Great. Good afternoon, everyone. My name is Sid Garg. I'm Managing Director within Media Investment Banking Group at Morgan Stanley. I guess I'll read quick disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com, Research Disclosures. If you have any questions, please feel free to reach out to a Morgan Stanley sales representative. This is first time for Nexstar at this conference. We're very excited to have you. We've got Tom Carter, President and Chief Operating Officer, and Lee Ann Gliha, Chief Financial Officer. Tom and Lee Ann, thanks for being here.
Thanks for having us.
Why don't we start? Nexstar today is a wildly different company than it was, even five years ago. Sitting here today, you have $15 billion enterprise value, $2 billion of EBITDA, and you now have America's One of major broadcast networks in The CW. Can you tell us a bit more about the Nexstar platform, how you fit in the broader media ecosystem, and what is it that differentiates you from the rest?
Sure. Well, first, thanks for having us. Nexstar really is an accumulation of about 10 years of M&A. Over the seven years between 2012 and 2019, we did 30+ transactions and went from covering maybe 40 television stations to almost 200 television stations, 199 plus one radio station. We always have to remember the one radio station. Since then, we've also, as part of the Tribune acquisition, we acquired a cable television network, which we are morphing into a cable news network. As you mentioned, we just recently did an acquisition for which I'll credit Lee Ann. We paid nothing up front for the CW to get into the national television broadcast network business. We're an accumulation of media assets along with some digital assets.
We have extremely strong reach locally. We reach 68% of all households in the United States. Obviously with two national networks, one on broadcasting and one on cable, we have a ubiquitous reach over near 100% of the United States in terms of households. We're a unique blend of assets that have national reach but local activation, and that gives us an opportunity to be to differentiate ourselves relative to other large media companies. For example, our local reach is 75% greater than NBC, CBS, or Fox, and we're three times greater than ABC.
We all have comparable national reach, but we have a much more deeper local reach, and we find that to be interesting and beneficial financially and operationally because national advertising is really all about or more about brands and content and kind of perception. Local advertising is more about a call to action or a price an item. You know, we've got pickup trucks back on the lot, and if you come in today, it'll be $1,500 off the sticker of everything. You know, or, you know, 1-800 DUI, here's the number to call if you got, you know, a DUI problem. Those are all local advertisers that, you know, really are a different mindset and a different end use from the national advertisers.
We're gonna play in both ends of that pool, and I think we do it really well, on modest leverage, a little over 3 x EBITDA and strong free cash flow. That's what's really served us well in a market's perspective over the course of the last 12 to 18 months, I'd say, is the free cash flow continuing to grow, the growth of free cash flow and the modest leverage.
Yeah. No, that's actually perfect segue into. You know, I was looking at the stock price over the course of last 12 months all across TMT. You guys are one of the only names in diversified media that's actually up in 2022. What do you think is driving that outperformance?
Well, I would say it's the change in the market sentiment back towards fundamentals of profitable growth, I think that's what we give the market for the most part. Additionally, I think it's the, you know, multifaceted of what we play in both local and national is a benefit in terms of diversification and kind of a diversified revenue stream and profitability structure from that. I would say, first and foremost, it's all about the free cash flow for us. It's really all about the free cash flow, not only in terms of return.
We return a significant amount of our free cash flow to shareholders, but also buying into assets that can generate our free cash flow and fit with our existing assets in terms of making synergies and, you know, turbocharging and enhancing profitability.
I would say despite the outperformance, I know you would argue the stock is so cheap and underappreciates the free cash flow point that you're emphasizing. What do you think investors are missing here?
Well, we think that they're missing quite a bit. You know, we've had phenomenal growth. It's been largely M&A driven, but all of our growth... You know, we closed on the Tribune acquisition in September of 2019. We did six months of integration, and we got hit like everybody else did with COVID. We started to look internally. Advertisers dropped away because they didn't know, you know, what the economy was gonna look like and what consumer capacity was. Our advertising revenue went down 40% in two quarters. The good news is it recovered back to near normal levels within three quarters after that. It's a resilient business model, but what we have seen is, I think people don't understand our unique place in the ecosystem.
