Nexstar Media Group, Inc. Q1 FY2021 Earnings Call

Good day, and welcome to the Nexstar Media Group First Quarter 2021 Results Call. Today's conference is being recorded. I would now like to turn the call over to Joe Jaffoni, Investor Relations. Sir, please go ahead.

Thank you, Katie, and good morning, everyone. I just need to read the safe harbor language, and then we'll get right into the call. 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 purposes of the Private Securities Litigation Reform Act of 1995. Next, our 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, 2020, and Nexstar 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 and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joseph, and good morning, everyone. Thank you very much for joining us to review Nexstar's record first quarter results with our net revenue, profitability and cash flows handsomely exceeding consensus expectations. The first quarter clearly highlights the resiliency and adaptability of our business and the proven ability of our long-term strategies to drive top line growth through increased content monetization and diversification, while at the same time leveraging our scale, reducing debt and allocating our growing free cash flow to return of capital initiatives, which are driving shareholder returns. We're extremely proud of the record first quarter results and the more than 12,000 members of the Nexstar nation across the country, who, while serving their local communities have managed through, and in most instances, overcome the challenges presented by the pandemic, putting Nexstar on a path for continued growth in the current quarter and beyond. Before getting into the quarterly highlights, I'd like to quickly review our progress against our capital allocation priorities and long-standing commitment to enhancing shareholder value. In the first quarter, we allocated $80 million towards debt reduction and returned approximately $151 million to shareholders through dividends and share repurchases, thus reducing our share count to approximately 43 million shares. Nexstar returned approximately $383 million to shareholders in the form of share repurchases and dividends in 2020. So with $151 million in the bank in Q1, we are well on pace to exceed that level this year. Tom Carter, Nexstar's President and Chief Operating Officer and CFO, is also with us on the call this morning, will review the quarter, our outlook, our plans for continued capital returns and our confidence in achieving our pro forma annual average free cash flow guidance for the '21/'22 cycle of $1.27 billion or about $30 per share. Nexstar started 2021 exceptionally strong, with record first quarter net revenue, including double-digit growth in distribution and digital revenue, alongside our team's success in driving a recovery in core advertising. Nexstar's first quarter net revenue grew 2% year-over-year to $1.1 billion, as the ongoing execution of our strategies to leverage our strong local content and diversify our revenue sources nicely offset the approximate $50 million in year-over-year decline in political advertising. Top line growth, the $178 million cash distribution from our 31% ownership stake in the TV Food Network and our expense management vigilance combined to drive record first quarter adjusted EBITDA and free cash flow before onetime transaction expenses to $572.6 million and $484.7 million, respectively. Nexstar brought over 35% of our Q1 net revenue to the operating EBITDA line before the Food Network distribution and onetime transaction expenses. You can expect Nexstar to further leverage its scale and operational excellence to generate significant free cash flow, reduce debt and drive further total shareholder returns throughout 2021 and beyond. First quarter 2021 total television advertising revenue, excluding political, decreased just 1.4% versus the prior year. That outpaced our expectations, and it reflects the growing demand for our premium local and national content and marketing solutions. Nexstar's new business strategies, ongoing sales training, performance-focused incentive structures, all continue to prove highly effective as we capture broadcast and digital ad spend and healthy levels of profitable new business. Our sales teams generated $27.8 million of first quarter new to television revenue, marking a 149% increase over the same quarter prior year. We are extremely proud of our sales team's successes in delivering solid first quarter core advertising results when you consider that the first quarter of 2021 would be our most challenging core revenue comparison for the year, given our core strength last year prior to the onset of the pandemic. Looking ahead, we're encouraged by the overall acceleration in economic activity and the improved trajectory of ad spending across our footprint as market conditions continue to improve. In the first quarter, total revenue for Nexstar's top 10 ad categories paced 9% ahead of the prior year, with gains in 6 of our top 10. In addition, 5 of our top 10 auto advertisers increased their spending year-over-year. The resumption in auto category spending is being complemented by the resurgence in insurance, lottery, sports betting, home service and repair, medical health care, packaged goods, grocery stores and auto aftermarket spending. Nexstar's core ad strength is being achieved despite the auto inventory headwinds as a result of the chip and supply chain issues. We're also accomplishing this growth before all small and midsized businesses have fully returned to the ad market, a trend which we think bodes well for our business and one that could possibly accelerate as we move throughout the year. With Nexstar's core advertising accelerating year-over-year beginning in the second quarter, our local sales teams are working hard to drive further revenue share gains as we move deeper into the recovery. First quarter 2021 distribution fee revenue rose 13% year-over-year to approximately $621 million, reflecting our 2020 renewal of distribution agreements across approximately 18% of our subscriber base. The synergies related to Mission Broadcasting's acquisition of WPIX TV in New York as well as our annual contractual escalators. Subscriber trends across our platform are stable and consistent with our expectations and support the ongoing distribution fee growth and net retrans margin trends that we continue to project. Nexstar has solid visibility into the distribution economics and ongoing growth of this revenue stream as over 85% of our Big Four affiliations are contracted through December 31, 2022. Our retrans growth, coupled with the Q1 cash distribution from our ownership stake in the Food Network, has significantly offset the historic seasonality that media companies typically face in Q1. One other note here on the significance of our ongoing revenue diversification initiatives. In the first quarter, total television advertising revenue accounted for about 37% of net revenue, while distribution fee revenue was 56%, the balance then came from digital and other sources. Looking forward, we expect continued growth from all of our nonpolitical revenue sources for the balance of 2021 with similarly high levels of overall revenue diversification. Moving on to digital. First quarter 2021 revenue increased 18% over the prior year to approximately $66.4 million with substantial profitability improvement, partially reflecting our actions over the last year to discontinue or deemphasize certain less profitable digital operations as well as the strategic operational realignment we put in place last fall. Top line growth was driven by the success of Nexstar's integrated content and audience development strategies as well as a full quarter contribution from our December 2020 accretive acquisition of Best Reviews. Our integration of Best Reviews is progressing ahead of our plan and results are similarly favorable. Nexstar's digital network continues to generate strong consumer engagement with our content as well as significant digital usage across our 400-plus digital touch points. Last year, Nexstar's digital properties delivered record growth in audience engagement, ranking #1 in local news for every month of the year and reaching all-time highs across key performance indicators, including average monthly users of about 91 million, total page views of 7.8 billion, total multi-platform minutes of 10.4 billion and total digital video views of 1.6 billion, all according to ComScore. With the momentum of our content and audience development strategy, we expect growth in digital revenue going forward and combined with the expected mid-7 figure expense savings this year, resulting from our strategic operational realignment of our broadcasting and digital operations conducted last year. We expect increased cash flow contributions from digital throughout 2021. This June, Nexstar will celebrate the 25th anniversary of our company's founding. During this period, the company has grown from a single station to become the nation's largest television broadcast operator as well as the top producer of local news in the country. This growth has come, thanks to our disciplined approach to growth through accretive acquisitions, a focus on enhancing operating results of our acquired stations and organization-wide commitment to localism. And at the same time, the material diversification of our revenue mix has resulted in strong and consistent free cash flow generation, affording us the financial flexibility to reduce leverage, increase shareholder returns and to pursue additional accretive growth opportunities while also investing in our business and our people. As always, we remain focused on actively managing our capital structure, and we expect Nexstar's net leverage, absent additional strategic activity, to continue to bleed in the sub-4x range throughout 2021. With that, let me turn the call over to Tom Carter for the financial review and financial update.

