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

Dan L. Kurnos - The Benchmark Co. LLC Barton Crockett - B. Riley FBR, Inc. Kyle Evans - Stephens, Inc. Marci L. Ryvicker - Wells Fargo Securities LLC John Janedis - Jefferies LLC Wayne Manning Cooperman - Cobalt Capital Management, Inc. James Charles Goss - Barrington Research Associates, Inc. Barry L. Lucas - Gabelli & Company.

Good day, everyone and welcome to the Nexstar Media Group 2018 First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Joseph Jaffoni, Nexstar Investor Relations. Please go ahead, sir..

Good morning, and thank you for joining Nexstar Media Group's 2018 first 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 during this conference call other than statements of historical fact may be deemed forward-looking statements within the meaning of the federal securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause future results to be materially different from those expressed or implied in the forward-looking statements.

Important risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements are specified in Nexstar's other filings with the Securities and Exchange Commission.

At this time, it's my pleasure to turn the conference call over to your host, Nexstar Founder, Chairman, President and CEO, Perry Sook. Perry, please go ahead..

Thank you, Joseph, and good morning, everyone. Thank you, all, for joining us to review Nexstar's record 2018 first quarter operating results this morning. With the success of our 2017 integration initiatives and our commitment to localism, innovation and growth, we're excited to review our continued operating and financial results.

Our return of capital and leverage reduction activities, our outlook for the 2018-2019 cycle and other ongoing initiatives to drive free cash flow growth and shareholder returns. As always, Tom Carter, our Chief Financial Officer is here with me on the call this morning.

2018 is off to an excellent start for Nexstar, as the first quarter marked another period of growth across all financial metrics that exceeded expectations with record first quarter net revenue BCF, adjusted EBITDA and free cash flow.

First quarter results benefited from, our expanded scale and our ongoing diversification; our ability to monetize Super Bowl and Olympic advertising through multi-platform revenue initiatives; solid political advertising spending in key markets; and another quarter of double-digit retransmission and digital revenue growth.

Our double-digit top line increase combined with our expense disciplines and focus on managing operations for cash flow translated into free cash flow growth of 19.8% before $1 million of transaction expenses in the quarter.

And we brought about 20% of every net revenue dollar to the free cash flow line, a metric that will grow in 2018 with the return of what are anticipated to be record levels of mid-term political advertising.

With over $121 million of first quarter free cash flow, we took advantage of several opportunities throughout the quarter to enhance shareholder value through our return of capital and leverage reduction initiatives, which in total amounted to approximately $78 million spread across share repurchases, quarterly dividend payments and debt reduction.

We expect results to build over the course of 2018 as Nexstar will benefit from key factors including growing levels of mid-term election spending and continued retransmission and digital revenue growth as well as the recurring free cash flow benefit from the enactment of the Tax Cuts and Jobs Act.

So with record first quarter operating results we remain confident in meeting our target for average annual free cash flow in excess of $600 million for the 2018-2019 cycle.

I can't stress enough that while we've endured the recent market volatility the Nexstar Nation continues to execute at a very high level and we've anticipated and are participating in the changes in the media landscape and ecosystem and we remain highly opportunistic in taking actions that we believe can enhance shareholder value.

In this regard following our fifth consecutive annual dividend increase earlier this year and our first quarter repurchase activity, our board recently approved an expansion of the company's share repurchase authorization for up to an additional $200 million of repurchases of our Class A common stock, the only class outstanding.

In concert with our return of capital policies, we remain focused on actively managing our capital structure as another means of enhancing shareholder value. We continue to expect Nexstar's net leverage, absent additional strategic activity and additional discretionary capital returns to decline to the mid-high 3 times range by the end of the year.

As we continue to benefit from expected significant 2018 mid-term political spending, the growing value of our retransmission consent agreements and the profitable operation of our digital assets, we have excellent visibility to meet our free cash flow targets in the current cycle and we believe we forged a clear path for the continued near- and long-term enhancement of shareholder value.

I'll now review the first quarter operating highlights after which Tom will go through the finances including an update on our balance sheet and other items of interest. First quarter core television ad revenue increased 6.5%, reflecting an 8.3% growth in local spot revenue and a 1.6% increase in national spot revenue.

