Nexstar Media Group, Inc. Q2 FY2021 Earnings Call

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

Thanks, Shelby, and good morning, everyone. Let me just go through the safe harbor language, and then we'll get right into the call. All statements and comments made by management during today's call other than statements of historical fact may be deemed forward-looking statements for 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 in the forward-looking statements made during the call. For additional details on risks and uncertainties, please see Nexstar's annual report on Form 10-K for the year ended December 31, 2020; 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 my pleasure to turn the call over to your host, Nexstar Chairman, Founder and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joe, and good morning, everyone. Thank you all for joining us to review Nexstar's second quarter, which highlights our success in achieving a faster and stronger-than-anticipated recovery in core advertising, another period of double-digit distribution revenue growth and profitable digital revenue growth. Overall, our record in second quarter net revenue, net income and adjusted EBITDA were all well ahead of consensus expectations while free cash flow represents the timing of our 2021 operating cash tax payments, largely related to operating results exceeding the prior estimates. Our solid second quarter and first half of 2021 reflect the resiliency and the adaptability of our business and our long-term strategies to leverage our scale to drive top line growth through increased content monetization and diversification. We're extremely proud of the consistent strength of our operating results and of the more than 12,000 members of the Nexstar Nation across the country who, while serving our local communities have offset many of the challenges presented by the pandemic, putting Nexstar on a path for continued success and growth. With our year-to-date operating results pacing ahead of internal forecasts, this morning, we increased our pro forma average annual free cash flow guidance for the '21-'22 cycle by $60 million to approximately $1.33 billion or approximately $31.50 per share. Tom Carter, Nexstar's President, Chief Operating Officer and until next week, CFO, is on the call this morning with me, and we'll review the quarter, our outlook, our plans for continued capital returns and our confidence in achieving our upsized pro forma average annual free cash flow guidance for the '21-'22 cycle. Before getting into the quarterly highlights, we're very excited to welcome Lee Ann Gliha, an accomplished finance leader with more than 20 years of experience in TMT Investment Banking and company operations, who will assume the CFO role from Tom next week. Lee Ann's appointment is another component of our previously disclosed operating structure changes to support our company's next phase of growth. Last November, we combined our broadcasting and digital operating subsidiaries under Nexstar Media Inc. to align the company's national leadership and local content production with its management teams and Tom assuming the additional role of President and Chief Operating Officer. Lee Ann's background and relationships will be instrumental in advancing our strategic objectives as we execute our long-term transition and further monetize our content, our spectrum and other assets. Overall, we're confident in the actions that we've taken over the past year and the management team that we've put in place, we feel positions Nexstar to continue providing outstanding content and service to our local communities while extending our record of delivering exceptional financial results and industry-leading risk-adjusted returns for our shareholders. Just as a side note, recent speculation regarding my retirement is just that. And I look forward to working with Tom, Lee Ann, Andy Alford, our President of Broadcasting; Karen Brophy, our President of Digital; Sean Compton, our President of Networks and all of our teams at corporate and across the country as we build on our strong growth momentum to continue delivering industry-leading capital returns and creating new value for shareholders. With respect to capital returns, during the second quarter, we repurchased approximately $138 million of our Class A common shares while returning an additional $30 million to shareholders through our quarterly cash dividend. Through the first 6 months of 2021, Nexstar allocated approximately $319 million towards share repurchases and dividends, while maintaining total net leverage well below 4x. By the end of this quarter, we will easily exceed the $383 million in total capital returns to shareholders in all of 2020. Our 2021 repurchase activity to date and our Board's remaining authorization to repurchase $916 million of additional shares underscores our confidence in the resiliency of our business model, our free cash flow prospects and our solid financial position. Operationally, Nexstar's strong rebound and start to 2021 continued in the second quarter with net revenue rising 23.7% over the prior year to $1.13 billion as we more than offset the approximate $13 million year-over-year decline in political advertising. Our top line revenue growth combined with expense management with operating expenses as a percent of revenue declining 400 basis points from last year's Q2 all drove our second quarter adjusted EBITDA and free cash flow before one-time transaction expenses to $419.7 million and $181 million, respectively. Nexstar brought over 37% of