Thanks, Perry, and good morning, everybody. I'll now review 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. Q1 of '21 was a very good quarter for Nexstar. Net revenue increased 2% over the same period of the prior year and approximately the same amount on a combined pro forma same-station basis. Net revenue ex political was up 7% to $1.1 billion and up 6% on a pro forma same-station basis. Core advertising revenue, local and national, was down 1.4% to $411 million, but on the television station side was up 2% on a same-station basis. Political revenues, as expected, were down approximately $50 million due to the lack of political advertising in '21 compared to the first quarter of '20. Distribution fee revenues were up 13% to $621 million and up 13% on a same-station basis as well. Digital revenues were $66.4 million, which was up 18%, and that was up approximately 3% on a comparable basis with the difference really coming from the acquisition of Best Reviews. Also, I might add that the digital business profitability continues to improve considerably during the year, and we see that as a growth vehicle going forward from a profitability perspective. Adjusted EBITDA was $571 million, which was up 2.4% over the same period the prior year. And importantly, free cash flow was $484 million, which was up 14% over the same period the prior year. Reported first quarter direct operating expenses, net of trade expense, and SG&A expenses were affected by previous quarter's acquisitions and the realignment of Nexstar's digital business. As a result, some expenses shifted from direct operating expenses into SG&A, making comparisons less meaningful on a direct basis. Overall, these combined expense categories increased $41 million, a 6.8% increase, which was attributable to the station and digital acquisitions during the period. First quarter pro forma fixed expenses, excluding programming expenses, were down 3.8% over the same period in 2020. Total corporate expense, including noncash compensation expense, was in line with the company's guidance for the first quarter. Corporate expense declined 18.7% to $43.5 million, inclusive of $11.6 million of stock-based compensation expense in the quarter. Total corporate expense, including noncash compensation, was in line, as I mentioned before, with overall guidance. And during the quarter, we were at $1.2 million in onetime transaction costs. First quarter operating cash taxes were only $5.5 million, as the first quarter estimated payment is typically made early in Q2. Ongoing CapEx totaled $27.5 million and was in line with our first quarter guidance. Spectrum repack CapEx totaled approximately $4.4 million, and we received approximately $5.4 million in reimbursements from the FCC during the quarter. As a reminder, we're anticipating being fully reimbursed for all CapEx related to spectrum repack as those activities wind down later this year. First quarter total interest expense amounted to approximately $72 million, down from over $100 million in 2020. Cash interest expense was $68.4 million compared to almost $97 million last year, with the decrease due to lower interest rates and lower first-lien borrowing levels. First quarter adjusted EBITDA of $573 million and free cash flow of $485 million, all before transaction expenses meaningfully exceeded consensus expectation and reflect the ongoing recovery in core advertising, strong double-digit distribution and digital revenue growth and $178 million in distribution from equity investments, primarily related to our 31% ownership in the TV Food Network. Looking ahead, we project recurring cash corporate overhead, exclusive of stock comp and transaction costs, to be approximately $30 million for the second quarter and $115 million to $120 million for the year. Noncash comp is expected to be approximately $12 million for the quarter and $50 million for the full year, with transaction expenses approximately $1 million to $2 million for the second quarter. Operating cash taxes are expected to increase to $110 million in the second quarter, as we make the estimated payment for Q1 and still expected to be approximately $280 million for the full year. CapEx should come in at approximately $35 million in the second quarter and $135 million for the full year, so no change there. We expect Nexstar's cash interest expense to approximate $69 million for the second quarter and $285 million for the full year, reflecting interest expense savings related to lower outstanding borrowings, the decline of LIBOR and our recent refinancing activity. For the second quarter of 2021, we anticipate recording approximately $22 million in TV Food Network distributions and continue to think that, that for the entire year will amount to approximately $220 million to $225 million. Turning to the balance sheet. Reflecting our most recent capital markets transactions and $75 million of voluntary payments in Q1 and $5 million of scheduled payments, Nexstar's outstanding debt at 12/31/21 was approximately $7.6 billion. On a total net debt amounted to approximately $7.25 billion at