While auto was up the pace of last year, we believe this is primarily attributable to record high vehicle incentives versus the prior-year period. In the first quarter, auto dealers deployed aggressive financing terms to move more inventory ahead of expected interest rate increases.

While these aggressive lease and financing programs directly impacted marketing budgets, we believe these trends will moderate and as incentive spending moderates and that brands seek incremental marketing support to move inventory as the year moves on.

Overall, Nexstar had gains in five of our top nine categories and the story was the same when you look at the next 15 with seven of those up.

We continue to address the core TV ad market through our focus on new business development with new to television ad revenue for Q1 of $13.9 million, which marks a 13.6% improvement over this metric in Q1 of 2017.

In total, our new advertisers accounted for approximately 5.3% of total first quarter core ad revenue, an increase from 4% in Q4 and approximately 3.1% in last year's first quarter.

These increases reflect the implementation of Nexstar's local sales practices across the media general markets and we continue to see our local sales efforts as a proven means of building share and offsetting the still weaker national spot market. As a result, we believe our core results outperformed the industry.

In addition, the industry continues to advance the TIP Initiative formed late in 2017, which is focused on accelerating electronic advertising transactions for local TV broadcasters and their media agency partners.

Streamlining the advertising buying and selling process and making standardized modern transaction interfaces available are keys to driving the future growth and innovation in the local broadcast television space.

To-date, this collaborative effort which includes Sinclair, TEGNA, Tribune and Hearst has released an updated framework for standard space transaction interfaces to accelerate system interoperabilities.

While there is a lot more work to be done, the early alignment of agencies and broadcasters toward our common goal of creating a more efficient marketplace for local television advertising is most promising.

With the Super Bowl airing on NBC this year we had about 10% fewer stations airing the game compared to 2017 when it aired on Fox, but we grew ad supported revenue by about 16% on a year-over-year basis. We also posted a 21.5% rise in revenue over the prior Winter Olympics inclusive of new simulcast streaming revenue.

For both events our stations did a solid job in creating custom local vignettes, news coverage and digital content which we were able to leverage across all 100 of the markets we serve and our record Super Bowl and Winter Olympic revenue again demonstrated our ability to work across screens to drive incremental revenue.

Political was the best performer in our first quarter ad supported revenue streams as political ad revenue rose to approximately $9.3 million, which was a 131.5% increase over the 2014 period for the last comparable mid-term election cycle.

As a result, Nexstar's television ad revenue inclusive of political advertising grew 10% as our spot inventory management strategies drove more than five-fold increase in year-over-year political revenue.

During Q1, we realized significant political spending in Illinois and Texas and we benefited from solid early gubernatorial spending across 18 states. By category we booked about 60% of our Q1 political revenue from candidate spending, while PAC and issue spending made up the balance.

Notably, excluding political, net revenue grew 12.5% in the first quarter compared to the prior year reflecting Nexstar's continued progress in leveraging the value of our television broadcasting operating model, our content creation capabilities and our unwavering commitment to localism.

Moving down our revenue lines, first quarter retransmission fee revenue and digital media revenue were both at record levels and rose 19% and 38.4% respectively. The year-over-year increase in first quarter non-television advertising revenue reflects the renewal of distribution agreements with MVPDs and OTT providers in 2017.

It also reflects Media General revenue synergies related to our after acquired clauses and our retransmission consent contracts as well as the January 2018 accretive acquisition of LKQD, also including the organic growth across our expanding and profitable digital operations.

I will add that MVPD subscriber levels in our markets remain consistent with our expectations and those embedded in our guidance with now potential upside from the OTT agreements that we completed last year. On a combined basis, first quarter retrans and digital revenue was $338.7 million and that rose 22.2% over the prior year period.

Together retrans and digital accounted for 55.5% of first quarter net revenue marking the highest contribution to our quarterly revenue mix for the combined metric, as well as significant growth of the 2017 first quarter level of 51.6%.

Again, we believe the continued shift of our revenue mix reflects the ongoing initiatives to build scale and diversify revenue and that our success on this front has again outpaced the industry.

In closing, local core ad sales are tracking consistent with our expectations, national remains somewhat challenged and we're already benefiting from what we expect to see as record levels of political advertising this year. And we remain confident in our political target of north of $200 million across all of our markets for 2018.

