Joseph Jaffoni - JCIR Perry A. Sook - Nexstar Media Group, Inc. Thomas E. Carter - Nexstar Media Group, Inc..

John Janedis - Jefferies LLC Aaron L. Watts - Deutsche Bank Securities, Inc. Marci L. Ryvicker - Wells Fargo Securities LLC Kyle Evans - Stephens, Inc. Daniel L. Kurnos - The Benchmark Company, LLC Leo Kulp - RBC Capital Markets LLC James Charles Goss - Barrington Research Associates, Inc. Barry L. Lucas - Gabelli & Company.

Good day, everyone, and welcome to the Nexstar Media Group 2017 Second Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Joseph Jaffoni, Nexstar Investor Relations. Please go ahead..

Thanks, Cathy. Good morning, everyone, and thank you for joining Nexstar Media Group's 2017 second quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions and answers but first I'll review the Safe Harbor disclosure.

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 preceded by, followed by or that include the words guidance, believes, 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, future financial performance including changes in net revenue cash flow and operating expenses involve risks and uncertainties and are subject to change based on various important factors including the impact of changes in national and regional economies, the ability to service and refinance our outstanding debt, successful integration of acquired television stations and digital businesses including the achievement of synergies in cost reduction, price fluctuations in local and national advertising, future regulatory actions and conditions in the television stations' operating areas, competition from others in the broadcast television market, volatility and programming cost, the effects of governmental regulation of broadcasting, industry consolidation, technological development and major world news events Nexstar undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

In light of these risks and uncertainties and assumptions, the forward-looking events discussed in this communication might not occur. You should not place undue reliance on these forward-looking statements, which speak only as of the date of its release.

For more details on factors that could affect these expectations, please see Nexstar's other filings with the Securities and Exchange Commission. With that, it's my pleasure to turn the call over to your host, Nexstar Chairman, President and CEO Perry Sook. Perry, go ahead, please..

Thank you, Joe, and good morning, everyone. Thank you for joining us to discuss Nexstar's record second quarter results.

This morning, we will discuss our return of capital activities, our synergy and integration successes, our trajectory toward leverage reduction, our increased guidance, and our growth outlook, including the 2018 political opportunity which for Nexstar appears to be extremely healthy.

Tom Carter, our Chief Financial Officer, will join me on the call this morning.

Nexstar's consistent operating momentum and financial growth was evident again in the second quarter as we delivered another period of record financial results with triple-digit net revenue, BCF, adjusted EBITDA, and free cash flow gains, with each metric exceeding the analyst consensus expectations.

Contributions from recently completed acquisitions, overall organic revenue growth, and our focus on managing operations for current cash flow and future growth have positioned the company for its sixth consecutive year of record financial results in 2017, and we have high visibility that 2018 will meaningfully surpass the 2017 results.

Our record second quarter growth clearly demonstrates that Nexstar is differentiating itself in the industry based on our ability to leverage our expanded scale and our commitment to localism, innovation, and growth.

Notably, 51% of our second quarter gross revenue was derived from non-core television advertising sources, and the continued shift over our revenue mix reflects our long-term initiatives to build scale and diversification through our focus on high-growth retransmission and digital revenue opportunities.

In addition to the record second quarter operating results, Nexstar remains active on its commitment to enhance shareholder value through capital returns and capital structure improvements. During the quarter, we repurchased slightly over 1 million Nexstar shares with cash from operations.

We also paid our 18th consecutive quarterly cash dividend, we made continued headway on debt reduction and more recently completed refinancing that is accretive to our free cash flow.

With the second quarter repurchase activity, our basic share count now is reduced to 46.2 million shares, while the interest savings related to the July refinancing increased our average annual free cash flow expectations, with our guidance for the 2017-2018 cycle rising now to approximately $574 million or approximately $12.40 per share, and that's before the Providence acquisition which we announced last night.

Importantly, Nexstar's operating results, including core, continue to pace consistent with our internal forecast and the Media General integration remains ahead of schedule. As to date, we've realized over 90% of the $81 million of synergies that we earmarked to be achieved in 2017.

As such, we expect 2017 to mark the company's sixth consecutive year of record financial results and as we prepare now for what's expected to be record levels of midterm political advertising in 2018.

This scenario sets us up well to significantly lower our leverage over the next 18 months and to continue to return capital to shareholders through dividends that have been increasing on an annual basis since our first declared dividend in 2013. Also, we anticipate opportunistic share repurchases during that time.

As such, we remain confident that Nexstar's net leverage will stay in the high-4 times range through the end of 2017 and drop to the mid-3 times range by the end of 2018. Our free cash flow generation also positions Nexstar to continue pursuing accretive M&A, like the small but highly accretive Rhode Island transaction we announced last night.

I'll do a quick review of the quarterly highlights after which Tom will go through the finances including an update on our cap structure, 2017 expectations, and other items of interest to those of you on the call.