They think that because we deal with a lot of larger companies, whether it's on the distribution side with Comcast or Charter, or whether it's on the affiliate side with Paramount or Disney or Comcast, again, you know, we have a unique place in that ecosystem. Our size, even though on a relative basis to other media companies is relatively modest, we have a, you know, a fortress position in the local market, having, you know, as I described earlier, a substantial amount of additional local assets compared to any other media company. That's really our forte, or historically has been our forte, and now we're leveraging that into national platforms like NewsNation. The near 200 television stations of Nexstar have 5,500 journalists.
We have the largest journalistic endeavor in the United States bar anyone else, whether they be newspapers or networks or anything else. We have leveraged that into a tighter organization at NewsNation that can take advantage of all of those local pods of journalists that we have in 40 states around the country, or 39 states and the District of Columbia. We can be, you know, if East Palestine in Ohio, the train wreck, we have stations in West Virginia and Ohio that could send people there, as opposed to CNN had to charter a jet and fly their reporter in there from New York or from Washington, D.C., and they showed up two2 days late. We are ubiquitous.
We're around the country and can take that, the benefit of that and morph that into other new businesses at a very handsome return from that perspective. It's really our scale, I think, sets us apart both locally and on a national basis.
Got it. Turning to the core business, you just reported earnings. Congrats on another very strong quarter. How are you guiding investors with respect to your future prospects?
Do you wanna take that one?
Oh, yeah, sure. You know, I think what we've got in our projection for free cash flow for the 2023, 2024 average annual free cash flow projection is about $1.25 billion, which if you adjust that for the CW investment and the interest expense, we actually have an increase in our free cash flow guidance over what we thought it was gonna be at the beginning of 2022 when we put our 2022, 2023 guidance out. We feel, you know, very confident about the future in terms of what our ability to continue to generate free cash flow. That's really gonna be driven by a number of different things. I mean, first and foremost, we've got really strong distribution revenues.
You heard us say on our earnings call that we expect to generate, you know, high single-digit, low double-digit growth in distribution revenue over the course of 2023, which is moderated a bit by some blackouts that our partner has in the first part of the year. We will also have, you know, mid-single-digit growth on the affiliate expense side of things. That, you know, those things together, if you look at the contribution margin should drive, you know, very, you know, high or double-digit, low double-digit, maybe even sort of low-teen type of growth. We feel very good about that. We also feel good about, you know, the advertising market. You know, we talked a little bit about, you know, national's been difficult.
Tom mentioned, you know, why that is. Local is really hanging in there. We feel, you know, we feel like the market is doing okay. It's still gonna be, you know, down a bit in the projection period, we feel very good about the overall economy and we will have some impact of year-over-year impacts from some cyclical things like the Olympics that we had in 2020, 2022 that we won't have in 2023. Look, we think longer term, you know, we're very bullish about our opportunity to continue to grow free cash flow and have a consistent number, which is not really necessarily something that's incorporated into our stock price at the moment.
You know, it's also interesting, a little bit off topic, but I just wanted to mention, you know, what we're seeing, you know, what we say is, you know, well, what is old is new again. TV is the new TV. We're starting to see quite a bit of reinterest in broadcast television from sports leagues, sports owners, conferences, et cetera, because of the downfall of the regional sports networks and the trouble that they're in right now. We, for the first time, in 10+ years, had the Clippers back on KTLA in Los Angeles.
We had 15 of their games on, we took that away from, basically, we didn't take it away from anybody, but Ballmer, Steve Ballmer, the owner, took it back from Bally's and redistributed it on broadcast, the premise there was that our reach is the entire market as opposed to cable reaches a percentage of the market and the RSNs within cable reaches a percentage of that market. He felt like he was only reaching a quarter of the entire market with their telecast, with KTLA, which is a top three station in Southern California, we can reach all of the consumers in the market. It's really back to basics, which is to serve the fan, to keep the fan interested.