March 31, '21 compared to $7.5 billion at year-end '20. Net debt for first-lien covenant purposes is $4.6 billion with that amount limited netting of cash to $200 million. Our net first-lien covenant ratio at 03/31/21 was approximately 2.14 compared to 2.28 at year-end and well below the first-lien covenant of 4.25. Our total leverage at quarter end was 3.4x compared to 3.6x at year-end 2020. As a reminder, Nexstar's only financial covenant our first-lien debt leverage, which is the aforementioned 4.25x. As always, we remain focused on actively managing our capital structure and expect Nexstar's net leverage, absent additional strategic activity, to be, as Perry mentioned, below 4x at year-end '21. In January, the Board of Directors increased Nexstar's quarterly dividend by 25% to $0.70 per share per quarter and authorized the repurchase of up to $1 billion of our Class A common stock. The Board's repurchase authorization reflects the attractiveness of Nexstar's free cash flow yield and a potential acceleration of share repurchases as our leverage moderates and large-scale acquisitions become more scarce given the current regulatory environment. The 20-plus percent increase in Nexstar's dividend for the eighth consecutive year and the implementation of a significant share repurchase will allow us to continue delivering industry-leading risk-adjusted returns to our shareholders. At the same time, the current dividend payout remains a modest low double-digit percentage of our free cash flow. Consistent with our capital allocation priorities and commitment to enhancing shareholder returns, during the first quarter, we returned $151 million to shareholders through the purchase of approximately 800,000 shares of stock at an average price slightly below $150 per share for a total cost of $121 million and through our upsized quarterly cash dividend payment increased to $30 million. In addition, Nexstar continued to delever on our leverage plan reduction reducing our first-lien debt balance by approximately $80 million. Altogether, during the first quarter, we allocated approximately $231 million in cash from operations towards dividend payments, share repurchases and leverage reduction. In preparation for Nexstar's 2021 proxy and annual meeting, we conducted extensive outreach to our shareholders during the first quarter to update them on the company's recent ESG initiatives and solicit their feedback on these matters. We also expanded the disclosures in our 2020 10-K on our ESG initiatives and launched a corporate and responsibility section on our website, which we will be adding to in the near future. The input and recommendations from our shareholders who elected to engage with the company were presented to the Board of Directors for consideration, and a summary of those efforts will be disclosed in our 2020 proxy. Throughout the company's history, the alignment of our commitment to our local communities and our commitment to our shareholders continues to be a key driver of our long-term success. As a result, we remain focused on evolving our ESG policies and disclosures in a thoughtful manner that supports our employees, communities as well as our goals for growth and enhancement of shareholder value. You can find the copy of the proxy on the SEC website. It was filed in the middle of last week, and we expect the proxy to be mailed sometime later this week. In March, we had a ratings review with S&P, which resulted in a 1-notch upgrade on our corporate issue rating to BB, a 2-notch upgrade to BBB minus on Nexstar's secured debt rating and a 1-notch upgrade on our unsecured bond rating to B plus. S&P's commentary is centered around the rapid deleveraging exhibited post Tribune acquisition and the approved economic recovery. We have similarly requested a ratings review from Moody's, and we are awaiting a response on their review. Looking ahead with operating momentum continuing in the second quarter across our businesses, we expect to generate year-over-year growth across all of our nonpolitical revenue sources throughout 2021. Nexstar has already made significant progress on our leverage reduction goals, and we enjoy a strong cash-generating position, which provides us financial flexibility to deliver growing capital returns for shareholders while reducing debt and investing in our business. In summary, our scale, leadership flexibility, synergy realization and operating plans are generating results, while our capital structure is in great shape from a cost to capital and maturity perspective. Finally, our service to our communities and our local and national advertisers has never been stronger. The solid foundation of our assets and operations, combined with the resiliency of our business model, give consistency and visibility to our results. As such, we remain confident in our ability to enhance shareholder value, deliver pro forma average annual free cash flow of approximately $1.27 billion over the '21/'22 cycle. That concludes the financial review for the call. And now I'll turn it back over to Perry for some closing remarks before Q&A.

