Nexstar Media Group, Inc.
Q3 2008 Earnings Call Transcript

Published: 10 Nov 2008

[Operator:]

Welcome to the Nexstar Broadcasting Group’s 2008 third quarter conference call. Today’s call is being recorded. All statements and comments made by management during this conference other than statements of historical facts may be deemed forward-looking statements within the meaning of Section 21 of the Securities Act of 1933 and section 21A from the Securities and Exchange Act of 1934. The company’s future financial conditions and results of operations and well as forward looking statements are subject to change. The forward-looking statements and comments made during the conference call are made only as of date of today’s conference call. Management will also be discussing non-GAAP information during this call. In compliance with Regulation G, reconciliation of this non-GAAP information to GAAP measurements are included in today’s news announcement. The company does not undertake any obligation to update any forward-looking statements reflective of change in circumstances. At this time I’d like to turn this call over to your host, Nexstar President and CEO, Perry A. Sook. Mr. Sook, please go ahead.

[Perry A. Sook:]

Good morning everyone. Matt Devine, our Chief Financial Officer is on the call with me today. Thank you for joining us this morning to discuss Nexstar’s 2008 third quarter operating results. After Matt and I complete our brief remarks, we’ll open the call up for Q&A. During the third quarter, Nexstar and its stations continued to perform very well in the face of a challenging economy and a difficult advertising market. Nexstar’s third quarter operating results include record revenue, BCF, and EBITDA which reflects strong political contributions and significant e-media and retransmission consent revenue growth. Combined, these factors resulted in total net revenue growth of 9% which demonstrates that we continue to outpace our industry. What’s even more impressive in my view is that we posted these results in spite of the effects of hurricane Ike which disrupted the operations of our South East Texas and Louisiana properties for much of the month of September. Overall Nexstar is nearly 10-fold increase in political revenues, 63% increase in e-media revenue, 38% in retransmission consent revenue and revenue contributions related to the 2008 summer Olympics broadcast enabled Nexstar to overcome the impacts of the current economy as well as certain acts of nature. In addition, our television stations are performing well from an audience perspective with our leading local news programming being the foundation for our political revenue growth. Our stations are in great competitive shape, even during these trying times and our local sales teams are doing a solid job of developing marketing solutions and partnerships with local businesses and demonstrating how and why our platform delivers results. Furthermore, during the quarter we made considerable progress in strengthening and expanding our digital media platform and our round 2-retransmission consent negotiations progress on plan with the announced DirectTV and AT&T agreements. Given the current environment, we’re focused on controlling our costs while continuing to make strategic investments in our e-media platform and working to complete our required digital build out. Let me review some of the third quarter highlights. New to television, local direct billing totaled $3.7 million for the third quarter. Quarterly retransmission consent revenues of $6.2 million were also nicely ahead of Q2 2008 levels of $4.5 million. E-media revenue of $2.7 million exceeded $1.6 million in the third quarter of 2007. Year to date, we’ve generated over $7.3 million of e-media revenue already and that surpasses the $5.1 million recorded for the full year of 2007. For the full year of 2008, we fully expect to double last year’s e-media total revenue. Our broadcast cash flow totaled $27.3 million in the third quarter of 2008, up 20% from $22.8 million in the third quarter of 2007. EBITDA grew17.2% to $23.1 million, up from $19.7 million in the third quarter of 2007. As it relates to categories, our top 10 category billing decreased 6%, [Otto] was down 11%, fast food down 5.3%. Four of our top 10 categories were up year over year. Legal was up 16.6%, retail at 14%, telcom rising 11% and medical posting gains of roughly 3%. During the quarter, our automotive spending comprised approximately $24 million of our core advertising, down from 25.8% in the third quarter of 2007. Factory and dealer group spending was down 18% in the quarter, deepening from a 15% decline in Q2. However, the bright spot in auto was our local dealership advertising increased 5% in the third quarter. After Matt’s financial review, I’ll come back and run through our outlook and strategies that we believe will result in significant free cash flow in 2009. For now, let me turn the call over to Matt Devine for additional detail on our Q3 financials.

[Matthew E. Devine:]

I’d like to review some of the key year over year Q3 and year to date lineup items on the company’s income statement and balance sheet. Before we do that, as we stated in this morning’s press release, in the third quarter of 2008, Nexstar recorded an impairment charge as required by SFAS 142. The events that triggered the need for the impairment analysis at September 30 included a decline of the price of the company’s class A common stock, the decline in overall economic conditions and the decline in advertising revenue at some of the company’s television stations. This testing resulted in a $48.5 million non-cash impairment charge in the third quarter breaking down as follows

[Perry A. Sook:]