Looking back at Q2, the ongoing strength of Nexstar's legacy operations combined with a healthy full quarter contribution from the Media General businesses combined led to triple digit growth in all of our non-political revenue sources.

For the second quarter, net revenue rose 139% to $626 million as our increased scale and the ongoing execution of our strategies to leverage our local content and diversify our revenue sources significantly offset the 42.6% year-over-year decline in political advertising.

Core pacings in Q2 picked up nicely over Q1 and our $238 million of local revenue and $91.1 million of national revenue were healthy in our current environment. In total, second quarter core ad revenue rose 146.5% with auto representing 25% of core billings.

On a combined basis, our top five categories finished the quarter flat or up with the year-ago period. Three of our top 6 categories were up or flat and the 5 of the top 10 that were down were all down in the low single digits.

Our core revenue growth continues to reflect healthy levels of new business with new to television ad revenue for the quarter of $13.8 million, marking a 4% increase over the prior year. We said on the call that Q1 GDP trends likely dampen the demand temporarily.

And with a stronger GDP uptick in Q2, we've seen the correlation to our businesses as July has been the strongest month of the year for us so far notwithstanding the comp from last year's Olympic programming. We see the rest of Q3 and the second half shaping up well as we begin to see the inventory displaced by political return back to the market.

Extending our historical success in growing political ad spending during odd-year cycles, we reported second quarter political revenue of approximately $6.5 million which I believe is also ahead of analyst expectations, and that was well over three times higher than the comparable 2015 period.

Excluding political, gross revenue grew 146.1% in the second quarter compared to the prior year. With the foundation of our success based on our organizational-wide commitment to localism in the markets we serve, we're proud that during the quarter, Nexstar was awarded 33 Regional Edward R.

Murrow Awards, bringing the total number of broadcasting and journalism awards that our stations have won for local content creation since 2009 to well over 500, and that does not include any awards earned by the former Media General stations prior to our acquisition.

Our solid second quarter core television ad revenue was outpaced by a 157.9% rise in retransmission fee revenue and 157.4% increase in digital revenue. At $253.1 million in the quarter, retransmission fee revenue reached the highest-ever quarterly level in the company's history.

Nexstar's second quarter digital revenue of $64 million represents organic growth in the Nexstar legacy digital operations and the swift and significant progress we've made since January in ensuring that all of the Media General operations are now contributing profitable digital revenue, and we remain optimistic about the future growth and the cash flow prospects from that digital revenue stream as well.

With respect to our revenue mix, combined second quarter digital media and retransmission fee revenue of $317.1 million rose 157.8% over the prior-year period and accounted for 50.6% of net revenue.

These data points highlight the positive ongoing momentum and revenue mix shift from the 2016 second quarter when these operations accounted for 46.9% of net revenue and our 2015 results when retrans and digital were just 41% of net revenue.

The year-over-year increase in second quarter non-television ad revenue reflects new distribution agreements reached in late 2016 with MVPDs covering approximately 10 million of our subscribers and the Media General synergies related to the after-acquired clause on the retransmission contracts, as well as our previously mentioned expanded and profitable digital operations.

I will add that subscriber levels in our markets year-to-date in 2017 give us no cause for concern and that we recently completed new long-term affiliation deals with ABC and Fox with both including attractive economics for the OTT platform that those networks participate in.

As we said on our prior calls, that provided we achieve the appropriate economics, we are agnostic as to whether Nexstar's unique local content and leading news programming, as well as our network programming is viewed by consumers over traditional MSOs or OTTs, and our new agreements are consistent with that view.

Our stations' locally originated news, weather, sports and community-focused content consistently achieves the greatest share of viewership in the MVPD home and the OTT home, and the engagement we remain – and with that engagement, we also remain focused on extending our legacy of local news leadership in our local markets.

The Nexstar platform currently produces over 508 hours of local content per day which equals 3,550 hours per week of local news or over 185,000 hours a year. The bottom line is that we're creating unique local great content and information for our viewers and our advertisers, which we want them to consume anywhere, anytime and on any device.

With our success in this front, we will continue to create new revenue streams for Nexstar just as we have with our recently announced OTT agreements. Now, let me turn the call over to Tom Carter, who will provide further detail on our financials.

Tom?.

Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q2 income statement and balance sheet data, after which I'll provide an update on our capital structure and some guidance points for the near term.

As noted in this morning's release, actual Q2 results presented reflect the impact of previously disclosed one-time Media General-related transaction expenses of $6.1 million and $53.9 million incurred in the three and the six months ended June 30, 2017, respectively.

The actual results for these three months ended June 30, 2017 reflect the company's legacy Nexstar broadcasting and digital operations, net of the six-station Nexstar divestitures, and the first full quarter result from Media General stations, net of the seven Media General station divestitures including the Media General digital assets.

The comparable three-month period ended June 30, 2016 reflects Nexstar-only broadcasting digital operations inclusive of those six stations, which were divested simultaneously with the closing of the Media General transaction. So that's a bit of a scorecard with regard to what is included in the press release and in the income statement.