Additionally, with the ongoing renewal of our retransmission consent agreements and growth in both of our digital platform and its revenue base, we have solid visibility on delivering or exceeding our free cash flow targets.

We continue to demonstrate that our capital allocation activity is directed to and focused on the enhancement of shareholder value.

And we intend to remain opportunistic as we allocate Nexstar's significant free cash flow over in excess of $600 million a year on average for 2018 and 2019 to leverage reduction, share repurchases, growing quarterly dividend and other actions that we see that will support the enhancement of shareholder value.

Now, let me turn the call over to Tom Carter to provide further detail on our financials.

Tom?.

Thanks, Perry and good morning, everybody. I'll start with a review of Nexstar's Q1 income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance.

To start, as noted on last quarter's call, effective 1/1/2018 the company adopted the new revenue accounting guidance issued by the Financial Accounting Standards Board. As a result beginning in the first quarter of 2018, the company presents local, national, political revenues as well as digital revenues net of their related agency commission.

This morning's release also provided the 2017 local, national, political, and digital revenue comps adjusted to net out to sales commission. In addition, we no longer recognize barter revenue and barter expense related to the exchange of advertising time for certain programming material.

These changes don't impact the company's past or future income from operations, net income, broadcast cash flow, and adjusted EBITDA or our free cash flow.

Also, effective 1/1/2018, the company adopted Accounting Standards Update number 2017-07, which requires pension and other post-retirement plans cost as well as credit and other than service costs to be presented outside of normal income from operations.

Thus, the income from operations during the three months ended 3/31/2017 was decreased by the pension and other post-retirement plans credit of $2.6 million as all of this was, again, previously announced on the last call and previously, that $2.6 million was previously in corporate expenses.

Same station net revenue for Nexstar was up 4% with same-station revenue ex-political up 2.5%. Core advertising on a same-station revenue basis was down 3%. Same-station retrans revenue rose 8% and same-station continuing digital revenues were up mid-teens with the recent LKQD acquisition increasing over 30%.

First quarter station direct operating expenses net of trade expense and SG&A expenses rose 27.5% and 5.1% respectively, primarily reflecting the expanded scale of our broadcasting and digital operations as well as budgeted increases in network affiliation expense, expanded local programming and expenses for LKQD.

Same-station fixed expenses, ex-programming expenses were down 1.8% over the previous year. Nexstar's first quarter corporate expense was $26.3 million inclusive of $6.4 million of non-cash comp expense and $1.0 million of one-time transaction costs relating to the completion of the Media General and LKQD transactions.

For 2018 second quarter, we project recurring cash corporate overhead will approximately $18 million to $19 million exclusive of stock comp. Non-cash stock compensation is forecasted to be $8 million to $9 million for the quarter and $30 million to $32 million for the year reflecting the issuance of new equity incentive awards in Q1.

As mentioned in our last call, for 2018, we reclassified some of the digital administrative expenses to corporate and with the adoption of the aforementioned accounting standards update moved pension and other post-retirement plans out of corporate expenses to reflect them as non-operating items, but they are still included in our definition of EBITDA which will remain a treatment going forward.

The $2.6 million was included in our financial reconciliation and is expected to recur on a quarterly basis for the balance of this year. Turning to the balance sheet, I'll review a few key items as of March 31, 2018. Total net leverage was 4.96 times and covenant first lien leverage was 3.13 times versus a covenant of 4.5 times.

First lien debt totaled $2.77 billion comprised of term loans in the revolver with a decrease from 12/31 of 2017 reflecting $47.2 million of payments against the term loans in Q1 and a $20 million increase in the revolver borrowings largely associated with the LKQD acquisition.

With expectations of significant free cash flows leading up to our first senior sub debt maturities in 2022 and the flexibility to prepay first lien borrowings without penalties, we feel very good about our capital structure in a rising interest rate environment and believe that the structure of the financing for last year's Media General transaction will serve us well going forward.

We continue to expect Nexstar's leverage, absent additional strategic activity and discretionary capital returns to decline to the mid to high 3 times range by year-end 2018. Net debt for 3/31/2018 amounted to $4.22 billion compared to $4.7 billion at the close of the MEG transaction on 1/17/2017, pardon me and $4.25 billion at 12/31/2017.