That as a catalyst, combined again with the financial difficulties of some of the RSNs, has really, I think, refocused people's efforts on the value of reach, which is really what we do. If you think about it, we are the last of the broadcast mediums. Everybody else is narrow casting.
Great. A few questions just on the core business. We'll also hit sports after that. I guess with respect to your distribution revenues, we know the market is skeptical about continued growth and pay TV prospects. Can you articulate your case for, you know, you've obviously said a lot about the fair share of retrans dollars. How much upside do you think, or how much further do we have to go before you reach your fair side of retrans?
As you mentioned there's a chart in our investor presentation that shows that the viewing levels in a pay television household, with broadcast taking about 40% share of total viewing. With regard to the fees that were paid by the distributors for their content, we're receiving somewhere between 28% and 30%. There's kind of a, you know, a 35% upside in that number with regard to what our fees could be relative to the value we bring if you determine the value based on the number of eyeballs. We think that's a very realistic way to think about it. We think that there is elasticity in our upside with regard to the rates we can achieve.
We just renegotiated contracts representing about 50% of our subscribers in the fourth quarter last year. I would say nothing that happened in that period in those negotiations dampened our interest or our optimism with regard to continuing to see rate increases relative to the value that we provide in a pay television bundle. That's first and foremost what we believe to be important from a pricing perspective. Look, we are projecting subscriber attrition. Even when you net out subscriber growth in the virtual MVPD kind of sub-universe, we are projecting subscriber attrition. Make no mistake about it, we do not see a cliff in subscribers.
We do not think we're at a precipice here or a, you know, a point in time where there's an inflection point. We will see some amount of attrition over a period of time, but we believe that the pay television ecosystem will plateau. 75% of the universe of people above 45 years or older take a pay television service. We think that's sticky, for at least the foreseeable future from our perspective. Those really are the two defining elements that really go into the pay television economics, which are the rate and the unit count. Those two, I think, you know, we believe are, in sum, benefiting us.
Yeah. I guess here's another variable is in net retrans. How has reverse comp paid to networks trended over time, and where do you see that going long term?
Sure. Trended over time, it has historically been increasing at approximately the same rate as retrans revenue. I think what you're seeing now with the diversification of some of the networks into other delivery mechanisms, whether it be direct to consumer, et cetera, we're seeing a marginalization of some of the historically unique content that we had been paying for in terms of exclusive content from the networks, sports most particularly.
As that sports content gets less and less exclusive, whether they put it on Paramount+ or they put it on Peacock or other streaming platforms, what we're seeing is an ability to reduce the rate of growth or eventually to reduce the absolute dollar amount of payments to the network because they're monetizing that in other ways that compete with us, and we're gonna pay less for less exclusive programming.
Got it. I guess you made several mentions. A lot has been said about the recent Paramount CBS Fubo situation. Can you help us unpack that from your perspective?
Sure. The virtual MVPDs are a different kind of negotiating cadence and a negotiating schematic with regard to the traditional MVPDs in that virtual MVPDs, the networks negotiate with the distributor and then pay the stations a portion of the money that they collect from the networks. In traditional MVPDs, we negotiate with the distributors, collect the revenue, and then pay the networks some. The networks control that discussion more. We would like to have something more approximating the traditional MVPD negotiating scheme, but that is contractually not ours right now. From the perspective of the overall ecosystem, I think it still remains healthy. We are in a dispute with CBS right now, really over the Fubo situation.