Turning to the 2Q income statement, net revenue was up 139% to $626 million. Core revenue, which we define as local and national revenue, was up 146% to $329 million, that was divided into local revenue of $238 million and national revenue of $91.1 million.

Political revenue, as Perry mentioned, was $6.5 million which we're very pleased with that result, but obviously compares against an election year in 2016 where we had $11.3 million in political revenue. Retrans revenue was up almost 158% to $253 million, and digital revenues were $64 million, which was up 158% also.

Broadcast cash flow was a record of almost $227 million. Adjusted EBITDA before one-time expenses was $208.3 million and free cash flow before one-time expenses was $145.2 million. On a combined company basis, pro forma for the divestitures, the same-station net revenue was up 5.3%.

Pro forma of combined company local advertising revenue was up 1% and national advertising was down between 5% and 6%. Gross revenue excluding political was up 7% on a pro forma same-station basis. Same-station pro forma retransmission revenues rose 25% and pro forma comparable continuing digital revenues were up 8%.

Second quarter station direct operating expenses net of trade expense and SG&A expenses rose 176% and 127%, respectively, primarily reflecting the operations of the acquired station and digital assets, and increases in network affiliation expense and extended local programming.

Comparable pro forma fixed expenses excluding network affiliation costs were down 6.5% quarter to quarter.

Nexstar's second quarter corporate expenses were $24.8 million inclusive of $6.5 million in non-cash stock comp expense and $6.1 million of the transaction expenses related to the completion of the Media General transaction and other certain divestitures during the quarter.

Net of these items, corporate expenses was actually slightly lower than forecasted.

For 2017's third quarter, we project recurring cash corporate overhead will be approximately $13.5 million to $14.5 million exclusive of the stock comp expense of $6 million to $7 million for the quarter and related Media General transaction expenses which we expect to be approximately $2 million for this quarter, as those expenses start to moderate as we finish out the year.

We expect total cash non-comp stock expense to be approximately $24 million to $25 million for the year and cash expenses for the quarter will be in line. And we expect total MEG related transaction expenses to be between $55 million and $60 million for the entire year.

Turning to the balance sheet, I'll review some key items as of June 30, 2017 and provide an update on capital allocation during the quarter. Just one thing to remember, as I talk about our credit agreement with the merger financing which closed in January of this year, our credit agreement has been simplified to only have one leverage covenant.

That is a first lien leverage covenant which is based on a 4.5 times maximum. For June 30, 2017, that comparable calculation was 2.96 times EBITDA and total leverage, even though it's not a covenant, was at 4.7 times as of June 30.

Nexstar's outstanding debt as of June 30 consisted of approximately $2.9 billion in term loans and balance under the revolver. We reflected approximately $66 million in term loan reductions during the quarter from free cash flow.

Then we have the three outstanding debt issuance, the 6.125%, $275 million face amount, the 5.875%, $400 million face amount, and the 5.625% which is the $900 million face amount. If you sum all that together, the total debt on a GAAP basis is approximately $4.4 billion, and we had unrestricted cash funds at June 30 of approximately $86 million.

Summing that all together, the $4.3 billion of net debt was compared to $4.7 billion as of June – January 17 from a closed MEG transaction, taking into cash into consideration, the higher cash levels in the quarter and the debt paydowns, we believe that we're in a good liquidity position going forward.

In addition to the fact that as Perry had mentioned, we spent approximately $58 million during the quarter to buy back cash. We still made significant debt reductions during the quarter. We did generate a lot of cash in addition to building the cash reserves by $13 million and the $66 million in term loan debt reductions.

As I mentioned, we allocated $58 million to return of shareholders in addition to the almost $15 million in the quarterly cash dividend that was paid during Q2. As Perry said, we're going to put our cash to use for the highest investment return of our shareholders.

And with our shares yielding approximately 20% on a free cash flow basis, it was clear to us that buying back a million shares in the quarter was the absolute right move and one which complements our leverage reduction and dividend programs.

Q1 total interest expense amounted to approximately $56 million compared to approximately $21 million in Q2 of 2016, while cash interest was $53.2 million compared to approximately $19.6 million in the year-ago quarter.

Nexstar's CapEx for the quarter, largely related to local news and station infrastructure investments, was $14.1 million and year-to-date was $27.6 million.

As such, we're on – we are pacing in line with our full year 2017 CapEx expectation of approximately $55 million inclusive of the sale of the Media General Richmond building which closed in June and excluding any spectrum-related activity. CapEx for Q3 of 2017 is expected to be approximately $20 million to $22 million.

Our Q2 free cash flow before transaction expenses, as I mentioned before, was approximately $145.2 million, while the $139.1 million of free cash flow after one-time expenses includes the impact of the $6.1 million transaction expenses and excludes approximately $35 million of cash taxes related to the divestitures that occurred earlier this year and a net benefit of approximately $13.2 million from the MEG building sale, as I mentioned before, which was done in Q2 and was originally planned to be completed in Q3.