Thank you, Tom. We continue to execute extremely well on our strategic priorities, including serving our local communities and driving increased content monetization, while reducing debt and allocating free cash flow to growing capital returns for shareholders. Looking ahead, we have excellent visibility to delivering on or exceeding our free cash flow targets in this current cycle and a clear path for the continued near and long-term enhancement of shareholder value as we follow the successful strategies that we've established in terms of building the top line, maintaining close control of fixed and variable costs and optimizing the balance sheet. Our disciplines in these areas have added consistency and visibility to our results while creating and enhancing value for shareholders. Our guidance for pro forma annual average free cash flow for the '21/'22 cycle is, again, $1.27 billion, and that underscores the strength and resiliency of our operations and ability to continue delivering free cash flow per share that is among the highest in the market. Our strong free cash flow generation is allowing Nexstar to meaningfully increase its return of capital initiatives, as reflected by our recent authorization to purchase up to an additional $1 billion of shares and our 8-year track record of dividend increases of 20% per year or more. We look forward to reporting on our continued growth and accomplishments throughout the year. And on behalf of the entire Nexstar Nation, our Board and our management team, thank you for your continued interest, support, and thank you for joining us this morning. Now let's open the call to Q&A to address your specific areas of interest.

Our first question comes from John Janedis with Wolfe Research.

You've got a good footprint. So can you talk more about the contribution from the gaming category. Can that to be top 5 longer term? And then from a market perspective, did the larger markets lag the rest of the portfolio due to COVID? And if so, how do you see those rebounding as we move into the back half of the year?

Thanks, John. Well, gaming is, in conjunction with lottery and all other gambling spend, is already a top 5 category. In fact, it was the #3 category behind auto and attorneys in the first quarter, and we have every reason to believe that it will be a 9-digit revenue contributor in 2021. As it relates to markets, there's really no hard and fast rule. I would say that New York and its reopening and recovery is lagging behind some of our other markets, New York City particularly. Chicago is maybe a little further ahead, but still not as open or robust as some of our other markets. While Los Angeles, even though in a virtual lockdown until just very recently, our station there is just absolutely excelling. So I don't know that you can apply any one size fits all to geography or market size, but generally, the larger markets have lagged behind the middle and the rest of the country in terms of reopening. But we did see a fairly broad-based support of our 116 markets, 104 exceeded their first quarter revenue and EBITDA budget, which means only 12 of 116 did not achieve that benchmark. So it's pretty robust. And we're very heartened with the reopening and the city employees and all that's going on in New York City because we think that will flow through directly to revenues at WPIX as the year moves on.

