Nexstar Media Group, Inc. Q1 FY2020 Earnings Call

Good day everyone. Welcome to today's Nexstar Media Group First Quarter 2020 Results Call. Today's conference is being recorded. At this time, I'd like to turn things over to Mr. Joe Jaffoni, Investor Relations. Please, go ahead, sir.

Thank you, Kelly-Anne, and good morning everyone and thank you for joining Nexstar Media Group's 2020 first quarter conference call. I'll read some safe harbor language, after which we'll get to management's commentary and your questions and answers. All statements and comments made by management during today's conference call, other than statements of historical fact, may be deemed forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. Nexstar cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during the call. For additional details on these risks and uncertainties, please see Nexstar's Annual Report on Form 10-K for the year ended December 31, 2019, and Nexstar's subsequent public filings with the Securities and Exchange Commission. Nexstar undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, it's now my pleasure to turn the conference call over to your host, Nexstar Founder, Chairman, President and Chief Executive Officer, Perry Sook. Perry, please go ahead.

Thank you very much, Joseph, and good morning, everyone. Thank you for joining us to review Nexstar's record first quarter results. Before we get started, I want to express our appreciation here at Nexstar, to all the brave frontline healthcare and other essential workers who are serving our country through this pandemic. We are also grateful to all of the employees of the Nexstar Nation for their frontline essential work, commitment and efforts in providing viewers with continuous access to local news and other services in our communities during these unprecedented times. And, as always, our Chief Financial Officer, Tom Carter, is here with me on the call this morning. As the world continues to address the health and economic challenges created by the COVID-19 pandemic and as our company with our country responds to changes in our day-to-day lives, our priority, as it has always been, is the health and safety of our employees, the well-being of our customers and the communities in which we operate. We take our role in delivering local news and other critical information to viewers very seriously, as we continue to navigate through the unique and evolving challenges related to this coronavirus. Local news and information has never been more essential to Americans. More people are tuning into stations, local newscasts than ever before. And since the COVID-19 outbreak, we are seeing significant year-over-year increases in our already strong local news viewership, both on air and online. As the nation's largest broadcast group and the top producer of local news programming, Nexstar and our talented and dedicated teams of over 5,400 local journalists are delivering essential life-saving news and information to our viewers across all traditional and digital media platforms. In this regard, 69 stations in 55 markets have aired over a dozen separate town hall meetings with state and local politicians and health officials as of this date, to address state and regional responses to the COVID-19 virus, as well as the actions across states that they are taking to reopen their economies. Our interactive town hall broadcasts and live streams have enabled local residents to get guidance from their state's top health and government officials about what they are doing to safely reopen their regions and we continue to create special programming events to keep our communities and regions where we operate informed by the best local sources. With Nexstar's market-leading stations, deep local and national reach and local broadcast record of being the most influential and effective medium for both brands and politicians, we expect to see advertisers allocating increased spending to our broadcast and digital platforms as this threat resolves. Looking at the few months since our last call, our preparations and disaster plan for emergency situations had already been established and we moved personnel quickly to remote work and work-from-home situations, to allow our operations to proceed uninterrupted. As I mentioned a moment ago, our service, especially in times of emergencies, is essential and we have been able to keep our teams safe and our stations on the air. The live local content we're delivering is not provided by Google, YouTube, Facebook or other platforms. And with our disaster plan in place, our strong balance sheet and our commitment to our markets and our employees, Nexstar has kept our employee roster intact, though we have made significant reductions in other Q2 operating costs, which we will review in just a moment. While the pandemic has undoubtedly impacted near-term ad sales, our results in the early part of 2020 were quite impressive, with significant growth in several key metrics and we've developed a range of proactive sales strategies and training webinars for our teams that have enabled them to keep clients during and after the pandemic up and running, as well as to preserve and build their businesses and brands as the country reopens. We also remain highly focused on the 2020 political opportunity with 17 primary elections scheduled from now through July, as well as the November presidential federal and state-wide elections. Despite the challenges presented by the onset in March of COVID-19, Nexstar delivered record first quarter operating results with net revenue, top-line and cash flow metrics all exceeding consensus expectations. Our strong first quarter financial results reflect solid core and digital advertising revenue growth in January and February, record Q1 political spending, 75% year-over-year growth in distribution revenue, as well as a meaningful cash distribution from our 31.7% ownership in the TV Food Network. Nexstar's double-digit top-line increases combined with expense management disciplines and the strong operating leverage in our business model drove BCF, adjusted EBITDA and free cash flow growth before transaction expenses of 107%, 207.6% and 242% respectively. During the first quarter, we brought about 39% of every net revenue dollar to the free cash flow line. Our first quarter results indicate that Nexstar was ahead of pace to meet our 2020-2021 pro forma operating annual average free cash flow guidance of $1.175 billion. Despite this promising start, beginning in March, mid-March, the broadcast industry experienced rapid changes in market conditions that impacted advertising revenue in the last three weeks of the month and into the second quarter. The duration of the COVID-19 impact on core ad sales is uncertain as conditions continue to evolve on a daily basis. And as a result and despite the revenue visibility afforded by our distribution agreements, our distribution from TV Food Network and other sources, we believe it is prudent for the time being to withdraw our free cash flow guidance for the 2020-2021 cycle. Having said that, it's important to note that more than 50% of our annual revenue is expected to be derived this year from contractual distribution fee and political advertising revenue, which is not expected to be materially impacted by the coronavirus. Specifically, Nexstar has solid visibility in terms of our contractual distribution economics through 2022 as we completed new multi-year retransmission consent agreements representing approximately 70% of our subscribers at year-end 2019 as well as new long-term affiliation contracts with CBS, FOX and NBC. At the same time, Nexstar has a strong balance sheet, including $434 million in cash as of March 31 with access to an additional $140 million under our revolving credit facility. Additionally, in late 2019, we completed the offering of a $665 million senior note offering due 2027 at 5.625%. That enabled us to retire the most expensive pieces of our unsecured debt. Now our nearest and long-term bond