Keep in mind that virtual MVPDs contribute less than 10% of our distribution revenue, and our distribution revenue is about half of our total revenue. Fubo is the smallest MVPD we deal with. We're talking about a relatively minor amount of money, quite honestly, to both us and CBS. It's kind of easy to pick Fubo as a fight to have. By the way, going dark on distributors is not a new thing in our business at all. We did it for two weeks in the fourth quarter with Verizon. If you wanna go back, you know, in ancient history, in 2019, we were off of DIRECTV for 2 .5 months. It's part of the negotiating tactics.
It's something nobody wants to pull out and something that they would use because it disrupts the consumer, and that ultimately is bad for everybody. It's a tactic that is used from time to time when circumstances require it.
Yeah. I think just to add to that, I think the other point to make is this is just we view this as a CBS only issue.
Correct.
It's just driven by, you know, the specific issues that surround the CBS situation.
On the core advertising side, are you seeing signs of recession? I think you mentioned locals doing better than national. Any color there? Are there any categories that are standouts, positive or negative?
I would say from a national perspective, we've seen probably two or three quarters of poor performance. Maybe the national advertisers are telling us we're going into a recession. The local advertisers are telling us a completely different story, in that they're closer to the cash register, they're closer to the consumer. Consumers continue to spend money. Their spending habits may shift around from little less in terms of, you know, more towards the durables and to the essentials and less away from the discretionary purchases, the local retailers continue to be strong from our perspective. Specifically, if the first quarter of this year remains consistent with the first two months of this year, we'll have three straight quarters of increased auto advertising.
We haven't seen that since the fourth quarter of 2019 in terms of growth in auto advertising, and that's really more of a local advertising phenomenon because dealers have inventory on the lots again. The supply chain disruption, while maybe it hasn't been completely resolved, has been resolved to the point to where they can get inventory on the lot and drive traffic to the lot, and that's what our job is for local car dealers, is really to get that word out that they've got the inventory. Basically, you can come in and, you know, the car buying experience is maybe not exactly like it was four or five years ago, but much more similar than it was two years ago.
Got it. Nexstar was the only broadcaster to exceed expectations for political this past election.
I'm sorry, I didn't hear that. Can you say that again?
Nexstar was the only broadcaster to exceed expectations.
Okay.
On political this past election.
I appreciate that.
I know 2024 is way away. Can you give us a sense of what you're expecting in the next cycle?
Well, it goes without saying, we're expecting another record amount of political advertising, in 2024. Nothing that we have seen, all of the responses that we got, the candidates' response, the PAC's response. By the way, party... I'm sorry, political action spending now represents about half of our total revenue, from political advertising in 2022. The key point there is they're not subject to rate locks and rate caps like national or, federal election, officials are. We can charge whatever the market will bear, and the market will bear substantial amounts for prime inventory. We haven't given specific guidance with regard to 2024 because it's really all around, campaign funding and campaign fundraising.
I say all the time, "Tell me who the two candidates are for the president, I'll tell you how that's going to go," because there's two ways a candidate can be useful for a political advertising for broadcast stations. He or she can either raise money, or they can make it easy for the other guy or gal to raise money. We may have a situation where both of those candidates, you know, are flashpoints for the other side and make it easy to raise money because that's the biggest determining factor in political advertising. Needless to say, you know, all of our indications are for a not insubstantially greater amount of political advertising in 2024. The reason I say that is 2024 is a presidential election.
History as a guide post would tell you that 35% of a of the money spent in a presidential election cycle is on the presidential primaries and the presidential general election. Last year, we did $500 million with no money from presidential election. You can kind of start to see what it could look like for 2024.
That's great. turning to The CW, you've obviously hit the ground running in terms of managing that asset. How do you feel about the value potential of the business, versus last summer when you closed the deal? How big of a contributor do you expect The CW to become over time?
Well, from our perspective, The CW network is core to what we're doing, but the other benefit that is ancillary and specific to Nexstar is the fact we're the largest CW affiliate. We have more CW affiliated stations than any other broadcaster. What's good for The CW network translates into what's good for our stations. If you followed The CW at all or any of our dialogue around this, historically it is owned by Paramount and by Warner Bros., and they really programmed it much more so as a syndication test ground for some of their programming, largely targeted at younger demographics than The CW network, which is like all network, skews older demographics.