Got it. And Perry, let me ask you, there have been a couple of cases where some of the digital players have paid newspaper publishers for news content. Do you see that as an opportunity at some point for the broadcast space?

I think we produce a lot of content on our own. And in those partnership discussions, there's never been, in my view, an equitable split of the economics. So at this point, I think, since we are the largest producer of local content across the country, over 300,000 hours a year of local news, I think we have enough content to fund our own platform.

Okay. And maybe one quick one for Tom. Can you give us an update on the buyback for the year? And if there's ultimately not much on the M&A front, does it grow in the deal?

Sure. Well, obviously, we bought back $121 million in the first quarter, and that was basically in 1 month because we were in a blackout period in the first part of the year. I would say that for a month, that's probably a good representation for quarter-by-quarter. I wouldn't say we're going to buy back $121 million every month. But I would say, if you extrapolated the $120 million for an entire year, that would be approximately $500 million. I would say that's probably a good number, maybe slightly more than that later in the year. But that also has some variance based on if there is some potential M&A. Although M&A, I don't expect to be meaningful; it could be a low 9-figure amount in total for the year, but that would potentially eat into the share repurchase program a little bit. But I would say, we're on trajectory to be at or slightly in excess of $500 million for the year.

Our next question comes from Dan Kurnos with Benchmark Company.

Another nice print. Perry, maybe just first for you. You already kind of talked about this. You guys have a really great visibility setup. But obviously, there pretty prominent public commentary just around retrans. And obviously, there are some tougher comps from the MVPDs in the back half of the year. So just kind of maybe if you want to give your own perspective on the retrans cycle and how much life there is still left on that? And then Tom, look, fixed costs, again, down 4% year-over-year. You've done a great job kind of keeping that down. I think it's hard for some of us to get sort of a handle on how much of the COVID savings are continuing. So just maybe sort of how we should think about expense growth over the balance of the year would be super helpful?

I believe regarding retransmission, I may have mentioned this in the previous call, I have updated my perspective on our goals. I think we have actually pushed our targets further ahead, and the potential may be greater than I initially anticipated for our major networks or total revenue. Despite what some might say, retransmission is not finished. We are very encouraged by our analysis of the trailing 12-month subscriber trends. Looking back at the first quarter of last year, our actual subscriber loss was in the mid-to-high 6% range on an annualized basis, while this year, in the first quarter, it's in the low 5% range. We believe, as previously stated, that subscriber declines will eventually stabilize, and we are able to achieve unit rate increases and continue to drive double-digit growth in both our top and bottom lines. So from that viewpoint, our outlook remains unchanged, other than I now believe we may have more growth potential than I originally thought three to five years ago.

And Tom, on the cost side?

On the cost side, I apologize for any misunderstanding. Costs are expected to be more challenging. We are facing tougher comparisons, especially in Q2 and Q3, where we made significant cost reductions last year. As a result, achieving comparable cost reductions for Q2 and Q3 this year will be more challenging. Nonetheless, I believe our fixed costs will be lower. Our variable costs may increase slightly due to anticipated growth in advertising revenues compared to Q2 and Q3 of last year, but our fixed costs will continue to decrease throughout the year.

Our next question comes from Jim Goss with Barrington Research.

First question relates to a comment you made in the text that you had noticed a difference in the pace of recovery advertising and bad geography. I wonder if you might expand on that and talk about any implications we should read into that?

Yes. As I said earlier, that's primarily pointed at New York, which is New York City, which has kind of lagged behind most of the markets in our universe. Unlike Upstate New York, that is very robust in terms of comps to the prior year. But it's primarily New York City that has lagged behind. And with the announced reopening, we think that business activity will begin to accelerate. Beyond that, as I said, it's pretty widespread recovery, perhaps a little less in New York, Chicago, L.A. But again, as I said earlier, our L.A. station in that marketplace is excelling, both digitally and linear television. And we think the secret sauce there is they produce about 90 hours a week of local content, which is way more than anybody else in the market, and people are very interested in what's going on these days. So that's about the extent of the differences in the commentary.

Okay. That's great. KTLA has always been a great station. Are you still an investor in the TV Food Network, or are there opportunities for programming on your platform using some of their content, perhaps for a special show or something similar?