maturities are in 2024. Following the outbreak, Nexstar took immediate actions to preserve liquidity to further strengthen the company for our long-term success as we return to normalized operations. In this regard, during Q1 Nexstar allocated $470 million towards debt reduction lowering our first lien net leverage ratio from 3.52% at year-end 2019 to 3.04 times at March 31, 2020, which is well below our first lien covenant of 4.25% that is our only covenant. Additionally, the company's cost of capital has declined as a result of the more than 115 basis point reduction in LIBOR rates which at current levels implies something on the order of approximately $60 million in annual cash interest expense savings. On the operating front, we've implemented a range of cost-cutting initiatives, which will result in operating expense savings of approximately $40 million in the second quarter of 2020. While we are proceeding with our investment related to the much anticipated September 1, 2020 launch of WGN America's Primetime National Newscast, News Nation, we have prioritized other capital expenditures to maintain maximum financial flexibility. The cuts that we've made in expenses were done in a surgical, not a shotgun manner, and we were thoughtful in preserving potential revenue growers like News Nation and other initiatives underway to build the top-line. Similarly, we have proceeded with select key operating and growth initiatives in terms of hiring or promoting general managers and key department managers to strengthen the leadership team and our local operations, and we've expanded local news programming and resources as local news is a key source of local ad and political revenue. As a result, Nexstar's business is well-positioned to withstand the near-term decline in core advertising, which, given our revenue diversification initiatives of the last decade, today represents about 39% of our total annual revenue in an election year. As such, we project that Nexstar will be free cash flow positive in every quarter of 2020. We are also confident in our liquidity position and availability to service debt through 2020 and we do not anticipate any liquidity or covenant issues as we move through the balance of the year. Looking quickly at first quarter results. Net revenue rose 74.2% to $1.1 billion, marking our first ever quarter exceeding $1 billion in revenue. Total television advertising revenue increased 86.7% to $472.7 million including record first quarter political revenue of $55.3 million and a 65.7% rise in core advertising revenue despite the inventory allocation to political and the falloff in March. Notably, with active spending by presidential candidates and our expanded scale in key primary states, 2020 first quarter political revenue outpaced our internal forecast and rose by 70% on a same-station pro forma basis versus the 2016 period, the last comparable presidential election cycle. Including political, first quarter net revenue would have increased approximately 66% over the prior year period that's excluding political. The inclusion of WGN America and the 2019 distribution agreement renewals were evident in our retrans line and resulted in a 75.1% rise in distribution revenue to a quarterly record of $549.7 million, and we grew digital revenue 6.8% to $56.4 million. In Q1 of 2020, 10 of our top 25 ad categories were up on a same-station basis. Nexstar's local sales initiatives continue to generate healthy levels of new business revenue with Q1 new-to-television ad spending rising both on a quarterly sequential and year-over-year basis. In total, our sales teams generated $18.6 million of new-to-television Q1 revenue, marking an 11% rise over the prior year. We see upside in the new-to-television ad revenue metric throughout the remainder of this year as the former Tribune stations more fully adopt the Nexstar sales disciplines and retransmission their sales teams through the Nexstar incentive plans. With respect to political, our fastest-growing ad category, we exceeded our budgets and we benefited from the presidential candidate spending as well as continued healthy levels of PAC issue and proposition spending across the group. Total combined first quarter digital and distribution fee revenue of $606.2 million rose approximately 65.3% over the prior year period. The year-over-year increase in first quarter non-television revenue reflects new distribution agreements reached in the second half of 2019 and our realization of Tribune Media revenue synergies related to our after-acquired clauses in our retransmission consent contracts as well as the inclusion of WGN America and our realigned digital operations. With respect to our expectations for net retrans growth in the low to mid-teen percentage in 2020, in the second half of 2019 we entered into new long-term network affiliation agreements with CBS, FOX and NBC. As a result, over 80% of our big four affiliations are contracted through December 31, 2021, and over 70% are contracted through December 31, 2022. With our successful 2019 renewals of retransmission consent agreements representing approximately 70% of our subscriber base with about 20% of our base to be renewed this year, our significant net retrans growth in 2020 will complement our strong political growth that we're already seeing. Taken together, the affiliation renewals which also include the OTT agreements and new retrans contracts provide us with clear visibility on net retransmission revenue growth in 2020 and beyond. With our focus on generating free cash flow, we remain disciplined in managing costs, while paying dividends, repurchasing shares and pursuing other opportunities to enhance shareholder returns. In this regard, during the first quarter, we allocated $25.7 million towards cash dividend payments and another $72.6 million to opportunistically repurchase 95,000 shares of Nexstar's Class A common stock in Q1, reducing our basic share count by approximately 2% to 45.2 million outstanding Class A common shares. Immediately upon seeing the extent of the COVID-19 outbreak in March, stock repurchases were halted in order to preserve cash as we continue to prioritize debt reduction. With our year-to-date progress on debt reduction, mid-teens pro forma net retrans growth and the biggest presidential election in the company's history before us, the reduction in the LIBOR rates and our participation in the TV Food Network distributions, Nexstar now expects our total net leverage ratio to decline to approximately four times by year-end, slightly higher than our previous estimates. On the return of capital front, last week we declared our second quarterly cash dividend for 2020 at the new $0.56 level or 24% ahead of last year's levels. In summary, while the coronavirus has presented challenges for the entire broadcast industry, Nexstar's leading local broadcast platform is well-positioned to withstand the challenging environment due to the continued growth of distribution revenue, our Food Network distributions, our focus on local ad sales and the wide use of the combined Nexstar Tribune digital media platforms and what are projected to be record levels of political spending in 2020. In terms of capital allocation, we believe that our free cash flow combined with the active management of our cost structure, our CapEx timing and our balance sheet strength will provide us with the financial flexibility to continue supporting our shareholder value creation initiatives. Looking ahead, we remain highly confident in our long-term strategies in terms of serving the communities where we have operations, building the top line, maintaining close control of fixed and variable costs and optimizing our balance sheet. Over time, our disciplines in these areas have strengthened the resiliency of our business and created an unrivaled local marketing platform while supporting growing returns for and to our shareholders. With all of that said, let me now turn the call over to Tom Carter for our financial review and update. Tom?