Net of all these, our second quarter recurring free cash flow from operations was approximately $126 million versus a consensus estimate of approximately $120 million. Operating cash taxes during the quarter were $16.4 million and we'll have a like amount in Q3 of 2017.

Subsequent to the end of the quarter, we announced that we refinanced our outstanding senior secured term loan facilities including the balance of the term loan B – the term loan A, both tranches of the term loan A, as well as the $175 million secured revolving credit facility.

The new $2.125 billion term loan B was issued at par and bears interest rate at LIBOR plus 2.50%, while its maturity remains unchanged. These new terms represent approximately a 50-basis-point interest rate reduction compared to the company's prior term loan B facility.

The new $800 million term loan A was issued at par and bears interest initially at a rate of LIBOR plus 2% with periodic adjustments based thereafter on leverage base grid.

The maturity of the balance of the $51.3 million tranche is unchanged and remains a portion of the – and well, the remaining portion of the term loan A will have a new 5-year maturity. The company's new senior secured revolving facility will be priced comparably to the term loan A and had a nominal amount outstanding at 6.30%.

The net effect of the refinancing transaction is an approximately $15 million reduction in annual interest expense on an annualized basis, which results in an increase in free cash flow of approximately $9 million over that same annualized basis.

This refinancing again reflects our laser focus on actively managing our capital structure to drive free cash flow and provide the financing flexibility to support our near and long term growth initiatives, as well as return of capital objectives.

Our capital structure represents the proper balance of fixed and floating debt, an attractive weighted average cost of capital of less than 5% and both prepayment and refinancing flexibility.

In addition, we have a well staggered maturity profile with no significant maturities until 2022, at which point we expect we'll have made significant headway towards substantial debt reduction.

Finally, with respect to the Contingent Value Right, which I know a lot of people are interested in, held by former Media General shareholders, per the terms of the CVR agreement, a distribution notice will be delivered by Nexstar to the CVR rights agent, American Stock Transfer, and the first payments will be made to the CVR holders we expect by the end of August.

And we'll continue periodically thereafter until all of the spectrum and CVR expenses has been finalized. Please refer to the CVR agreement for additional details with regard to the process.

As it relates to management's focus on free cash flow generation, our positive outlook for Nexstar Media Group will follow the approach we've successfully deployed in terms of building the top line, maintaining close control on fixed and variable costs, and optimizing the balance sheet and capital structure.

This plan will continue to support our goals of generating significant free cash flow growth, while allowing us to reduce leverage, pursue additional selective accretive acquisitions, pay dividends, repurchase shares and take any other action that can enhance shareholder value.

In summary, Nexstar is executing well across all functions including operations, integrations, synergy realization, capital allocation, capital structure and service to our local communities.

As such, we are highly confident in our increased guidance for average annual free cash flow in the 2017/2018 cycle of approximately $574 million annually or approximately $12.40 per share and the value to be created for shareholders.

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

Thank you, Tom. Notably, our operations generated over $246 million in free cash flow year-to-date before the one-time transaction costs which equates to approximately $5.32 per share in free cash flow.

With accelerating growth in the back half of the year and the full benefit of the 2018 new affiliation and retrans renewals combined with our ability to capture large shares of political advertising in our markets, we have excellent visibility towards achieving our free cash flow, deleveraging and return of capital targets.

We're remaining opportunistic with respect to accretive value-building acquisitions without materially altering our leverage profile. For Nexstar and our shareholders, free cash flow is our priority performance metric.

I hope that our results today and my comments this morning highlight why we believe we have highly visible prospects to generate in excess of $574 million of free cash flow in the current two-year cycle and the effectiveness of our equity given that expectation.

We look forward to reporting on our continued growth and our accomplishments in three months' time, and on behalf of the more than 9,200 employees of the Nexstar Nation and our management team, I'd like to thank you for your continued interest, support and for joining us this morning.

Now, let's open the call to Q&A to address your specific areas of interest.

Cathy?.

Thank you. And we'll take our first question from John Janedis with Jefferies. Please go ahead..

Thank you. Perry, the comments from you and your peers, I guess, seem a little bit less correlated than usual and I guess your end comments seem a little more bullish.

And I'm wondering to what extent it's related to maybe your affiliations, your markets revenue mix or to some extent, are you seeing some early revenue benefit from the Media General stations?.

I would say all of the above probably contribute to baking that cake, John. I would say that with the 26 new general managers that have been named across the hundred markets in the Nexstar Nation, they are having a substantial impact on stations that perhaps were without management in the historic period.

So we are seeing great responses from – and the majority of those are Media General markets or historically Media General markets. I would say that I think management teams matter and our focus and dedication, I think, is evident in the results that you see quarter after quarter.

Beyond that, I don't know the geography or affiliation mix necessarily would play into it. It could be somewhat of a factor.