our Q2 net revenue to the adjusted EBITDA line before the one-time expenses. You can expect Nexstar to further leverage its scale and operational excellence to generate significant free cash flow in the balance of 2021 and beyond. Total television advertising revenue increased 35.1% over the prior year, reflecting a 42% rise in core advertising revenue outpacing our expectations and highlighting growing demand for our premium local content and our national marketing solutions. As we've done consistently for many, many quarters, Nexstar's local sales initiatives continue to deliver healthy levels of new business with our sales teams generating a record $32.9 million of second quarter new-to-television revenue, marking a 59% increase over the prior year and an 18% rise over the first quarter of 2021. Nexstar's new business strategies, ongoing sales training, performance focus and incentive structures all continue to provide highly effective results, and they are key differentiators as we help businesses large and small with their recoveries and business-building strategies. 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 second quarter, total revenue in Nexstar's top 10 ad categories was 53% ahead of the prior year and 44% ahead of our 2021 first quarter. We recorded gains in all of our top 10 categories with the biggest dollar gains in our top 2, auto and attorneys. From an overall growth standpoint, the lottery and sports betting category had the biggest percentage increase growing by 282% over last year, and this category remains very hot across all of our platforms. The broad-based rebound across our top 10 categories continues in Q3 as small and midsized businesses have begun to return to the ad market. 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 and deeper into the year. Moving on to retrans. Second quarter 2021 distribution fee revenue rose 15% year-over-year to approximately $617 million. The growth reflects distribution agreement renewals in 2020, representing about 18% of our subscriber base, the additions related to Mission Broadcasting acquisition of WPIX and stabilized subscriber trends across our platform that remain consistent with our expectations and support the ongoing distribution fee growth and net retrans margin trends that we project. We continue to have good visibility under our contractual distribution economics, with over 85% of our Big 4 affiliations contracted through December 31, 2022. We expect continued retransmission revenue growth, reflecting our contract renewals, representing a high single-digit percent of our subscribers this year and approximately 65% of our subscribers in 2022, resulting in a higher rate of growth from this revenue source going forward into 2023. Distribution, digital and other revenue growth continued to contribute to our ongoing revenue diversification push. In the second quarter, distribution, digital and other revenue accounted for about 61.8% of all net revenue. Looking forward, we expect continued growth from all of our non-political revenue sources for the balance of 2021 with similarly high levels of overall revenue diversification. Speaking to digital second quarter 2021 total digital revenue increased 57% to approximately $73.4 million, with digital profitability up again substantially over last year. The results benefited from our actions over the last year to discontinue and deemphasize certain less profitable digital operations and lines of business as well as the strategic operational realignment we spoke about effective last fall. Our top line increase was driven by strong year-over-year growth in our local digital advertising revenue, our agency services business and contributions from last year's accretive acquisition of BestReviews, which is fully integrated and performing well. Nexstar's integrated content and audience development strategies continue to deliver impressive audience engagement stats with our media content and significant consumer digital usage across all of our networks and our 400-plus digital touch points. We continue to build on Nexstar's Digital's 2020 strength when our properties delivered record growth and 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 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 our realization this year of the mid-7-figure expense savings resulting from our strategic operating alignment of our broadcasting and digital businesses, we should see continued cash flow growth from digital. In June, Nexstar marked its 25th anniversary of the company's founding. Over these 2.5 decades, the company's transformational growth and financial success highlights our culture that is committed to localism and operational excellence. We've built upon that foundation with our innovation, monetization and revenue diversification strategies and highly disciplined approach to expense management, M&A and capital allocation. We now sit as the largest broadcast group and the top producer of local news in North America, and we're actively mobilizing our resources at scale to leverage the many opportunities we see across the business over the near and long term to deliver growing levels of content monetization. Overall, we're confident the actions we've taken over the past year positioned Nexstar to continue to provide outstanding content and service to our local communities while extending our record of delivering exceptional financial results and industry-leading risk-adjusted returns for our shareholders. With that said, let me turn the call over to Tom for the financial review and update. Tom?