Thanks, Perry, and good morning, everyone. As mentioned in today's press release, the results for the three months ending March 30, 2020, reflect our legacy operations and a full quarter of results from Tribune Media stations, which we acquired on September 19, 2019. These results have been adjusted for divestitures that occurred in September and another round in early March 2020. Revenue from WGN America, also acquired in the Tribune transaction, is included in our core advertising and distribution fee revenue. The income statement reflects our 31.3% stake in the TV Food Network and other investments acquired in the Tribune deal under income or loss from equity investments, while cash flow statements show distributions from these equity investments. The previous year's comparable period only includes our legacy operations. The actual results reflect one-time transaction expenses of $7.4 million and $5.4 million for the quarters ending March 31, 2020, and March 31, 2019, respectively. I will now review Nexstar's Q1 income statement and balance sheet data, followed by an update on our capital structure and guidance. On a combined company basis, first quarter same-station net revenue increased by 14.2%. Same-station core advertising declined by 5%, showing strong growth in January and February but a decrease in March due to the COVID-19 pandemic. Consolidated digital revenues dropped by 13.7%, although local station and website revenues rose by 6.5% as we navigated previous year's revenue comparisons that involved discontinued business lines. Pro forma same-station political revenue improved by 70% over the comparable period in 2016, during the last presidential election cycle. Excluding political revenue, total net revenue increased by 9% on a pro forma basis. Distribution fee revenue grew by 28.2% compared to Q1 of 2019, and increased by 23% from Q4 of 2019, reflecting the impact of renewed retrans agreements. First quarter direct operating expenses for stations, net of trade, were approximately $442 million, up from $289 million in the prior year, primarily due to expenses tied to the Tribune acquisitions and expected budget increases in network affiliation costs to balance our rising distribution revenue. On a same-station pro forma basis, fixed costs excluding program expenses dropped by 9% year-over-year as we achieved synergies from the Tribune acquisition. First quarter station SG&A was around $165 million related to Tribune operations, while corporate expenses were $53 million, including $10.7 million for stock-based compensation and $7.4 million in one-time transaction expenses. After excluding non-cash compensation and one-time expenses, recurring corporate costs were about $35 million, which is better than our Q4 guidance of approximately $40 million. By the end of April, we realized most of the initial operating synergies from the Tribune transaction. First quarter operating cash taxes were only $2.1 million as the estimated Q1 payment is due in April. Ongoing and transaction-related capital expenditures amounted to $43 million, with spectrum repack costs around $17 million, partially offset by approximately $13 million in reimbursements during the quarter. We expect to be fully reimbursed for all spectrum repack costs. First quarter interest expenses totaled $101 million, compared to $53 million in the same period last year, while cash interest expenses were $97 million up from $51 million, due to debt incurred for the Tribune acquisition. First quarter broadcast cash flow was $430 million, adjusted EBITDA was $565 million, and free cash flow was $434 million, all exceeding consensus expectations due to realized synergies and distribution agreement renewals from the second half of 2019. Adjusted EBITDA and free cash flow include approximately $170 million in distributions from equity investments linked to our 31% ownership in the TV Food Network, with expected cash distribution of about $25 million in the second quarter of 2020. To mitigate the impact of COVID-19 on advertising revenue, we initiated various cost-cutting measures, which are expected to save approximately $40 million in the second quarter of 2020. For the second quarter, we project recurring corporate overhead, excluding stock compensation and transaction expenses, to be approximately $21.5 million, staying on track with our annual guidance of around $120 million for corporate overhead. Non-cash compensation is anticipated to be about $12.5 million for the quarter and $48 million for the year, while transaction expenses are forecasted to be approximately $5 million for the second quarter, decreasing later in the year. Second quarter operating cash taxes are expected to range between $45 million and $50 million, and for the year, operating cash taxes will be significantly lower than the previously estimated $350 million. Second-quarter capital expenditures are expected to be around $47 million, while we are budgeting approximately $160 million for the year, continuing with our investment in the summer 2020 launch of WGN America's Primetime National Newscast, News Nation. We have also prioritized expenditures to maintain financial flexibility, meaning that the timing of certain capex may be extended over several quarters. We expect Nexstar's cash interest expense to be about $82 million for the second quarter, significantly less than the full year estimate of under $370 million, reflecting interest expense savings driven by decreased LIBOR rates. Looking at the balance sheet, Nexstar's debt as of March 31, 2020, was approximately $8.050 billion, comprising $5.4 billion in first lien term loans and two series of 5.625% senior sub-debt, one maturing in 2024 for around $900 million, and another in 2027 for about $1.8 billion. As previously mentioned, we had a strong cash balance of $434 million at the end of the quarter. Our net debt was approximately $7.6 billion, down from $8.3 billion at December 31, 2019. In response to the COVID-19 outbreak in March, we took prompt actions to adapt our business operations and conserve liquidity for long-term success as we aim to return to normal operations. Accordingly, Nexstar allocated $457 million from operations and investments towards debt reduction, reducing our net first lien covenant ratio from 3.52 at the end of 2019 to 3.04 at March 31, which is comfortably below our covenant limit of 4.25 times. Our sole covenant is the first lien debt covenant at 4.25x. Additionally, during the first quarter, we allocated $25.7 million towards cash dividends and repurchased nearly one million shares of Nexstar Class A common stock for $72.6 million, lowering our basic share count to 45.2 million at the end of the quarter. Upon witnessing the severity of the COVID-19 outbreak in March, stock purchases were halted to prioritize cash retention. Despite potential challenges ahead, Nexstar has a robust balance sheet, including the $434 million in cash as of March 31, plus access to an additional $140 million from our revolving credit facility. Our nearest bond maturities are in 2024. In the fourth quarter of 2019, we issued $665 million of 5.625% senior notes due in 2027, which allowed us to retire our most expensive unsecured debt and near-term maturities before 2024. Looking forward, with ongoing double-digit year-over-year growth in distribution revenue and high spending levels expected for the upcoming presidential elections, which we don't foresee being significantly impacted by the coronavirus, we have great visibility over more than 50% of our 2020 annual revenue. Consequently, we anticipate being free cash flow positive in each quarter of 2020. Nexstar has made considerable progress in our debt reduction strategy and maintains a strong cash position with extra capacity available through our revolving credit facility. The decrease in interest expenses tied to favorable LIBOR rates, along with expected operating expense savings of about $40 million in the second quarter and our prioritization of capital expenditures will greatly benefit us in the coming quarters. We are therefore confident in our liquidity and our ability to meet our debt obligations during these challenging times, without anticipating any liquidity or covenant issues throughout the year. In addition to maintaining our dividend payments, we remain committed to directing the majority of our free cash flow towards reducing leverage and are optimistic about achieving our slightly revised target of decreasing total net leverage to the four times range by December 31, 2020. In summary, despite the unprecedented challenges posed by the coronavirus outbreak, our integration, synergy realization, and operational plans are yielding positive results. Our capital structure remains strong in terms of cost of capital, maturity, and leverage management, and our service to local communities and advertisers has never been stronger. Our disciplines in these areas have facilitated significant growth and provided consistency and visibility in our results. While we have withdrawn our 2020/2021 pro forma guidance for annual free cash flow of $1.175 billion at this time, we maintain confidence in our capacity to deliver on the long-term value of the Tribune transaction once the pandemic subsides. This concludes the financial review, and now I'll hand it back to Perry for some closing remarks before the Q&A session.