Our total net debt reduction since the Media General transaction amounts to approximately $480 million. Our platform is generating significant free cash flow, which enables us to take advantage of strategic opportunities, reduce leverage and return capital to shareholders both on a scheduled and an opportunistic basis.

As Perry noted, our record operating results including $20 million of quarterly free cash flow enabled us to take further action in the first quarter to enhance shareholder value through our return of capital and leverage reduction initiatives, which in total amounted to approximately $72 million.

That $72 million includes $33.8 million of cash from operations to purchase approximately 500,000 shares of Nexstar's stock and we paid our 21st consecutive quarterly cash dividend amounting to approximately $17.3 million.

In addition, we funded the $94 million acquisition of LKQD Technologies, our enterprise digital video, advertising technology, infrastructure business with a minimal amount of cash borrowings.

Q1 total interest expense amounted to $54.6 million compared to $79 million in the previous year's first quarter and cash interest expense was $52 million compared to $57 million in Q1 of 2017. As we had mentioned before and we continue to reiterate, we expect cash interest expense for 2018 to approximate $200 million.

In Q1, we had an operating cash tax refund of $1.2 million compared to $3.6 million of cash taxes in Q1 of 2017. With the enactment of the Tax Cuts and Jobs Act in December, the federal income tax rate was reduced from 35% to 21%.

The Tax Act was timely in terms of benefiting Nexstar as our NOLs were minimal at yearend and we expect cash taxes in 2018 to continue to approximate $108 million.

Nexstar's CapEx for the quarter totaled $21.1 million, of which $14.6 million was related to station infrastructure, investments, our platform and programming in digital operations with the remaining $6.4 million for station repack and the relinquishment of the spectrum costs, and relinquishment of spectrum costs largely associated with the MEG CVR.

For the entire year, we expect CapEx from continuing operations to approximate $75 million with approximately $20 million coming in Q2. With the passage of the RAY BAUM Act in March which provides an additional billion dollars of repack reimbursements, our FCC mandated repack costs should be fully reimbursable.

For the year, we expect repack CapEx to approximate $50 million. Through March 31 of 2018, we have spent $5.4 million, that amount is included in CapEx and then reimbursed $1.4 million, which is reflected in the income statement.

We will manage this cash flow item during the year to minimize any cash flow impact and as I mentioned before expect those expenses to be fully reimbursable at the end of the day. Our Q1 free cash flow was approximately $120 million inclusive of the impact of $1 million of one-time transaction expenses.

As such our first quarter recurring free cash flow was approximately $121 million compared favorably with the consensus expectations of approximately $112 million.

We continue to believe that our capital structure represents an ideal balance of fixed and floating debt and attractive weighted average cost of capital of less than 5% and both prepayment and refinancing flexibility.

As noted a moment ago, we'll have a staggered maturity profile with no significant maturities until 2022 at which point we expect to have made significant headway towards substantial debt reduction.

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 of 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 other actions that can enhance shareholder value.

In summary, Nexstar continues to execute well across all functions including operations, integration, capital allocation, capital structure and service to our communities. As such we are reiterating guidance for the annual free cash flow in the 2018/2019 cycle of approximately $600 million, or approximately $13.10 per share on a fully tax basis.

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

Thanks very much, Tom. In closing, Nexstar continues to execute in all facets of our business planning including our continued operational improvements, additional synergy realization, further optimizing the capital structure and cost of capital and improving service to our local viewers and advertisers.

Our disciplines in these areas have strengthened the consistency and the visibility of our results while supporting growing returns for our shareholders.

We're highly confident in our strong growth prospects going forward as we follow the successful strategies that we've established in terms of building the top line, maintaining close control of fixed and variable cost and optimizing the balance sheet.

With the forward reporting on our continued growth and accomplishments in 2018 as the year goes on and on behalf of the more than 9,100 employees of Nexstar Nation, we thank you for your interest this morning and your ongoing support. So now let's open the call to Q&A to address your specific areas of interest.

Operator?.

Thank you. We'll take our first question from Dan Kurnos with Benchmark Company. Please go ahead sir..

Great, thanks. Good morning. Congrats on the results. Just, OTT seems to be the topic de jour, Perry, so let's start there since you've been pretty vocal about the opportunity in that space.

Maybe just give us kind of an update on sort of the trends you're seeing sub-counts and ultimately I know, you and I've spoken sort of about potential for leverage in the space in terms of unit economics.