Thanks, Perry, and good morning, everyone. I'll now review Nexstar's Q2 income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance. Second quarter net revenue increased 23.7% to $1.13 billion. Excluding political, second quarter net revenue increased approximately 26%. Total television advertising revenue increased 35.1% to $432 million, reflecting a 42% rise in core ad television revenue to $424 million and the anticipated year-over-year reduction in cyclical political advertising to $8.5 million. Distribution fee revenue increased 15% to $616 million, reflecting distribution agreement renewals and Mission Broadcasting's acquisition of WPIX in New York, both of which occurred at year-end 2020. Digital revenues increased 57% to $73 million, with digital profitability up substantially over the comparable prior year period, reflecting the successful alignment of our digital operations and contributions from our 2020 December accretive acquisition of BestReviews. On a same-station basis, total net revenues were up 20%. Net revenues excluding political were up 22%. Core advertising revenue was up 38%. Distribution fee revenues were up 12.5% and digital revenues were up 25%. The increase in reported second quarter direct operating expenses net of the trade expense and SG&A expenses primarily reflect higher revenues related to the recovery in core and digital advertising as well as expenses from our fourth quarter 2020 station and digital acquisitions. As a percentage of total net revenue, combined second quarter direct OpEx and SG&A expenses declined 415 basis points reflecting Nexstar's ongoing emphasis on expense management and driving efficiencies across the organization. Second quarter pro forma fixed expenses, excluding program expenses, were up 4% over the same period in 2020 as we started to add back certain expenses that were suspended in 2020 in response to the pandemic. Total corporate expense of approximately $42 million, including non-cash comp expense of approximately $10 million was in line with our guidance for the second quarter. During the quarter, we recorded one-time transaction cost of slightly less than $1 million. Ongoing CapEx totaled $33.5 million and was in line with our second quarter guidance. Spectrum repack CapEx totaled approximately $1 million and received approximately $7 million of reimbursements from the FCC during the quarter. As a reminder, we anticipate being fully reimbursed for all CapEx-related spectrum repack as those activities wind down later this year. Second quarter total interest expense amounted to approximately $70 million, down 15% from $82 million in Q2 of '20. Cash interest expense was approximately $66 million compared to $78 million last year, with a decrease due to lower interest rates and lower first lien borrowing levels. Second quarter operating cash taxes were $167 million and came in above our guidance of $110 million, largely due to enhanced profitability in the first half of 2020 and our reforecast of associated taxes and the timing of cash tax payments for the year. During the second quarter, we reported approximately $30 million in distributions from equity investments related to our 31% ownership in the TV Food Network as that entity continues to produce strong results. Second quarter adjusted EBITDA of $419 million increased 41% over the prior year, exceeding our budgeted amount and with the strong leverage in our business model, adjusted EBITDA margin of 37% improved 500 basis points meaningfully exceeding consensus expectations, while free cash flow of $181 million was impacted by the aforementioned timing of cash tax payments. As Perry mentioned, with our year-to-date operating results pacing ahead of our internal forecast, we are raising our pro forma average annual free cash flow guidance for the '21-'22 cycle by $60 million to approximately $1.33 billion, which supports our view that Nexstar's path to growth, expanded returns of capital and enhanced shareholder returns remains on plan. Looking ahead, we project recurring cash corporate overhead, exclusive of stock comp and transaction cost to be approximately $32 million for the quarter, and we continue to expect corporate overhead of approximately $115 million to $120 million for the year. Non-cash comp is expected to be approximately $13 million for the quarter and less than $50 million for the full year. Transaction expenses are approximately $2 million for the third quarter. Operating cash taxes are expected to be approximately $70 million for the third quarter and we are now projecting operating cash tax of approximately $310 million for the full year on improved profitability, largely realized in the first half of '21 so far. CapEx should come in at approximately $33 million