Thank you very much, Tom. In our more than 23 years of business and over 16 years as a public company, Nexstar's management team, board and employees have weathered the storm of the dot-com bust, 9/11, the 2008 financial crisis and the recession that followed. Throughout each of these times we worked to support and sustain our employees, our local businesses and the communities in which we operate. Nexstar has always been – this has always been our approach to business and it is more important today than ever before. In each case, we came out on the other side stronger and better equipped to deliver outsized returns to our shareholders and our long-term record of value creation would support this. As we address a pandemic that will no doubt become a chapter in the history books, our commitment to all of our constituents remains unwavering. While we've endured the challenges set upon us by the COVID-19 outbreak, I hope our comments today reinforce the fact that we remain confident in the strength and resilience of Nexstar's scale and diversified business model. Our business is less impacted than it was some 11 or 12 years ago during the recession because we took the steps necessary to create significant new contributing revenue sources. And our focus over the last decade in expanding our scale is serving us now as a leading platform for political candidates as well as national regional local advertisers looking to reach nearly every demographic in the United States. Our leverage is very manageable and coming down. Our liquidity is great and we intend to remain free cash flow positive while continuing to pay our quarterly dividend. This focus combined with our time-proven operating integration strategies will enable us to overcome the near-term challenges and extend our long-term record of shareholder value creation. We look forward to reporting on our continued growth and accomplishments throughout 2020. And on behalf of the entire Nexstar Nation, our Board and Management team, thank you for your continued interest in the company, your support and for joining us today. Now let's open the call to Q&A to address your specific areas of interests.

We'll hear first today from Dan Kurnos with Benchmark Company.

Great. Thanks. Good morning. You guys had crushed our street high retrans carriage estimate here. I'm just trying to get a sense of if there was anything – I know Tom I think you'd mentioned some kind of pushout from AT&T that bled into 2020? Or if there was some noise there? And then Perry in your prepared remarks you talked about kind of confidence in that net retrans number. I don't know if you mentioned expectations near-term around sub declines. Obviously, it feels like you guys believe they'll come back. But just any thought on if that upside just outweighs any potential near-term choppiness? Or just kind of your views there?