I don't know if that's still a consideration in the upcoming negotiations that are likely to happen over the next 24 months, so some color there would be appreciated? Thanks..

Sure. Well, first of all I'm happy to announce that we launched our NBC affiliates on YouTube last Friday. Obviously it took time for us to get the deal we wanted and the terms we wanted, but we have that now, so all four networks are launched on YouTube TV in the markets that they've launched as of last Friday.

So we won't see sub reports probably from NBC for YouTube TV for another 60 days, but it's an important step to be all up and running on what appears to be at this point one of the larger purveyors of OTT services. All in as of our last sub-count report and again, they lagged the current day by probably 60 days or 90 days.

We have a mid-six figure sub-count number and with the addition now of NBC, I would expect that to grow. And again, we were very deliberate in getting the deal and the terms that we wanted, so we feel confident going forward that we will participate as the services participate and continue to roll out.

I will tell you that in the OTT space, there is a fair amount of churn after the free subscriber period, so I think it will take a few, maybe a couple of quarters this year until we have a real sense of what a steady state OTT contribution would be. But again, we're coming off of a zero base in 2017 in terms of any real dollars against this.

So we view all of this as plus revenue to our MVPD contributions and look at it as another revenue source for the company..

Great. Thanks. And I think I'll probably just let everyone else ask all of the core and auto questions. So just on political Perry, going forward here. You kind of reiterated you're above $200 million. I think you kind of imply that you see some strength in the market.

So can you just give us a sense of pacing, which markets are performing well, kind of timing of when political is going to fall if there was some shifting from Q1 to Q2? And I don't know if you're going to handicap another exact number on this, but sort of if there is any pressure from digital which it doesn't sound like we're hearing from many any of the other peers.

Thanks..

Well, if you follow the news, there was a primary election in West Virginia last night on the Republican side. Not surprisingly the state contributing the highest dollars of political in the second quarter to-date is West Virginia followed closely by Ohio and Tennessee and Indiana and Pennsylvania.

But listen, we look across our footprint here and of the 36 gubernatorial races to be contested this year, we are in geographies representing 31 of those and we see at least half of those being what we would call battleground competitions. Obviously, all of the House is up and much will be said about that as the year goes on.

As far as Senate races, there are 35 of them being contested. We represent geographies for 29 of the 35. And, again, approximately half of those we see as being fairly contested. So we're very – political is building in the second quarter.

At this point we have more political revenue on the books than we finished first quarter, and that's after literally a month and a week. So we feel very strongly that our north of $200 million guidance is solid for the year and it's playing out at or slightly above our expectations for the first 4.5 months of the year..

Thank you, Perry..

Thank you. We'll now take our next question from Barton Crockett with B. Riley FBR..

Okay. Thanks for taking the question. I wanted to ask a little bit about the kind of M&A environment a little bit more because we just had a lot of divestitures kind of firmed up I guess by Sinclair. And I noticed that you guys were not in that.

I was wondering if you could talk about what kept you out of that process, and how you see the availability now and maybe if there might be a little bit more kind of openness to doing deals now that we've seen this big kind of pig in a python wrapped up with Sinclair?.

Well, I would say as it relates to the Sinclair divestitures, obviously we appraise everything, and we have our walkaway prices, and when prices go above our walkaway prices, we walk away. That's been our consistent practice with any acquisitions.

I will tell you that we're involved in any number of swap conversations with any number of companies, some of which have reported in the last two weeks, some are not. We're looking at single station acquisitions from the high-single digit millions to potentially nine figures. So there's a lot that's being looked at.

It's just – it's not as simple as seeing a stock on a screen and pressing enter and buying it. I mean, obviously contracts need to be negotiated and things just take time. As I think you saw from the rollout of the Sinclair-Tribune acquisition mirroring our rollout of the Media General acquisition we closed on in early January of 2017.

A lot of moving parts. I do expect the cadence of conversations will pick up. I think we have increasing regulatory clarity on some fronts and on others, particularly the national cap, I think you'll see additional clarity on that later this year from the regulatory agencies perhaps in the late summer.

But then that will probably provoke the inevitable court challenge. So I don't know that we ever have regulatory certainty, but at a certain point we feel confident in moving forward in the current environment, and I think we're there now as it relates to in-market opportunities and certain opportunities that would increase our national exposure.