But as I think we mentioned, July was the best core advertising revenue month of the year thus far with local up in the mid-single digits and national flat with the prior year and we haven't reported that in either of the first two quarters on a quarterly basis.

So I think that overall, we see the economy accelerating slightly and I think we're the beneficiaries of that. But we're also laser focused in capitalizing on those opportunities as they present themselves..

Yeah.

I'm sorry if I missed it, Perry, but did you say either what August is looking like or the quarter in general in terms of the – on the core front?.

Well, we are currently forecasting to substantially exceed our budget in August. Having said that, August was where the Olympic fell in 2016 and for NBC stations in total, we're budgeting to be behind prior year in total ad revenue.

However, the increase in retrans will almost make up for loss of Olympic revenue from our NBC affiliates in the month of August..

Okay. And maybe one other quickie.

Look, as you know there's been some concern in the market about reverse comp and with your FOX and ABC deals behind you and I'm assuming others coming up, could you talk about visibility on net retrans over the next couple of years? It seems like at this point, there shouldn't be much uncertainty maybe through the end of the decade? Is that right?.

Well, John, this is Tom. I'll take that. You're exactly right. I mean, we have very little unknowns in terms of that economic equation through the end of 2018 and on into 2019. Vast majority of the affiliation agreements are done, a high percentage of the retrans agreements are done.

So there's not open points in terms of what that economic looks like – economic equation looks like. And we expect it won't be a straight line growth but we expect a CAGR of low double-digit net retrans growth through the end of the 2019 period. It will be higher in 2017 and 2019 and a little bit lower in 2018.

But if you average them out, it'll be low double digits..

John, just to add a little color to that, we have a few of the legacy Media General NBC affiliates that we – that are up for renegotiation at the end of this year, and that's the only thing between us now and the end of 2019 in terms of affiliation renewals. So, there is stability and visibility in that revenue and expense stream..

Great. Thanks a lot, guys..

And we'll take our next question from Aaron Watts with Deutsche Bank. Please go ahead..

Hey, guys. Thanks. Two questions for me. On the whole, we're seeing consistent primetime ratings decline for the networks.

What, if any, impacts are you feeling from that at your stations?.

Not much. I mean, if you just follow the math, network primetime is roughly 20% of our ad-supported revenue, that is approximately 49% of our total revenue. If it's down 10%, that would be a point. I don't think it's down 10%, and we get very little inventory to sell.

So, I don't think there's a direct correlation between those ratings and our unit rates. And as you know, as we've said time and again, we make half of our ad-supported revenue on the television stations from our local news products, and we're much more concerned with what the 10:00 lead-in does to our local news than the 10:00 show itself.

I mean, the marquee programming is nice to have, and it's a superior value proposition in the bundle when you marry the local content and the marquee national content. But it's a much bigger issue to network owners than it is to local station owners..

Okay. Got it. And then my last question was just on the affiliation agreements. You just re-upped with Fox and ABC.

I guess specifically on those agreements, would they be impacted if you were to make an acquisition that materially grew your footprint and I guess more generally, do you believe any of the networks would take issue or action if you were to make such a move in the future?.

Based on our discussions with the networks, I would say, no. I mean there is no ability or any inclination or any communication that would indicate in any acquisition we've made to date or any we might contemplate that current affiliate agreements would be reopened.

And I would characterize our relationships with our network partners as excellent as evidenced by the fact that we've been able to announce agreements in the affiliation space, in the OTT space. Those haven't been easy negotiations and they've all certainly been long, but we've been able to get to the point where both parties can do business.

So I'm not concerned that acquisitions would create any additional degree of difficulty..

Okay. Thanks, Perry..

And we'll take our next question from Marci Ryvicker with Wells Fargo. Please go ahead..

Thanks, I have a couple.

The first, what exactly drove the strength in July because I think you're the only one that's really talked about strong July so far?.

Well, I think it's a number of factors. Again, I would highlight new management positively impacting the results at the stations they now manage and everybody's been in place now for a month or more and then some folks six months, and management really does matter at the local level.

And I do think that you had some political revenue with half the amount of political revenue in the month that we had the year prior, so we're starting to be up against the effect of those comps. But beyond that, I just think it is focused execution that is driving the results..

Okay. And we're sort of dancing around the questions, I'm just going to ask you your thoughts on the FOX-ION joint venture and if that's real and if that would impact you at all..

I can offer an opinion. Only FOX and ION would know for sure, but I would notice the same reporter that commented on FOX and Blackstone as part of the Tribune auction process. I would comment that I don't think that that combination really works in the long term, and ION would have to basically sacrifice its business to become a FOX surrogate.

And according to the head of ION, who I'm told was wandering through vineyards in Tuscany last week, I'm not sure you can engage substantively in negotiations then, but I would say that he has indicated he's not interested in selling off pieces of the company. It would be a whole company transaction or none at all.

And I think FOX has stated that they're at this point most focused on closing the Sky transaction and maintaining their leverage profile and not in deploying more money at this current time into the station business. Has FOX looked at ION? Yes. Has Nexstar looked at ION? Yes.