Jim, I am on the Board, and that is a possibility. Currently, Food Network is concentrating on maximizing their content with the new Discovery Plus, which we will engage with from Food Network's standpoint. We receive a share of any advertising revenue from the Food Network channel as well as the Cooking Channel. Additionally, we receive a portion of the subscriber fees on Discovery Plus. It's important to remember that there are two main drivers on Discovery Plus: HGTV and Food Network, and we own 31% of one of these. Therefore, it will contribute positively to our financial results this year. However, they are in a rollout phase currently. A significant part of the subscriber base comes through Verizon, which is currently attracting subscribers without a fee for a period of time. It will take some time to determine the exact outcome, but it will be a positive addition for us this year.

Okay. That's great. Great insight. And lastly, I might ask if you have any expectations as to the FCC with the new group in Washington in terms of ownership caps or 2 stations in a large market or anything else that you think might be important to you?

We don't anticipate much activity in the short term. The Supreme Court has essentially overruled the third circuit court, and the decision will be sent back to them to be forwarded to the FCC to restore the previous rules. This is all procedural and will take some time. It does not impact the national cap or our ability to expand into new markets on a linear basis, but it may create some opportunities for us to acquire second stations in markets where we were previously limited by the 8 voice test, which could provide a slight advantage. Additionally, any combinations involving the top four firms will still require case-by-case approval, so we're uncertain about the specifics of those regulations. Sorting all this out will take a while, but we do have a strategy in place and potential opportunities identified in each of the markets where we currently operate only one station. However, I don't expect these opportunities to materialize significantly in the short term, possibly later this year or into 2022. Thus, I wouldn't foresee any major developments happening immediately.

Our next question comes from Steven Cahall with Wells Fargo.

So maybe just a big picture question, Perry and Tom. I think there's now about 40 million homes that don't take any form of the bundle and maybe never will, and that pool might be growing. You've got a lot of cash that you're generating. You've started to make some digital investments. You talked about digital growing and profitability this year. How do you just think about targeting those 40-some million households that aren't going to be participating in the traditional bundle? And how you get your content in front of them and using your balance sheet to maybe grow those assets over time? And then I have a quick follow-up.

Sure. Since going public in 2003, we've consistently noted that about 15% of our television households do not use a pay service. This number has increased slightly, bringing it down to the low 80s in terms of pay TV households, which includes both traditional and virtual MVPDs. However, this is not a significant change, and the attrition has been much less than we anticipated. We are confident in our growth prospects. We reach viewers every day over the air, which predates the current popularity of OTT. These viewers also access our digital networks. Antenna TV has experienced substantial growth over the past year, particularly as rescanning TVs now reveals new channels available for over-the-air consumption. We plan to launch a second digital network, REWIND TV, focusing on content from the 70s and 80s, while Antenna TV targets the 60s and 70s. This presents a near-term opportunity for us. In addition, our future spectrum endeavors will aim to reach all households, particularly those capable of receiving a 3.0 signal over the air. This is important as we consider the implications of sports betting, where latency in streaming services can hinder the ability to make timely prop bets. Traditional cable or over-the-air delivery may become more appealing for sports bettors. We continue to serve this audience daily, and because they have fewer channels, our advertising is more valuable in those homes due to reduced competition. Overall, we see gradual changes rather than drastic ones.

Thanks. And then maybe just on the balance sheet, the comment of staying below 4x maybe implies that there'll be some upward pressure on leverage as you move through the year. Just wondering if that reflects anything contemplated in terms of uses of cash? Or if that's just a reflection of some more COVID impacted quarters hitting the trailing 8-quarter EBITDA calculation?

I would say it's even more linear than that. We're expecting to lose $400 million in political revenue in the third and fourth quarters of this year. This will increase leverage, which is a natural occurrence. In an odd-numbered year, I don't think this has anything to do with capital allocation. We did manage to compensate for $50 million of lost political revenue in the first quarter. However, those figures become quite significant in the third and fourth quarters, and we don't expect to recover that lost revenue until 2022.

Our next question comes from Craig Huber with Huber Research Partners.

Can you discuss the TV advertising pacing for the second quarter? Last year, it was down about 35% due to the pandemic. How much do you think you can recover this year? How close do you expect to get to the comparable levels of 2019 in terms of revenue for the current quarter?

I can share the results for April. In that month, ad-supported revenue increased by 62% compared to the previous year. The broadcast segment, which includes political advertising, grew by 73% over the prior year. If I project that trend forward to 2019, we anticipate being slightly down in the low single digits compared to the second quarter of 2019 based on our internal projections. However, we expect to recover a significant portion of what we lost, if not all or more, in Q2 from an ad support perspective.

My next question, please. I believe in the past, you've said you expect net retrans for the year to be up low double digits. Is that still the case? And just on a preliminary basis, do you think it will still be up next year?