And I think the more clarity we have, I think that once the Sinclair-Tribune merger closes, I think that will be a relief or a removal of an overhang from the sector, and we can get back to talking about the business of doing business..

Okay, great. And then on the auto ad environment, just stepping back to a bigger picture, I mean I think it's been kind of asserted that the auto ad softness on TV is really just money not being spent as opposed to being allocated away from TV to digital media.

Is that your belief? And if so, is there any evidence you can cite to support the idea that it's not just being yanked from TV and spent elsewhere that it's just being pocketed?.

Well, our auto in the first quarter was down kind of a high-single digit amount in total. And again, Dodge, Chrysler, Jeep was down. The most of those that had negative. But then we saw a huge increase from Ford that was up against lower comps from the prior year.

So it's like every other category, you're going to have folks are up and folks that are down. We do business with over 2,700 auto dealers in our company.

The top 50 of those represent almost a quarter of the billing, and so Tim Busch and Brian Jones and our regional vice presidents on the television side are in the midst of having a sit down detailed conversations with all 50 of those top 50 dealers to talk about in great detail what is going on in the marketplace.

One of the contributing factors I think in addition to incentives sucking money away from marketing budgets is I think there is a continued decline or shift in co-op dollars that support the local dealers and in some cases the associations.

I think that money is being increasingly controlled at the OEM or factory level, so that may have taken some money out of local spot. I will say that that can be cyclical as well. Just as we saw Ford shift money out of spot, they're shifting money back into the spot in 2018. So I think there is a certain ebb and flow to that.

Again, we're in conversations with the top 50 auto advertisers, and I think we can come away with that with very granular knowledge is just what's going on in the auto space. But I don't see a secular change or a secular trend here. I do see the cyclicality of ad-supported businesses and auto is certainly one of those categories..

Okay. That's helpful color. Thanks a lot..

Thank you. We'll now move on to Kyle Evans with Stephens, Inc..

Hey, sorry to have to ask you to replay something, Tom, but you were going really fast.

Can you do the same-store local, national core numbers again?.

Sure. Total net revenue up 4%, same-station total net revenue ex-political up 2.5%, same-station core advertising down 3%, same-station retrans up 8%, same-station continuing digital revenues up mid-teens, and the LKQD acquisition increased 30-plus percent..

Thank you. Could you talk a little bit about – I know Perry said that pacings were in line with expectations.

Can you tell us what your expectations were or what pacings look like specifically?.

Are you talking about for second quarter?.

Yes, sir..

I think second quarter is going to be a repeat of first quarter. We have one month April in the books, and if I look at the percentages for April and compare them to where we finished first quarter, they are right on top of one another.

So we obviously are going to see an increasing cadence of political, but in terms of our bookings and where we sit right now five weeks into the quarter, it looks a lot like first quarter to us..

Got it. And thanks for the detail on the OTT side of the sub count equation.

Can you tell us what you saw on the traditional MVPD side for 2017 and what first half 2018 looks like?.

We haven't given specific numbers, but obviously you saw the fourth quarter results in retrans were down slightly from third quarter. And that was as we mentioned in the fourth quarter call, a result of lower traditional MVPD sub numbers with a lack of offset from virtual MVPD sub numbers, we've seen that the virtual MVPD numbers increase in Q1.

And I would say that the traditional MVPD numbers, the loss has been mitigated if not completely removed in the first quarter, and we've seen a much more steady environment there..

I'll also mention, Kyle, that we just completed a negotiation and a repricing with a top 10 MVPD that some of their subscribers repriced on May 1. And the majority of their subscribers repriced at the end of the year, but that was done on terms that were very acceptable to the company and to the MVPD..

And consistent with our growth rate, indications for both gross retrans and net retrans..

Great segue.

Can you kind of remind us what your kind of long-term outlook is for gross and net retrans growth?.

Sure.

Well, over a three-year period, we expect gross retrans to continue to grow at double-digit as well as the same type growth trajectory for net retrans?.

Thank you, sir..

And by the way, you're finally going to be able to get KARK on YouTube Live in Little Rock now, Kyle..

My dad is really happy..

That's what we're here for..

Thanks..

Thank you. We'll now take our next question from Marci Ryvicker with Wells Fargo..