Our 4Q guidance reflects the strong share of political revenue that we’ve garnered in our market. The company’s positioning in battleground states like Pennsylvania, Indiana and Missouri and spending by candidates on several hotly contested statewide races; this revenue is booked and the cash is in the bank, in fact, is still coming in. There’s a congressional election in Shreveport in early December and we’re still booking political revenue in Louisiana. While we certainly did not anticipate anything near what occurred over the last few months in the general economy, we continue to advance our strategies for long-term revenue growth and we are exercising disciplined expense management while preserving the strength of our ad sales and our local programming initiatives to drive digital revenue growth. This end during Q3, we announced that we renegotiated a multi-year retransmission consent agreement with DirectTV as well as a completely new agreement to bring AT&T U-Verse subscribers Nexstar’s locally produced content including our market leading local newscasts in both FD and HD. These new agreements extend our success in generating growing value from our station programming and validate the strength of our award winning local content, local news, and leading national programming while raising the bar for retransmission consent consideration on a per-subscriber basis for the company. These deals also represent further progress in driving meaningful incremental revenue from a round two retransmission consent agreement negotiations with what will continue through 2009. We will be generating high margin revenue growth from this source for the remainder of this year, throughout 2009 and into 2010. Also, despite the overall challenging market conditions, we remain focused on our long-term strategy of identifying and pursuing accretive and de-leveraging acquisitions. Last month we announced the acquisition of the assets of KWBF, the My Network TV affiliate serving Little Rock, Arkansas for $4 million, a multiple of less than 6 times the last12 months’ pro forma cash flow. The proposed acquisitions compliments our existing Little Rock station KARK TV, our local NBC affiliate there, and upon completion, Little Rock will represent the 19th market where we provide services to more than one television station. Post closing, our immediate strategy is we will focus on extracting financially synergies leveraging our existing local sales team, leveraging our award winning local news and e-media operations across both stations and under our ownership, KWBF will generate retransmission revenues for the first time. In addition, late last month, we announced that as of January 1, 2009 KBTV in Beaumont, Texas will become a FOX affiliate, enabling Nexstar to broadcast our strong local news and other programming in time periods that meet local viewer preferences while partnering with the strength of the FOX network programming. This will be a positive from a revenue perspective for Nexstar in 2009. As reflected by our year over year, year to date results, our e-media activities and momentum continue to benefit from strong usage trends and advertiser demands. Innovation on the part of our e-media team is also positioning us well for continued growth. We expect continued quarterly sequential growth in e-media revenue with a full year run rate of our new products and features again in 2009. Next year, we’ll be positioned to substantially increase our revenue from this source for a full year basis. We reiterate our expectation that 2008 e-media revenue from retransmission consent agreements and new media initiatives will account for approximately $30 million in total 2008 revenue, 5% increase compared with our total contributions in 2007. We continue to evaluate additional opportunities to derive value from our content with other new and emerging technologies and we will pursue those that are in the best interest of our viewers, users and shareholders. Notwithstanding the current market evaluations, Nexstar consistently outperforms the industry by adhering to its core strategies for growth

[Operator:]

(Operator Instructions)Your first question comes from Bishop Cheen - Wachovia.

[Bishop Cheen:]

Let me focus on the balance sheet, clearly you are 6.5 times [covey] as we get toward year end, that’s the covenant EBITDA, and it looks like you’re going to clear it and I think you already gave guidance on that low 6’s, but as you get to 2009 without the political, I guess the concept here is whether all of the retrans, the e-media, the other things you’re certainly putting in place including cost control can replace the Olympic and the political which were certainly higher margin revenue. Can you give us any color you’re thinking about 2009?

[Perry E. Sook:]

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

[Bishop Cheen:]

That’s very helpful. One other follow up; since September, October, November, have you bought back any more debt or stock as a company?

[Matthew E. Devine:]

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

[Operator:]

Your next question comes from Edward Atorino - The Benchmark Company.

[Edward Atorino:]

Would you repeat, you bought in $4 million, 4.8 of the 11 3/8 and $4 million of the seven or $8 million of the seven?

[Perry E. Sook:]

We bought in $5.2 million of the 11 3/8 and with the 4.8 remaining, we bought in approximately $8 million face value of the 7’s.

[Edward Atorino:]

Ok, so $13.2 total. Would you, I’m a little confused, are you projecting $30 million from e-media in 2009? Did I hear that right?

[Perry E. Sook:]

No, we’re projecting that this year our... taking together retrans and e-media would equate to about $30 million in 2008.

[Edward Atorino:]

Okay, I got you, and both of those ramp up in 2009?

[Perry E. Sook:]

Rather substantially, yes.

[Edward Atorino:]

I guess the key word now, how the pacings look going out of 2008 and into 2009, are the broadcasters have been seeing some pretty stiff down trends, are you seeing the same thing?

[Perry E. Sook:]

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

[Operator:]

Your next question comes from Barry Lucas – Gabelli and Company.

[Barry L. Lucas:]

Couple of quick items; political in 4Q, most of it in the bank, do we have a good handle on what that’s going to amount to Perry?

