance or leverage or whatever, assume that there is no proceeds from the spectrum auction. But our leverage profile could change fairly interestingly if we achieve somewhere in the range of outcomes in the spectrum auction to what we have advertised that might be available to us. So I think that the point on leverage is – and this is instructive, I think, it will be 5.5 times if it will close in late third quarter, and a full point will be knocked off by the end of the year, will be at 4.5 times there. Absent proceeds from the spectrum auction, the leverage will creep up slightly in 2015, not as much as you may think, but again, that could be reversed if the spectrum auction proceeds are anything material. So all of that goes into account, and all of that will happen in real time, but all of the numbers we've given you assume nothing – no proceeds from the spectrum auction until we know more, we're not going to count on anything there.

[Tom Carter:]

And just one more point, it would have been very easy for Nexstar to have given its shareholders a CVR, just as Media General shareholders got a CVR, but we thought it was important to keep any of those proceeds in the company to reduce debt first. And then the shareholders can benefit from that, as well as a reduced leverage company going forward and the options for return of capital once that deleveraging happens.

[Davis Hebert:]

Okay. Excellent. Really helpful. Thanks again for the commentary. Appreciate it.

[Operator:]

We'll go next to John Kornreich with JK Media.

[John Kornreich:]

Tom, direct numbers question. Given that you're annualizing 325 (01

[Tom Carter:]

Is there a question in there, John?

[John Kornreich:]

Yes. Do you confirm that?

[Tom Carter:]

We don't give full-year guidance, but clearly I understand the building blocks that you're coming up with. It includes a partial quarter of West Virginia. It doesn't include anything for North Dakota. But keep in mind, North Dakota is 0.4%, I think, of the U.S. household population, so it's not a big subscriber base. And you're right, there is a mid-year adjustment to a pretty meaningful MVPD. So yes, there should be growth above fourth quarter annualized. I'm not here to say exactly what that is, but yes, there will be building blocks that mean that retrans revenue will be higher than the fourth quarter annualized.

[John Kornreich:]

And besides Cox, what did you do in the second half of any note, in the second half?

[Perry Sook:]

Of 2015?

[John Kornreich:]

Yeah.

[Perry Sook:]

There were 36 agreements that were up for renewal in Nexstar. Then when we got to West Virginia Media stations, we had another half-a-dozen or so. There were only nine of those that were greater than 25,000 subscribers. So there were some mid-tier companies in there. Cable ONE and (01

[Tom Carter:]

And the other thing I would just mention, John is, keep in mind that we do have annual escalators in all of our retrans contracts.

[John Kornreich:]

Yeah.

[Tom Carter:]

And the majority of those contracts do come up at year-end. So you'll get the escalators kicking in in Q1 of 2016. So yes, there are some building blocks for growth above Q4 annualized.

[John Kornreich:]

Would you reiterate what you – I missed this, what you said about local core and national spot core in the fourth quarter. I got the first quarter, but what about the fourth quarter, is it 2%, was it?

[Tom Carter:]

I'm sorry. For fourth quarter of 2015?

[John Kornreich:]

Yeah.

[Tom Carter:]

Flat.

[John Kornreich:]

Yes.

[Tom Carter:]

Flat for Q4 2015.

[John Kornreich:]

Yes.

[Tom Carter:]

Same station basis.

[John Kornreich:]

Was what, 2%?

[Tom Carter:]

Flat.

[John Kornreich:]

Oh, flat. I'm sorry.

[Tom Carter:]

Zero.

[John Kornreich:]

Yeah.

[Tom Carter:]

Nothing. Flat.

[John Kornreich:]

And last question is, exactly what do you calculate your national penetration to be pro forma for Media General, and any divestitures and other adjustments?

[Perry Sook:]

Assuming that we sell to investor markets as planned and using the current household penetration estimates, we would be at 38.9% of U.S. television household.

[John Kornreich:]

Again. Okay. Thank you. I appreciate it. I'll see you guys in The Breakers.

[Perry Sook:]

Thank you.

[Operator:]

We'll go next to Michael Kupinski with Noble Financial

[Michael A. Kupinski:]

Thank you. Just a quick question, some of your other broadcast peers appear to be stepping on the accelerator for content development. And I was just wondering now that you'll have a much broader platform. If you can just talk a little bit about your plans for content development, and if there are any specific benchmarks that you can give us in terms of dayparts, primetime versus – and how many hours of programming that you'd like to have at certain benchmarks and timeframes and so forth?

[Perry Sook:]

Sure. Well, I mean, we stepped on the accelerator in 2015 as well, we added about 50 hours a week of local news. Again, we believe that what we do well was local, so we're not going to spend a tremendous amount of time on national – content development for national, given that we produce so much news, our need for syndication programming is much less than CW, MyNetwork and FOX-oriented groups. So I don't think that you're going to see us go into that realm. I don't think you'll see us, you're going to have much interest in national cable networks. We think that that's a tough spot in the media ecosystem to be in. I do think that Media General has something interesting going on with their BiteSizeTV, and we've made no value judgments on that. They've been successful with it in a pure organic sense. It's not making any money yet, but it's – it may well get there. And so I wouldn't rule out – continuing things are being done, but we're going to invest money, we're going to invest money to better serve our local markets in heightened localism. And I don't think that there is an unmet need for additional content beyond the local content we produce every day.

[Michael A. Kupinski:]

Great. Thanks for the color. I appreciate it.

[Perry Sook:]

You bet.

[Operator:]

And at this time, I'd like to turn the conference back over to management for any additional or closing comments.

[Perry Sook:]

All right. Well, thank you very much for staying with us this morning. Thanks for your interest. We look forward to coming back to you in three months time to report on our first quarter results, as well as give you an update on the progress of the Media General transaction as we move through the regulatory and shareholder approval processes. Thanks very much, everyone. Have a great day.

[Operator:]

And that does conclude today's conference. Thank you all, for your participation.