So there is a kernel of truth that there could have been discussions and that people may have looked at the information on ION. But I don't believe it's an actionable transaction..

Great. We all very much appreciate that. A few more quick ones. I'm going to ask you again about your view on transformative transactions at this point..

Well, if they present themselves and they beat buying back our own stock as accretion, then those are the kinds of things we will lean into. Whether it is the divestitures out of the Sinclair Tribune which are fairly substantial, that's an opportunity. There may be whole company opportunities down the road.

I can promise you there will be more opportunities like Providence, probably larger than that, for us to acquire scale in marketplaces and we'll look at all of them.

But Tom and I have this conversation probably three times a day because whether it's Greg Raifman in digital or Tim Busch in broadcast or the shareholders' dividend or repurchase opportunities, everybody competes for capital on the same playing field.

And the decisions are made on a dollar-denominated basis, and it's the highest and best use of the capital, and the most accretive use of that capital is what wins the day..

Okay.

My last question, I got this from a couple of investors this morning is why wouldn't you be more aggressive at these valuations in terms of buying back stock given where that trades and how high your visibility is through 2018?.

Well, let me just say that, first of all, if you follow the leverage statistics, our leverage remained flat during – between Q1 and Q2 on a total basis. The only way you do that when you're losing political revenue is to pay down debt. And we paid down a substantial amount of debt in Q2.

And as we – you'll see and we've mentioned, we continue to pay down debt subsequent to the end of Q2, in addition to allocating almost $60 million of cash for stock buybacks in Q2. So the cash flow is definitely there. We are taking an opportunistic view of buying back stock, but we definitely have shown a willingness and a capacity to do that.

But at the same time, we're committed to deleveraging, and the only way that we're going to deleverage is to actually pay down debt.

Until we get into 2018 when political will return, in which case we'll be able to deleverage because of increases in EBITDA, but we're committed to actually reducing the quantum of debt, but we can walk and chew gum at the same time, and I think we experienced that and demonstrated that in Q2..

Thank you so much..

And we'll take our next question from Kyle Evans with Stephens, Incorporated..

Hi. Thanks. You gave pacing for the quarter on local and national.

Could you walk us through auto in 2Q and talk about what you're seeing in 3Q so far?.

Sure. Auto was down a couple of percentage points. Let me go back and just start, and I think I said this on the call, but if you look at our top 10 category, 5 of our top 10 categories were up and the other 5 were down, but no category was down more than 3 points versus the prior year.

Auto was down a couple of points in Q2, our Toyota, Nissan, Honda, GM, and Volkswagen spending were up. Volkswagen was way up. The laggards were the domestic plays of primarily Ford and Chevrolet. Dealer spending was slightly down, kind of in line with the overall decline across the quarter.

And I would say Q3 at this point, now again, we did have a fair amount of automotive advertising in the Olympics last year on our NBC stations, but we are not seeing a departure from those kinds of numbers in Q3, granted we only have a month and a week in the books at this point.

But the conversations with our local dealers remain healthy and productive. And I think that automotive will be thematically a lot like Q3 than what we reported in Q2 which is an improvement over where we were in Q1.

So we see kind of status quo on automotive with the possible caveat of the carve-out of Olympic dollars that were taken off the top last year..

Okay. Perry, you mentioned that the sub-count numbers were not cause for concern.

Would you put a number or a bracket around that one?.

Sure. So it's year-to-date through seven months for which we have that information. Absolute sub count loss is less than 0.5% across our footprint on a year-to-date basis. So, you could impute a run rate of significantly less than 1% loss for a full year if the current sub count trends continue.

And again, that's before any – these OTT agreements were just struck and they're not launched in most of our markets. And so, there are no OTT subs to counterbalance that. So, that's a pure number. And I would point out that against that on a year-to-date basis, our retrans revenue was up 4,800 and 48%..

Okay. Lastly, I know it's too early to be seeing actual impact of the OTT deals.

But internally, as you think about that, when do you expect that or if and when do you expect that to become kind of a material component of your sub count?.

I don't know if it'll ever become a material component of our sub count. I think that our markets – and a lot of these are maybe launching in the top 50 markets and there's one that's only launching in the top 10.

And of course, we're participating in a more limited view in some of those, but I would expect that we will have some revenue from OTT maybe in the fourth quarter of this year, but in 2018 – but I don't see it in any time horizon here over the next two or three years being anything I would call material..

Okay. Thank you..

And we'll go to our next question from Dan Kurnos from The Benchmark Company. Please go ahead..

Great. Thanks. Good morning. Just two real quick ones for me. Perry, you mentioned in your prepared remarks that all of the Media General business, the digital business were profitable now.

Have you shuttered all the businesses you're going to shutter at this point and kind of what's sort of the growth trajectory there? And then separately, I know you guys are a sort of major provider of spectrum to Katz, with them being acquired by Scripps.