[Perry E. Sook:]

Yes. It’s in excess of $19 million for the fourth quarter on the books at the end of the day.

[Barry Lucas:]

Just sort of refresh our memories in terms of where CapEx can go from the $25 million to $30 million level this year to where it’s going to drop in 2009?

[Perry E. Sook:]

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

[Barry Lucas:]

That’s helpful and Ed was asking about 2009 pacings, what do you see in terms of any color you can provide on either categories or geographies in 4Q so far?

[Perry E. Sook:]

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

[Operator:]

Your next question is a follow up from Edward Atorino - The Benchmark Company.

[Edward Atorino:]

Review the CapEx plan for ’09 again and how does the details on this basketwork. What amounts go in there and any restrictions on it?

[Matthew E. Devine:]

The CapEx for ’09 will be a number of less than $10 million and that’s really primarily maintenance CapEx. It’s possible that $1 million or $2 million that we’ve got earmarked to pay this year related to HDTV build out will fall into January just because there’s only a limited number of vendors etc., but aside from that, you can look at a maintenance CapEx number of somewhere around $8 million to $10 million. What was the other item that you asked about?

[Edward Atorino:]

On this basket, how does it sort of work? Are there restrictions on what you can do with it?

[Matthew E. Devine:]

In our credit agreement if our leverage is above 5 turns, we have a $10 million basket that allows us to buy in any of our securities and so assuming that our leverage is not below 5 turns next year, we would have access to a fresh $10 million basket.

[Edward Atorino:]

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

[Matthew E. Devine:]

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

[Operator:]

Your next question comes is a follow up from Bishop Cheen –Wachovia.

[Bishop Cheen:]

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

[Matthew E. Devine:]

Yes, there’s a couple little things in there Bishop. For example that non-cash employee stock option expense would get added back to our EBITDA.

[Bishop Cheen:]

[inaudible] was that also running around? I think you said $5 million but I can’t remember if that was 9 months or LTM. Non-cash.

[Matthew E. Devine:]

LTM that number, I’m going to be off a little bit, but LTM and that number is going to be close to $2.5 million. I think I said it was $1.8 million for the 9 months of this year. There are other minor things in there, the difference between trade revenue and trade expense will get factored into that calculation. That’s normally the only material difference.

[Bishop Cheen:]

So when I do my math, I’m like 2 to 3 decimals off with the covenant 6.55 is and that’s kind of the way it should be, right?

[Matthew E. Devine:]

Yes.

[Operator:]

Your next question is a follow up from Barry Lucas – Gabelli and Company.

[Barry Lucas:]

Perry, a little bit more general question looking at stock prices of the group. A bunch of them are under $1. How do you see this group evolving and how do we get out from under the current constraints if there is a way out to see some higher stock prices or some appreciation here?

[Perry E. Sook:]

That’s a great question Barry and I wish I had an answer. I know that not speaking for Matt but when he and I have discussed this in the past, we look at these kind of valuations as great buying opportunities for ourselves and I guess I thought it was a great buy at $3 in September so I think it’s a much better buy. I think that the opinion towards the sector has been overblown and oversold. I think that 2009 will be tough economic times but then again so were 2001, 1999, 1991. Everybody seems to be in the mind of, “But this time it’s different.” I don’t think it is. We’re making cash registers ring in local marketplaces. Our automotive dealer spending in the third quarter was up 5%. That’s a testament to our local sales force having relationships and developing ideas that work on our platform and I think that needs to be our focus. I think TV has this quadruple play that I spoke about at the end of my remarks where we’ve got the revenue streams from subscription which is retrans. We’ve got our core ads growth. We’ve got e-media and then we have this whole digital mobile mineral rights that we just haven’t quite figured out how to drill to yet. Again with our branded relationship in each of our local marketplaces, everybody knows who our TV stations are, both the buyer and the seller of product and I think that the more and more like on our e-media platform that we can get in the way of transactions like we are right now, we see that being a growing opportunity for our business beyond just 30 second spots on the advertising, so I think that again the pendulum always seems to swing too far in either direction and it’s probably never as bad as we think it is but it’s also probably never as good as we thought it was. So we’re just going to stay the course and be disciplined. We think that this creates potential buying opportunities, whether it’s within our securities or to expand the platform on the cheap, and we will continue to try and grow. We have been reporting every quarter sequentially over the year prior for the last two years record revenue for that quarter and we see that continuing here in the fourth quarter and we look to again take advantage of those opportunities as we continue to build the platform out opportunistically and strategically in the months and years ahead. But again, I don’t expect that you can add up this basket of stocks and get change back from your $20. I don’t think that will last for forever, but I do think it’s a buying opportunity in the here and now for those that have the courage of their convictions and certainly the management of this company does and has been putting their money where their mouth is.

[Operator:]

There are no further questions at this time. I will turn the call back over to Mr. Sook.

[Perry E. Sook:]

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

[Operator:]

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