Well, sure. Listen, as far as sub declines go in our internal models, Dana Zimmer and her expert team produced a model that projects sub attrition and which is how we develop the guidance that we give to all of you. I can just tell you that all reported sub declines this year have been less than the assumptions we have in our model. So it is not like sub declines are sneaking up on anybody here. But I will say that – obviously two schools apart, one is that in an economic time people look to cut expenses. There are other folks who think that since cable and the bundle is kind of the cheapest entertainment that that is one of the last things to go. And I think time will tell. But I would say in previous recessions what we have seen is there has been sub – some sub churn because people are unable to pay their bills, that however has not yet been factored in because the MVPDs have made a commitment to no disconnects for non-payment at least for the next few months. But our long-term view would be that the bundle providing internet and video as well as convenient navigation is a pretty – movies may suffer, but people will stay home and watch television. Our viewership would certainly sustain that. And I saw a report yesterday, where people were prioritizing cable over utilities because of other disconnect – no disconnects for non-payments that have been made. So I think as far as looking forward, we think that what we have projected in our models are consistent with what we think will happen and we don't expect any significant variance to that. There was no real AT&T effect that pushed over from fourth quarter to first quarter. That will manifest itself in the third quarter of this year, where we'll be up against zero history for a period of time. But no, the numbers are real, the numbers are solid and we expect the numbers to continue throughout the year.

I would say Dan, if there was any – we beat our budget in the first quarter by 1% or so. So that's $5 million on a – call it around $550 million distribution fee. Some of that was just truing up subscriber numbers with Tribune et cetera. So there may be a little bit of over performance there but not a lot. But you will see a slight – we obviously, as Perry mentioned, attribute attrition every quarter. So you'll see some attrition between Q1 and Q2, especially in light of the fact that the repricings at the end of Q1 were pretty nominal. But we're very confident in our numbers and continue to see strong growth in the retrans through the year.

We did have a significant pricing happen in Q2 with a not insignificant MVPD and we are very pleased with those results. So the beat goes on Dan.

Super helpful. And then, Perry, I'm sure there's nothing you'd prefer to talk more about than core but just if you could give us just your sense on pacings or maybe conversations you're having with advertisers to inform your kind of optimistic we come out of this stronger and budgets' shifts to TV once we get out of this?

Sure. Well, sitting here in Dallas, we probably have a little different perspective than folks that sit in the northeast on what's going on, because businesses here in Texas are opening. Even my barber is going to open on Friday, and I hope to be one of the first in line after two months…

You don't have to go to Georgia for a haircut anymore.

That's exactly right. We believe Q2 will be the most challenging period for us. We have two forecasts: one is our expected outcome and the other is a more pessimistic scenario, which is significantly worse. However, in all these situations, we anticipate remaining profitable in every quarter. While this COVID-driven recession poses significant challenges, it won't completely derail us. We will get through this. Our projections for third quarter core revenue look much better than Q2. Although it's based on limited data, we also have seen many advertisers cancel their Q2 ads and move them to Q3, often with increased budgets. While these are just individual examples, we are bracing for a difficult Q2 and, based on what we've heard from others in the industry and their forecasts, we believe Q3 will improve, though we are ready for any outcome.

As we move through Q2, we are noticing stronger progress towards the end of the quarter compared to April. This improvement is partly due to the general reopening of various markets. Given the wide reach of Nexstar, we are involved in many of these, particularly in Texas, Ohio, and Florida. Therefore, we expect to exit Q2 with a better pacing position than we had at the beginning.

Got it. That is really super helpful color, guys. Thanks very much.

We'll move next to John Janedis with Wolfe Research.

Thanks. You guys talked to net leverage around four times at year-end. Understanding you pulled the guidance. Does that mean in the base case assumption you still feel reasonably good about your initial EBITDA expectations for the year when you factor in, I guess, your non-advertising revenue and expense initiatives? And then maybe as a follow-up to Dan, on political, I know you said not much of a COVID impact, but to what extent did that or has it impacted timing of money getting put to work? And understanding it's going to be a good year, has your outlook or shape of the year changed at all?

I will address the political question first. The strong performance in the first quarter was mainly due to Mayor Bloomberg's involvement in the presidential process, so we did not anticipate that the second quarter would necessarily outperform the first quarter politically. However, with the primaries moving from April and May to June and July, there has been a shift in funding, but we do not believe this will affect the total amount of funding accumulated by the end of the year. The critical period for political revenue is in the fourth quarter, where we expect 50% of the revenue to be generated between Labor Day and the general election. Therefore, we do not foresee any changes to our guidance, projections, or expectations for our political revenue performance in 2020.

Regarding our EBITDA budget, we anticipate an impact on Q2, Q3, and possibly Q4 depending on the rollout model. This will lead to a decrease in our EBITDA for the year, although some aspects will offset that decline. We have more options to influence the balance between EBITDA and free cash flow than we do between revenue and EBITDA. Revenue and EBITDA are significantly influenced by market conditions affecting core advertising; we can mitigate this to an extent, but not extensively. In contrast, when we look at the disparity between EBITDA and free cash flow, our cash taxes are expected to be much lower due to the decline in both EBITDA and operating income resulting from reduced revenue. Our interest expenses will decrease by over 20% because of reduced interest rates, particularly LIBOR, allowing us to manage this effectively. Our capital expenditures will also be lower. Therefore, the three key factors affecting EBITDA and free cash flow can be positively managed, resulting in our free cash flow expectations showing less variability compared to our EBITDA. I'm not sure if this answers your question, John, but that’s how we view the situation.