Is there going to be any change there now that it's owned by Scripps?.

Well, just an increase in their credit profile, so we feel pretty good about the counter-party risk now in terms of the revenue they pay us.

And your first question was...?.

Digital. We did shutter a couple of legacy Media General businesses in Q2. So, you'll see obviously reduced revenues from those businesses going forward. Those will trail off in Q3 as well.

But the growth trajectory of the remaining businesses, I will tell you, the station website business remains very strong and the other digital businesses are all growing. And on a consolidated business – on a consolidated basis, that business continues to have positive growth and positive EBITDA..

Great. Very good..

The Federated Media I think we announced was shuttered in Q1; and Dedicated Media, we discontinued operations at the end of Q2..

Got it. Thanks, guys..

And we'll take our next question from Leo Kulp from RBC Capital Markets. Please go ahead..

Hi. Good morning. Thanks for taking the questions. I had two.

First, I'm assuming you can't discuss specifics, but how do the economics of the FOX and the ABC OTT deals compare to what you generate on a net retrans basis from the traditional MVPDs?.

Well, we won't discuss the specifics, but we will say what we have said and that is that on a net basis, whether we collect from the MVPDs and then pay the networks, what we keep in that situation versus the OTT where the networks are making a direct payment to us, on a net basis, the OTT deals are worst case equal to and best case better than our current net retrans position from traditional MVPDs..

Okay.

And just to confirm, that includes Fox, too, correct?.

That includes Fox..

Got it. Okay. And then my – thank you. My second question is, it seems like there's been an uptick in discussions around private equity looking to get back into the broadcast space.

Can you provide an update on your thoughts around taking private equity investments, either for the entire company or to – or as an equity stake to fund a larger-scale acquisition?.

Well, I had a private equity partner that was a majority owner of the company up until 2013, and they have exited, so we certainly understand that experience. I think there has been increased activity. I don't know how far anybody has leaned in.

We've had a few phone calls and taken a couple of meetings, but again, if that was in the best interest of shareholders, we would consider that, but it's only one of the things we consider on any given day.

I do think that if you look at private equities' debt risk profile, it probably is an appetite substantially beyond what the public markets are comfortable with.

And then when you look at – I've seen the thesis that you could take a company like Nexstar private, lever it up to 6 or 6.5 times, dividend recap it a couple of times, and make your 20-plus percent internal IRR even if you exit at the same multiple that you enter at. So I think the math is there.

It's just I don't know whether anyone is prepared to step up the curve in any of these scenarios. Again, obviously, a private equity buyer is not going to have any synergies in a jump ball acquisition where companies like Nexstar certainly have synergies and so might have a competitive advantage.

But if you could lever – if you're prepared to lever up more, then maybe you could pay as much or more. The proof will be in the pudding, with anything that comes downstream if private equity is a player or not.

On the other side of that, private equity would tend to push up multiples for the entire space and that's not a bad thing even if it becomes more competitive from an M&A perspective..

Got it. Thank you for the color..

And we'll take our next question from Jim Goss from Barrington Research. Please go ahead..

Thanks. You noted earlier on, as you have I think in prior calls, you've now edged above 50% in terms of the share of revenues that are not advertising-driven. And I was wondering what your ultimate objective might be in that regard.

Also, does that count retrans as gross or net basis? And to the extent that you've been creating local content, could you discuss the monetization of that content beyond local ad sales? Perhaps that's one of the things that would get you to a higher share in non ad-driven revenues..

Sure.

Well, I think if you just look at the growth characteristics of each of those revenue lines and retrans because we're talking about revenues, it would be on a gross basis because it is a gross revenue basis that the only people that think of net retrans primarily are the financial and analyst community because that's really a programming fee for the networks and the geographic exclusivity to sell ads and to sell distribution.

But having said that, if you look at the top line growth characteristics of digital and retrans, both being double-digits and retrans being well in excess of 20%.

Take that out three more years against a single-digit growth, low growth or no growth core revenue line, and those numbers are going to get to 60/40 in the not-too-distant future and may continue beyond after that. So we don't have a stated objective.

It's just kind of the way the math works with our continued push to get our fair share on retrans which we have several innings of that ballgame yet to play and our intent to try and grow core ad revenue in an environment where we admit that that's a slower growth trajectory than any other revenue line that we have.

I think if you look down the road to monetization, I mean, we had a meeting with the heads of our digital company as well as the heads of the broadcast company and we spent the entire afternoon yesterday talking about monetization opportunities for local video content beyond what we're doing today.

There's no question that the substantial opportunity, upside opportunity is on mobile video, and we are working and racing to move toward that direction to supplement our digital revenue stream both for Nexstar digital and for our local market sites because we see that where the action is and that's where the bulk of the viewing is coming from on digital devices..

Okay. Thanks, Perry. And one other one then. What – which of the regulatory relief elements that are being talked about would be most beneficial to your M&A ambitions? Would it be the top two out of four? Would it be – obviously you have room under the existing ownership reach.