Thanks. I'm going to bug you on core.

When we had you last quarter, core was expected to be sort of flat and I just want to make sure that the down 3% includes Olympics and Super Bowl, and that's what we're comparing to the flat? And if that's the case, was it auto that took you down 3%?.

I would say again if you break it up, local was down about 1 point, national was down about 7 points, and so that's what yielded the minus 3%.

I would say the only missing element from flat would be, we traditionally – in during Olympic times have participated in unwired networks for our large market NBC affiliates, which would be Tampa, Columbus, Austin, Norfolk along the way. That is organized by the NBC owned and operated station group and basically this is network overflow.

And that didn't materialize this year we think because there was inventory available at the network level and inventory needed for make goods at the network level.

So that was the only element and that's a mid-single digit millions revenue number that probably would be the difference between flat and the minus, slightly less than 3% that we reported here this morning..

And when you say Q2 is trending similar to Q1, is it trending more like flat or more like close to the negative 3%?.

I think I said it was trending more like Q1. So I would say minus a low-single digit would be an operative term..

Okay.

And then with your free cash flow guidance of in excess of $600 million, what is the underlying core expectation? Is it flat, down, up?.

Yeah. For the second half, it's flat..

And then my last question for you, your digital initiatives or strategy has been a little bit more successful than a lot of your other peers.

Can you talk about contribution to margin today versus what you expect over the next couple of years?.

Right now I would say our margin contribution from digital taken as a whole and that includes the digital website business at the station level is probably a 20% plus kind of number. If you just target the digital services business that's probably closer to a high-single digit to a low-double digit percentage.

Some of those businesses are high-volume and low-margin business. I think we're starting to evaluate if those businesses are worth all the time and trouble. But what we focused and what we saw in LKQD is a very high-growth business with good service level margins but not single-digit margins from that perspective.

And we expect overall if you think about the website business at the local level, should be something approximating what the television margins are. And then the services business at Nexstar Digital, LLC will be growing from a high-single and low double-digit we believe to something into the mid-to-high teens over a period of time..

Great. Thank you so much..

Thank you. We'll now take our next question from John Janedis with Jefferies..

Thanks. Yeah, Parry, given your footprint, you've tended to outperform the broader marketplace on the advertising front. So I was wondering are you seeing much of a difference in performance between maybe your larger- and smaller-sized markets.

And then maybe on a related topic, when you talk about the money new to TV and as it's grown, are there a couple of categories that stand out as contributors? And how far along are you in terms of driving that higher?.

Well, first of all, Tampa is our largest market, our traditional affiliate NBC and our management team in Tampa is just killing it right now. So I don't think I can make any comparisons large market to small market here.

Obviously, we have fewer competitors in the medium size and smaller markets, but there are generally less money available, it's all about how good a job you do locally and in markets like Tampa and Austin and Norfolk and Little Rock and even on down Charleston, South Carolina and Fort Smith, Arkansas.

I mean, good management teams are doing great jobs in those marketplaces. So I don't think there's any conclusion you can draw from all of that.

I will tell you that our new business development is being led by Tim Busch and his teams in the broadcast division and is literally I think the byproduct of a change in commission structure where if you don't hit your new business revenue target on a monthly or quarterly basis, you actually give back a percentage of your agency commission revenue.

So if you do the same thing as you did last year you're going to make less money. So that is driving people to develop new business. I would also say, we've introduced kind of the new business culture that we have uniformly across the platform which includes our recently acquired stations. And I think all of that is driving our results.

I will tell you that our internal target here is within three years that 20% of our core revenue comes from new business on an annual basis. And you saw what the number was reported in first quarter with my comments. So we think that is achievable and that's an internal goal, but I think it is more than aspirational, I think it's achievable..

Great. Thank you..

Thank you. We'll now take our next question from Wayne Cooperman with Cobalt Capital..

Hey, guys. Just I'm sure that this isn't going to be a great question, but I mean you're into $600 million of free cash flow each of the next two years on your numbers and the stock trades at obviously a very low multiple.

Why not just buy back more shares now and the leverage won't really go up because your EBITDA is growing and the debt will be flat.

Just kind of curious about debt targets, capital allocation and taking advantage of a really high free cash flow yield?.