By any measure, The CW network was a financial disaster. It was run for something other than the profitability of The CW. It was really run to promote the value of those products in the aftermarket, which originally was gone to syndication for broadcast and originally was put into the syndication market for broadcasting. Subsequently, over the last five or seven years, had been sold to Netflix for handsome returns there. Our thesis and our operating philosophy is to change it into a real broadcast network that tailors its programming to the audience, skewing older. Historically, The CW, because it was run by a bunch of studios or owned by a bunch of studios focused it on scripted programming.
You'll see a more, a better blend of scripted and unscripted, and I'm sure if anybody's as big a golfer as I am, and Lee Ann doesn't think that person exists yet.
Yeah.
You know, we put LIV Golf on for the first time, weekend before last. The CW in its 30-year history, had never done any afternoon weekend programming and had never done any sports. It was very successful from our perspective. The average annual or the average audience on an hourly basis was a half a million people, and that was about a third to a fourth of the PGA tournament that weekend. The PGA has been around for 40 years, and this was LIV's first broadcast,
Wow.
on television. We're very excited about it. They'll be on 13 more weekends this year. We have a three-year contract with them at very favorable rates because the PGA TOUR did a really nice job of discouraging any of their media partners from bidding on LIV, which kind of left us and Fox , you know, didn't see the potential in it that we did, and we're very excited about it. Not only from a network perspective, but the value that comes to local CW affiliates, we reap a substantial benefit from that as well.
Tom, does that mean should we expect more moves in sports going forward on the premise of Clippers and the LIV Golf that you were talking about?
Well, we would like to do more moves. It's all depend on the economics. You know, we're here for a return. We wanna put good programming on, which will benefit the affiliates, but at the same time, we're not gonna overpay for programming, whether it be scripted, unscripted or sports. There's got to be an economic value to it. I would like to think we will have more.
Okay. We're just about done here. I'll end my question on capital allocation. You generated $1.5 billion of free cash flow, which means you have a lot of cash to deploy. How do you think of your capital priorities going forward?
I think we think about our capital priorities similar to how we've thought about it historically. You probably saw that we increased our dividend by 50% this year. Off the top, we'll have the dividend payments go out to shareholders. We have a small amount of mandatory amortization that's required under our debt agreements. We'll probably pay a little bit more down in debt in terms of that. The remaining amount of cash will go to, you know, help invest in The CW until we get that to profitability in 2025. Whatever's left over will be used for any M&A that we think or other strategic investments that we think will create more shareholder value.
To the extent that we don't have those things, we will continue to execute on share repurchases, you know, like we have been. You know, in 20, you know, we're gonna have less cash flow this year than we did last year because it's not a political year. You know, last year we bought back about 12% of our stock.
That's great.
So.
Any questions from the audience?
Should we expect the mix of national advertising to continue to grow as a percentage of total advertising?
I think so. You know, really, as The CW kind of hits its stride, I think, because NewsNation is growing as well, both of those are almost 100% national advertising. On the overall mix, those two growing units, because they're relatively, you know, early in their growth cycle, I think you'll see a slight increase, but not material.
Are you kind of at your potential for local advertising to be kinda like the-
Well, we believe local advertising will continue to grow, but it'll grow over a longer period of time at a low single-digit percentage. No, we think that there's upside on that.
Okay. Should we expect a little more cyclicality then in your mix of national advertising and local?
I guess if you know, if that's how you're gonna base cyclicality, I would say probably so.
Thanks.
Okay. That should conclude the chat. Thank you, Tom, Lee Ann for joining us.
Thank you very much.
Great. Thank you.
Thank you.
Appreciate it.
Thanks, everyone.