Yes. That will do it. Thanks, Tom.

We'll move on to Kyle Evans with Stephens.

Thanks. You guys referenced double-digit net retrans growth for the year in the release. Could you maybe at a high level talk about how we should think about the year one rate hike on that 70% that you just renewed versus accelerators in years two and three?

I pointed out the growth between Q4 and Q1 was 23%. Our overall growth was 23%. 70% of those subscribers repriced, while 30% may or may not have. All of the remaining 30% had an escalator at year-end. You can find an arithmetic equation within that where you could try to assign a value to the increase of the 70%, but generally, it would be higher than the 23% we observed across the portfolio between Q4 and Q1.

Got it. And Perry you mentioned, you've gotten a sizable renewal done in 2Q and you're happy with that. I guess with probably saying blackouts are off the table, kind of how does that shape the game theory on renewing?

It doesn't really. I mean, parties are continuing to negotiate in good faith. And obviously, you don't have a deal until both parties agree. So, we don't think that will be any real effect. I mean we expect it will just continue to be business as usual. And from this point forward we don't have any significant other renewals of the approximate 20% of our subscriber base that gets repriced this year until Q4.

Great. How much of that 20% is in 4Q out of curiosity?

We're not going to give you the playbook here.

I would say a large percentage of the 20%.

The biggest piece of it is in 2020, but it's got to be something after the imagination.

All right. Well, I'll go high level with my next one. Could you talk about the interplay between lower sell-through and non-political core due to cancellations and just lowering ad rates and keeping people in those spots and how you plan to balance those two?

We have a fixed level of inventory, so if demand decreases, rates will also be lower. We're collaborating with advertisers to maintain our presence, and we are considering adding billboards and other promotional strategies. Our goal is to be strong partners with our business associates. Additionally, we have more inventory available to promote offerings, such as WGN America's News Nation. The pricing is straightforward and based on supply and demand. We generated significant political revenue in January and February, which created price peaks in some markets. However, many of those gains diminished in March due to canceled primaries and various events being postponed or canceled. We observed declines in categories like auto, travel, leisure, restaurants, and certain retail sectors. Conversely, the categories that experienced the most significant year-over-year growth were attorneys, home repair services, drug stores, grocery stores, and packaged goods. This aligns with changes in people's lifestyles. Our dealerships in Pennsylvania, Ohio, and Texas remain open, and we anticipate a rebound in these categories, particularly with attractive financing offers like 0% for 84 months. Many customers are taking advantage of these deals, and reports indicate shortages of trucks and popular vehicle models.

Gentlemen, can you still hear us?

I can hear you.

Okay, standby. And everyone please standby as we reestablish our speaker's phone line. And gentlemen please continue.

Sorry. Kyle, sorry about that. We had some technical difficulties. Not sure where in Perry's answer we got cut off.

We lost you at certain truck models are starting to come up short.

Okay. Well, that's certainly true. So, I guess, the end of that came shortly after that comment is that we see the ebb and flow and the supply demand will probably even out. But there is demand and causing shortages in some models, particularly in popular truck and SUV models right now.

Great. Thank you.

We'll move on to Jim Goss with Barrington Research.

Hi. A couple of items. One just a little nit regarding the political spending, will you benefit or be hurt if campaigns are more virtual this year?

I would expect on balance if you're not holding rallies, you're not spending money to fill stadiums and auditoriums that you're going to spend more money on television. And we've heard that from some of the political advertising agencies that this is going to be the primary means of communication through the campaign at least maybe until the late stages when people feel comfortable congregating. So, I would think on balance Jim, it would be a net positive. I couldn't quantify to what extent though.

Yes, I also wonder if any of the old laws about equal time come into play and whether one party will purchase a political ad at least on a national level versus another.

It's difficult to determine. Generally, we are required to provide equal time, which we do. There is no requirement to purchase it, and this typically refers to how candidates are allocated time on air. As we enter the political season and the emphasis shifts, we will continue to hold debates at the statewide level with senators, representatives, governors, and similar officials. The company has become particularly skilled at organizing these events, especially in states where we have a significant presence, such as Illinois, Tennessee, Texas, and Pennsylvania. You can expect us to keep participating, and we anticipate that the debates will be lively and that spending will be substantial.

Okay. And then one other area. I wonder if you could provide a little more color on WGNA blend of local sources versus national overlay like, what are you envisioning? Is it pure news or will it have a political point of view target audience target advertisers? Where do you fit in? What if you – and maybe the expansion potential if it does develop a good following?