Sure. Let me take a stab at that and then Perry can come in behind me. We're not all in on any one structure. But obviously there is some method to our madness here. Our RP basket is not unlimited at the leverage level we're at. The RP basket becomes less meaningful to us when leverage is below 4.25 times.

And so that's a target for us that does require some amount of debt reduction, but as you saw in the first quarter and that was basically a 27-day window we bought back 500,000 shares, and we will allocate capital to opportunistic share repurchases going forward.

But we're also mindful of the fact that there is benefit and shareholders do care about leverage not only from a perspective of what it allows us to do on a return of capital to shareholder basis but also just a de-risking of the balance sheet in general.

So we acknowledge the share price and the high free cash flow yield on the stock, and we are buying it back but it's not an all or nothing strategy either for paying down debt or for buying back stock. There's a measured approach to that and we'd like to think there's some logic behind it as well..

Yeah, I guess my question was do you change – given where the stock is, you'd go more to repurchase and less to deleverage and then adjust accordingly?.

That's why we call it opportunistic..

Okay. Thanks..

Thank you. We'll now take our next question from Jim Goss with Barrington Research..

Thanks.

As your revenues become increasingly immune from the variability of advertising, do the rating agencies indicate that your leverage requirements to maintain desired rating level moderate enabling greater flexibility in the use of free cash flow for your various needs?.

I've never heard the rating agencies say much about anything in terms of specific changes to the business. They like the fact that we have subscription-based revenue, but they're not want to give leverage targets or changes from that perspective with regard to our ratings or what it does – they run a dynamic process.

I think your line of questioning is correct, in that when we are less or more immune to advertising cyclicality, I think we believe that our business model is healthier. We think that they share that but I'm not sure that has necessarily materialized into either higher ratings or higher leverage for the same rating kind of considerations..

Okay. One other thought, I'm sure you're aware of TEGNA's DBL programming and it's sort of working with potentially other broadcasters with that programming.

I was wondering if it's appealing to you to join TEGNA's DBL or to create a similar program of your own i.e., news focused in ad scripted vehicles that I know you don't have an interest in joining?.

Yeah, we are evaluating their offering in real time and making value judgments on whether or not we want to participate in that.

I want to go back to your earlier point though, Jim, that if you look at the front page of our press release, you'll note that retransmission fee revenue is larger than core advertising revenue for the first time, and we also think we're probably the first company in our space that can make that statement and so we will continue to drive, not only drive our retransmission fee revenue, but as the growth rates of that and core continue to diverge, this is going to be a story I think that is still going to be written, but I also think we're in new territory here as I think we're the first company that have skated to the puck, and I think others will obviously follow, but we do see this as a continuing trend in our industry and certainly for Nexstar..

Okay. I think you have an argument to be made. And thank you..

We don't disagree..

Thank you..

Thank you. We'll hear now from Barry Lucas with Gabelli & Company..

Thanks. And good morning.

Tom, just one housekeeping question to start, the $200 million target for political this year would compare against a pro forma combined 2014 of what?.

$195 million or slightly less..

Okay. And to Perry, I think you noted earlier that several companies have already mentioned that swap trade discussions are ongoing, but since these swaps in trades are kind of outside the purview of the whole Sinclair, Tribune issue and probably require less gross dollars, and the economic benefits to the parties involved are fairly manifest.

Why do you think we haven't seen anything on the tape yet in terms of a deal?.

I think that there's any number of factors, I think they're all situational. Some companies may be distracted by other activities right now.

And it's tough to find a perfect match where we're trading $10 million in cash flow for $10 million in cash flow, so somebody has got to pay (48:42) and/or figure out what multiple is going to be used for an exchange ratio, and listen we stand willing, obviously we understand the benefits of driving an economic benefit of more than one station in the marketplace.

I think we're more duopolized than literally any other broadcaster out there with own stations and virtual duopolies. And I think it's a process. I mean if discussions started in January or February, it's the early part of May, I don't think there's any gating issue but I think the conversations are all – it's just somewhat situational at this point..

Thank you..

Thank you. And that does conclude today's question-and-answer session. I'd like to turn the conference back over to management for any additional or closing remarks..

Thank you all for joining us today and thank you for your continued interest and support in Nexstar and we look forward to reporting our Q2 results in the next 90 days. Have a great afternoon..

Thank you. That does conclude today's conference. Thank you all for your participation..