Yes and yes.

Very helpful. I like that. Okay. And then next, you touched on this a little bit, but your SG&A line up 10% year-over-year, but then you talked about some reallocation of costs in that line. I don't want to get into accounting discussion here because I don't want to waste your time on that. But what should we expect your SG&A line going forward? It seems like the last 2 quarters, it's been roughly around $200 million each quarter SG&A, is that reasonable to expect going forward? How should we think about that?

I'm not really able to discuss specific expense figures for Q2 or later. However, I believe the reallocation took place in Q1, which will influence future outcomes. When comparing it to the same quarter last year, there will be adjustments, but considering the new distribution of total operating expenses, excluding corporate, between sales and SG&A and direct, I think Q1 will be a good indicator of those proportions moving forward.

What was the biggest change you had to make in your reallocation there?

No, it's not really a change. It's just an allocation of cost of goods sold for digital products. When we're selling third-party websites, is it a direct operating expense or is it a sales expense?

And then my other question, if I could ask, just go through the percent of your retrans subs, again, that renewed last year, what percent up for renewal this year? I believe they're all at year-end and what percent is for next year, please?

It was 18% last year. It is in the high single digits this year. The number fluctuates a bit less. I expect it to be between 60% and 70% next year.

Our next question comes from Aaron Watts with Deutsche Bank.

One follow-up on the core ad, specifically auto. It sounds like the category is performing better now. Just to be clear, am I correct to say that auto was still down year-over-year in the first quarter? And then looking forward, can auto return to year-over-year growth in the next couple of quarters given the supply chain headwinds that you mentioned earlier, Perry?

Auto was down in the first quarter, a low single-digit compared to the prior year. It depends on the chip shortage. At some point, there will likely be a significant increase in demand from people seeking cars that they can't find. I'm not sure if that demand surge will happen in the third or fourth quarter, but I expect it will be there. I don't think it will occur in the second quarter. However, our auto performance is relatively on par with the first quarter performance when compared to the previous year.

Okay. Got it. And then second, we had seen some headlines a while back now around some networks intend to prioritize growth of their nascent streaming platforms, perhaps over that of the linear broadcast. Have you had any further discussions with your partners around that? I'm just curious your latest thoughts there.

We have discussions all the time. They have their corporate priorities, and we have ours. And so I don't think anybody is going to change anybody's mind. I think we'll see down the road how streaming plays out and what the churn rates are on these products. I think there'll be probably 2 or 3 winners and everyone else will be in a less good place. And so we'll see where we are over the long term. We're not too excited about. We don't get too excited about these things because having been in the business 42 years, it seems the more things change, the more they ultimately kind of gravitate back to a traditional model. And so I think that would tend to favor what we do over the long term. But obviously, we all have to work our way through these shiny new things.

Okay. Got it. That's helpful. One last one for me. We had a notable announcement yesterday in the space from Gray and Meredith, the latest several consolidation transactions over the past couple of years, and certainly, Nexstar has taken part. Does all this consolidation change the competitive dynamic at all on a market-to-market basis for you? And then, I guess, more holistically, do you view a more scaled local TV space overall as a positive relative to the evolving video landscape and some of the pressures facing the traditional distribution channel?

We firmly believe in the importance of scale, not just nationally, but also because we currently operate in every market in New York. We are focused on creating unique content and advertising opportunities that set us apart from competitors. This also applies in states like Tennessee, Illinois, Missouri, and California. We see significant value in this, especially now that we have all our stations and digital properties aligned under one roof. This consolidation is beneficial for the business, and we believe that strong companies positively impact the industry. In video distribution negotiations, having scale is crucial and can often be the deciding factor. It's vital to maintain our importance in the market. I want to extend my congratulations on the acquisition of the Meredith stations. Based on our internal analysis, if everything proceeds as planned, they will form a broadcasting entity about half our size. I believe our company is unique; no one has been able to replicate what we've accomplished in linear television due to the lack of transformative transactions available. We are pleased with our scale and are starting to harness the economic advantages of it at regional, state-wide, and eventually, national levels. More updates will follow.

Our next question comes from Kyle Evans with Stephens.

Tom, thanks for separating out Best Reviews in digital. Could you update us on the rough percent split between national and local in the digital segment? And then maybe give us some high-level thoughts on M&A in that segment?

Kyle, I'm unsure if I have the specific local versus national splits for digital. We don't typically analyze it that way. It is significantly more local than national, but I don't have the exact percentage.