Sure. Well, we start with the fact that WGN America is distributed according to Nielsen approximately 75 million homes. And if you look at the programming across the prime time day part, it's either entertainment or hopefully once again sports or opinion shows. There's no real hard news entity in prime time. And so that is the direction that we're going to head. We announced our launch date of September 1, 2020, and it will be three hours of live news. We've hired our main anchor team. We're in negotiations with our weekend anchor teams. We've hired approximately 30 people out of the 130 that we'll be hiring to launch. Construction goes on unabated in Chicago, where the broadcast will originate from. And we're very excited about this. And we've had virtual upfront presentations with probably 100 national advertisers, some of which would never talk to WGN America, because reruns and certain original programming was not the demographic they're trying to reach. So this will be hard news 100% absent of bias. And we're so serious about that, we're hiring a panel of rhetoricians to review our broadcast for unconscious bias that may creep into the words we use and the reporting that we do. And I can tell you from my related conversations, people have said the timing for this couldn't be better. The country just wants straight news, no opinion and they'll make their own decisions and that's what we're going to try and serve. It will be all news using the backbone of our 5,400 journalists plus the 130, 140 people we hire that will be based in Chicago. We have hired network-quality correspondence. There are no names that you would recognize today, but hopefully names you recognize down the road. And we're working through our promotion plan as well as finalizing all of the technical aspects of it, but it will be absent bias and local and based from Chicago. So we're calling it the center of news and this will be from the heartland and primarily directed for the heartland, which is where WGNA's distribution is the strongest.

All right. Thank you very much.

You bet.

And from Huber Research Partners, we'll hear from Craig Huber.

Thank you. A few questions if I could. This – your retrans subs in the quarter were they down say 4% to 5% year-over-year on an organic basis including the OTT benefit?

We're down at the bottom end of that range.

Okay. Thank you for that. And then I know this was asked before, but for the month of April can you give us a sense how much your core organic TV ad revenues were down? I mean just so people can get a sense what's going on out there? And also what your – maybe your outlook is for the full quarter if you could?

We're not talking about obviously specifics with regard to the quarter, but I would say our experience is not materially different than some other of our peers and with regard to the decline in core revenue that they saw or are seeing early in this quarter.

When you say that does that mean like down say 35%, 40%? Is that what you're referencing?

We just don't give guidance down to that level of detail. We give free cash flow guidance and which we've withdrawn because of the core advertising performance, but we're just not going to give guidance to that level of detail.

No. I understand. I'm sorry, but just – but for the month of April when you referenced to your peers the number you're referencing for your peers, is that say down 35%, 40% just for April please.

That is on what you read. But

But that's the number that I've heard before. Yes.

Okay. Thank you for the clarity there. And then Perry, I'd be curious to hear if you could quantify obviously households are watching the news a lot more out there and stuff? I mean can you quantify the best you can how much your news ratings have been up here over the last couple of months? And I know it's tough, but I mean, how much of that do you help to hold on the back end of this? I mean -

Sure. It depends on day parts, but I would say early morning news is up. If we look at the average and this average in KTLA with our ABC affiliate in Dothan, Alabama but we – I would say, morning news is up approximately 15% mid-teens across the board. Some markets more than that. Where we're seeing the biggest increase is in the early evening news and the late evening news, and those numbers have been as high as 40% increases. And I think some – we're hopeful that some new habits are forming that people are realizing that there is value in this product that does keep them connected with what's going on locally. And time will tell, how much of those audiences we actually retain. But I think that, it will be a number greater than zero and something less than 100% of the levels we're performing at now.

Then a couple of cost questions if I could. Can you just help us – how should we think about your use of furloughs here in the second quarter versus permanent headcount reductions?

None.

On either side?

On either side.

Okay. That's interesting. And then just my last question. The $40 million of cost savings that you referenced for the second quarter. Just to be clear that's above and beyond anything that you already were thinking you would be able to take out of the system from the Tribune acquisition, and it's also a number versus all else being equal versus your first quarter cost base. Is that true?

It is in addition to the expense synergies that were part of the Tribune transaction and they are specifically related to reduction in revenue and discretionary expense above and beyond, as I mentioned before the Tribune anticipated. It is really relative to our budget.

Okay. Thank you guys.

We'll hear next from Aaron Watts with Deutsche Bank.

Hi, guys. Thanks for getting me on here. Perry, I'm sure that even after all this time away from the barber, the hair is still looking tighter and sharper than 99.9% of us. So I'm not worried there.

Well, thank you for your support.

I'm curious maybe in some of your smaller markets, what you're hearing from the SMBs there. Encouraging to hear that you're seeing auto dealerships open, but more broadly are you feeling that the pullback in advertising from SMBs is temporary in nature as more of a permanent tilt this time? Or maybe somewhere in between? And maybe also how important that group of advertisers is to your overall ad pie?

It's difficult to provide a straightforward answer to that. If businesses were required to close, there wouldn't be much value in advertising. We noticed an increase in grocery and drug stores, as well as appreciation for first responders, which led to a shift in advertising focus. Some businesses that were already on the edge and not spending much on advertising may struggle, but I've been in contact with our 140 vice presidents and general managers. About a month ago, I advised them that as we start discussing reopening, they should reach out to all their advertisers and accounts—not to push for orders but to discuss strategies for a strong reopening and capturing market share. We've been proactive in this regard. Our regional vice presidents, along with the COO and the President of the Broadcast Division, are contacting our top 100 advertisers. The goal is not just to check in but to explore how we can assist them during this reopening phase, share our ideas, and hear their suggestions on how we can help them regain momentum and outpace competitors. The response has been positive, with our peers not engaging similarly, and clients appreciating the time and effort we are dedicating to understanding their needs. However, for small businesses like a single location hair salon or restaurant, they may not have been significant advertising clients for us, and some may ultimately decide to close. There will be fewer businesses in these markets compared to pre-recession levels, which is a common trend in recessions. These small businesses represent a small segment of our overall operations, and if they are just getting by, they likely don't have funds for advertising in the first place.