Are there anything – any other things that are important to you right now?.

Well, I think the reinstitution of the old JSA rules, the pre-2014 JSA rules coupled with the elimination of the eight-voice test and the elimination of the two of the Top Four being a per se violation of local ownership rules would, taken together, do the most to create M&A opportunities for ourselves and others as we can build scale in the markets that we're in.

And you're right, we still have room under the national cap, and that will be revisited at some point.

But these local ownership rules – when you look at OTA television, which is just over-the-air television, as a percent of local revenue in all 210 markets, it's about 14% of all the local ad revenue that's spent, which competes with digital, which competes with direct mail, which competes with radio.

And the fact that it is thought of as its own market is such a backward thought in terms of being relevant that it's obviously not even accurate. And I would say that that applies to the way DOJ views the local markets as well as the FCC. I think the FCC is ahead of the DOJ in realizing that their current rules don't reflect reality.

But I think, taken together, those local ownership rules would create substantial opportunity for ourselves and others to rationalize the portfolio and to create additional scale in markets that we all individually care about..

All right. Thank you very much..

We'll take our next call from Barry Lucas from Gabelli & Company..

Thank you and good morning. Perry, I was hoping, as we get closer to adoption of ATSC 3.0, you could provide a little bit of color.

The initiative with Sinclair and the consortium, how important is that? How many more people do you need? What's the pace of the rollout then, and when do you think revenues from both ATSC 3.0 sources become visible and then material..

Well, between – thank you, Barry – between Sinclair with Tribune and Nexstar and Univision, we reached in excess of 90% of the U.S. I've got calls this afternoon and tomorrow with other broadcast companies that are interested in learning more to determine if they want to sign on as affiliate members.

But our goal is to, again, aggregate a nationwide footprint of spectrum and then see who might be interested in that. And we have hired a search firm to look for a CEO to lead this venture that the founding partners would fund.

And that person will then spend full time, as opposed to my continuous personal attention, on looking for additional members to aggregate more spectrum in individual markets to create more opportunities, but also try and fill out that nationwide footprint to literally a universal nationwide footprint.

So, we – the transition to ATSC 3.0 needs to happen before spectrum monetization can become a reality in a big way. We think that the spectrum repack post-auction will be a catalyst to jumpstart people's investment in ATSC 3.0 technology.

We, as a company, have made the commitment that if we have to replace a piece of equipment, if it costs incrementally 20% to make sure it's 3.0 compatible and also ATSC 1.0 compatible, we'll spend that extra money because the initial investment in the ATSC 1.0 is going to be reimbursed by the government.

And if we have to put a new antenna up, we're going to make sure it's ATSC 3.0 compatible even if the antenna cost more than the government will reimburse because the FCC is reimbursing us for the tower climb.

So, I think most broadcasters are thinking that way, so that the installed base on the approximate 1,000 of 1,700 television stations in the country will be 3.0 compatible.

And as you saw in the quarter, we also announced with Sinclair, we have developed a transition agreement in terms of how this will physically work in the markets that we are both in and even in markets that we're not in. So, we're spending a lot of time thinking about it.

Brett Jenkins, our CTO is leading that effort on our behalf from a technical side.

But in answer to your question, if we have 39 months to complete the repack and most broadcasters move into the 3.0 arena from a technical capability standard, I would think that you've got to look probably on the other side of that before we see the ability to generate much revenue.

So I continue to believe that material revenue is probably five years away.

I want to manage that expectation so that people don't get too far out over their skis but I think that's realistic to think that a transition takes place, we have a nationwide footprint of spectrum that we can offer for sale or lease, whether it's to General Motors or to Google, or to anybody else that has particular design.

I think it's a real opportunity that I've said in other speeches that I made that I think over time, spectrum revenue could equal retrans revenue over time. And so I think it's a real opportunity, it's a substantial opportunity. It's the next leg to our economic footprint and the stability of our economic stool, if you will.

But I do think it will take some time. The transition is tough. It's not impossible. And once we have a universal footprint of spectrum to offer, we'll see what the market wants to do with it.

What I have tried to counsel others is don't get caught up in the technology, don't get caught up in what you think we should use this for, let the market come and tell us what they think the highest and best use is, and let's make dollar-denominated decisions, and I think that that resonates pretty well.

Is it a universally held view? Probably not yet. But that's why we wanted to take the lead and say, okay, here's somebody that's actually put out a shingle that says, if you have ideas how to monetize the spectrum, come talk to us, and it'll be a single point of contact when we hire our new CEO..

Great. Thanks for that color, Perry..

Thank you. That concludes today's question-and-answer session. At this time, I will turn the conference back over to Perry Sook..

Thank you very much everyone for joining us today. We appreciate your continued interest in the company and your support and we look forward to reporting on our Q3 results in the early part of November. Have a great afternoon..

Ladies and gentlemen, this does conclude today's call. Thank you for your participation, and you may now disconnect..