Okay. Fair enough. And then maybe just some early thoughts on the 2022 political cycle.

2022 election cycle?

Yes.

Okay. Well, listen, we got our first orders over the weekend for the recall election in California. So don't discount 2021 in terms of being a political year; that is maybe ahead of our expectations. But we obviously think that both the House and the Senate will be in play in 2022 who controls those. I think if you look at some of the early elections here, the incumbent party usually loses seats in the midterms, and we think this will be no exception. And losing enough seats means losing control and the balance in both houses is precarious. So we expect a lot of spend in those races. We also have several visible gubernatorial races in 2022. So we think it will be a very healthy year. There is a number embedded in our guidance. It is somewhat less than 2020, but maybe not as far down as you would think. But we anticipate the political cycle to continue to grow and be robust in the off-cycle years as well as the presidential election years.

Our next question comes from Alan Gould with Loop Capital.

Numbers are excellent. I was wondering if you can talk strategically about our big picture, what's happening in terms of ratings, particularly ratings of the local news? And are you able to capture how much of the audience is moving from your local TV stations to your digital properties?

I would say that compared to last year, when we experienced a significant increase in local news viewership reaching 20-year highs across nearly all day parts, there has been a decline from those peak levels. However, we are still collectively performing better than pre-pandemic viewership levels for our local news products across all markets. We're pleased to see some retention in these numbers. As we move into the next political cycle, we anticipate this retention will continue. In terms of the shift from local television to our websites and apps, we are beginning to analyze data on our digital users, which helps us understand their movement, but we cannot determine if they were previously watching linear TV. Therefore, I don't have complete information on this transition. Our objective is to serve our viewers and marketing partners on all platforms and screens, using a unified approach to content access, and we aim to facilitate their ability to sell products regardless of how they consume our content. However, tracking the movement between digital and broadcast accurately remains challenging.

Thanks, Perry, if I could just follow-up. What is the common currency you're looking at using?

It's all about impressions. Broadcast television is currently the only medium that sells ratings. If we were to sell based on impressions, known as thousands across digital, linear, diginet, cable networks, and broadcast, and establish a common currency, it could significantly benefit our business. There are initiatives like TBB and Tip that are working towards this goal. Other companies are also collaborating with us to convert all audience metrics into a common currency of impressions. It seems straightforward, yet it feels counterintuitive that it hasn't been implemented yet. However, momentum is building as more people recognize the value of selling impressions instead of ratings. It’s perplexing why we continue to market the smaller figure of ratings when impressions could provide greater insights. We need to simplify our business processes, as I believe that doing so would attract more investments, given that everyone recognizes the enhanced value proposition.

Before we take another question, I did go back and look up some information on Kyle Evans' question. It's about 65% local, about 15% national and about 20% consumer, which is basically Best Reviews.

Our next question comes from John with JK Media.

I have a few quick questions. Tom, I noticed that cash outlays for TV programming rights are trending down. Is that trend going to continue? And why is that happening?

That's really all around WGN America News Nation using less syndicated programming as are some of our larger stations locally are using less syndicated programming because we're doing more local news.

So this will continue?

Yes.

Okay. CapEx for the year, I may have missed that.

$135 million, John.

Okay. What is the difference between the 43 million shares and the 45 million fully diluted shares? What does that do to?

That's really outstanding options and RSUs.

Okay. Could you confirm for me that stock-based compensation is not part of the free cash flow calculation?

It is a noncash item. So it is part of free cash flow.

So it's not part of free cash flow or it's an add back to free cash flow?

It is added back. If you look at the press release that we put out, there is a reconciliation of free cash flow on Page 8. In that, we add back the stock-based compensation expense, which is a noncash item.

Okay. Okay. That will be maybe, what, 30 million or 40 million for the year?

It will be about 48 to 50. And that is the unintended consequence of a higher stock price.

Okay? Not today. Anyway, lastly, just a quick incidental. Any thought being given to split the stock?

We've looked at that, John, and I've got studies on my desk that show there could be a benefit in the study saying there's no benefit to no long-term benefit to that. So no plans to do it currently, and we've got other priorities that would be ahead of that in any event. But I'm not convinced that there is a long-term benefit to doing it, although we've certainly asked the question on a number of occasions.

This concludes today's Q&A. I would now like to turn the call back over to Perry Sook for closing remarks.

Thank you very much, everyone, for joining us. We look forward to gathering together in 3 months' time to update you on all of our initiatives and our operating performance for Q2. Have a great afternoon.

Thank you, ladies and gentlemen, this concludes today's teleconference. You may now disconnect.