All right. That's helpful context. Thank you and stay well.

Thank you. You too.

We'll move on to Zach Silver with B. Riley.

Thank you for taking my question. My first inquiry is about capital allocation. I recognize that reducing leverage is a priority this year due to the economic uncertainty. However, your stock is currently at low levels, and I would like to know what factors might provide you with the confidence to restart the opportunistic share repurchases you've conducted in the past.

I believe we need more clarity on our core advertising revenues moving forward. I don't anticipate any stock repurchases for the remainder of Q2. Depending on how the economy recovers and its impact on our revenues, we may consider the option later. For now, I would say the stock buyback plan is effectively suspended. We still have about $80 million to $85 million available under the Board's authorization for repurchases, but I don't expect to be active in that market in the next 60 days.

Got it. And then one more if I could. Just on the non-programming OpEx side, this $40 million in efficiencies in the second quarter, I guess in the bare case you guys are contemplating plays out, are there opportunities to flex that beyond $40 million? And then longer-term with more of your employees working from home, more digitization of processes perhaps, do you think that there could be any structural tailwinds to the long-term cost structure from this?

I would say we actively manage our business, and yes, there are more opportunities for cost reductions. At that point, we begin to cut into the more essential aspects rather than the less critical areas of our expenses. However, in the current situation, we don't see an immediate need to pursue these reductions. To put it another way, we understand how deep the river is when we navigate our challenges, but we are uncertain about its width. Therefore, based on the speed of any potential recovery and our core performance, we can adjust our business strategy as needed.

I want to add that we've implemented some cost reductions that will impact the third quarter. This figure will change depending on how our revenue shifts in that period. As Tom mentioned, we have options available to us. It's expected that a decline in revenue will lead to lower commissions and reduced travel expenses, which shouldn't be surprising. However, we've kept our workforce intact because we need them to support our communities and deliver essential services. We haven't asked anyone to take furloughs or face layoffs. As I often mention in our monthly managers' call, if this situation persists for a year, we will reconsider our approach, but at this moment, there's no need to do so. We must maintain robust businesses to take part in the ongoing recovery. The governor lifted the stay-at-home order at the end of April, and our corporate office is open. Employees are here unless they have health issues or need to care for children or seniors, for which we are accommodating them. Some states are fully operational and never implemented shelter-in-place orders. New York City will likely be one of the last areas to reopen, which is understandable, but even upstate may operate under different guidelines and have more flexibility than the Metro New York region. We're handling these situations on a case-by-case basis. What we're witnessing now is the start of economic reopening, and businesses looking to grow will be our partners moving forward. As Tom said, we will actively manage our costs and capital allocation in response to revenue changes. We've developed two scenarios: one outlines our expectations for the next few quarters, and the other is a worst-case scenario that we have prepared for. We are managing the business based on our base case, but if the worst-case scenario arises, we are ready to act accordingly.

Got it. Very helpful. Thanks, Perry. Thanks, Tom.

We'll hear now from Steven Cahall with Wells Fargo.

Thanks. Maybe, first, Tom, you talked a little bit about the levers between EBITDA and free cash flow. You've done a lot on cash tax savings and cash interest savings. So if we just think about a lost dollar of advertising, is there an easy way for us to think about what that is in terms of the impact to operating cash flow or free cash flow?

No, because some of it is structural like commissions and sales expense etc., and some of it is more discretionary. That again, is something that requires actively managed as opposed to just direct sales expense. So it's hard to say. I would say, we're probably looking at somewhere on the order of 15% to 20% direct and the rest is kind of discretionary.

Okay. And then when we just think about your leverage guidance for the year, how do we think about the EBITDA or cash generation from the Food Network stake as a component of that? I imagine you've assumed a little bit lower from that since they face some advertising challenges as well?

Yes. But keep in mind that, I gave guidance for second quarter. So if you add those two together that will approximate 90% of the cash flow to be realized from the Food Network in 2020. So that score has already been put on the board, for the most part.

Okay, great. And then you talked a little bit about how political is really a game that's played from Labor Day to November. Could you maybe speak at all to what sort of expressions of interest you might already be seeing in terms of ad buying for that period? And I think there was a story last week about the Trump campaign starting to roll out a couple of wads of ads. The first time they've done that post-COVID. I don't know if on the democratic side, you've already seen a wave of expressions already to start or if they're still sort of restrategizing based on the way things have changed, so just commentary about the level of demand that you're already experiencing for that period? Thank you.

We have time reserved for political advertisers leading up to and including Election Day. This situation creates an options market, as it intensifies and people decide whether to stick with current pricing or adjust to shifts in the market. While it's interesting, it may not be significant. However, I would note that the current demand aligns with our expectations for a presidential election year. Additionally, we anticipate that half of the funding will be secured between Labor Day and Election Day, as has been the case historically. We also exceeded our internal expectations in the first quarter. The second quarter may be unpredictable due to some primaries moving to the third quarter, but we do not believe this will impact our political revenue projections for the year.

Anything further, Steven?

Super helpful. Thank you.

Thank you. And Perry at this time I'd like to turn things back to you for closing remarks.

Thank you very much. Thank you all for joining us today. And it was a longer call than usual. We thought it important to spend time and share as much of our thoughts as we can with you. We look forward to gathering again in early August to report on our Q2 and report on our increased visibility for the remainder of the year. Thanks, again, everyone for joining us. We'll talk again soon.

And that does conclude today's conference. Again, thank you for joining us today.