for the quarter and $135 million for the full year, which continues to be static with our previous guidance. We expect Nexstar's cash interest expense to be approximately $70 million for the third quarter and $275 million for the full year, reflecting interest expense savings related to lower outstanding borrowings, the decline in LIBOR rates and our recent refinancing activity. For Q3 of '21, we anticipate recording approximately $12 million in TV Food Network distributions, which were approximately $230 million for the full year. During the second quarter, Mission Broadcasting closed on a new $300 million Term Loan B facility. The net proceeds for Mission's new Term Loan B were used to pay down borrowings under the existing revolving credit facility paid share service fees to Nexstar and for general corporate purposes. In addition, concurrent with the closing of the Term Loan B facility, Mission reallocated $255 million of its revolving credit facility commitments to Nexstar's availability. At quarter end, there was a total of approximately $366 million available under the 2 revolving credit facilities. Turning to the balance sheet, reflecting Mission's capital markets transactions. Outstanding at June 30 was approximately $7.6 billion and consisted of $4.8 billion in the term loans and revolver balances, with the balance in 2 issues of senior notes at Nexstar. Total net debt amounted to approximately $7.3 billion at June 30 compared to $7.5 billion at December 31, 2020. Net debt for the first lien covenant purposes was $4.6 billion, with net cash limited to approximately $200 million. Our net first lien covenant ratio at June 30 was approximately 2.1x compared to 2.28 at year-end 2020, which is well below our first lien covenant of 4.25x. Our total leverage at quarter end was 3.3 compared to 3.6 at year-end 2020. As a reminder, Nexstar's only financial covenant is on our first lien debt, 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 well below 4x at the end of 2021. Consistent with our capital allocation priorities and commitment to enhancing shareholder value. During the second quarter, we returned $168 million to shareholders through the repurchase of approximately 926,000 shares for a total cost of $138 million and through our upsized quarterly cash dividend payment of $30 million. Our team's success in generating faster and stronger-than-anticipated recovery in core advertising as well as our continued double-digit distribution and digital revenue growth, allow Nexstar to generate year-to-date free cash flow of $665 million and returned $319 million to shareholders through share repurchases and dividends during the first 6 months of '21. Reflecting all shares repurchased to date, Nexstar has approximately 42.2 million shares of Class A common stock outstanding and has approximately $916 million available under our share repurchase authorization. In addition to our return of capital initiatives, Nexstar will continue to deliver on our leverage reduction plan. Following Nexstar and Mission's second quarter capital markets activity, we allocated approximately $80 million in cash from operations towards debt reduction earlier in July. As Perry mentioned, we're very pleased to welcome to Nexstar Lee Ann Gliha, who will be assuming the position of CFO on August 9, allowing me to fully transition to my role as Chief Operating Officer. In the coming weeks, I'll be working with Lee Ann to ensure a seamless transition. Perry, the Board of Directors and I are confident in our ability to advance our strategic objectives while extending Nexstar's long-term record of outstanding financial results. I look forward to working with Lee Ann and introducing her to our followers on Wall Street over the coming months. Looking ahead with operating momentum continuing in the third quarter across our businesses, we expect to generate year-over-year growth across all of our non-political revenue sources throughout 2021. We enjoy a strong cash-generating position, which provides us with the financial flexibility to deliver growing capital returns for shareholders while reducing debt and investing in our business. In summary, our scale, leadership, flexibility and operating plans are generating results while our capital structure is in great shape from a cost of capital and maturity perspective.

Finally, our service to our local communities and 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 and deliver on our upsized pro forma average annual free cash flow guidance of approximately $1.33 billion over the '21-'22 cycle or approximately $31.5 per share. With respect to our ESG and local community initiatives, we continue to cultivate a culture that values collaboration, inclusion, diversity, innovation, integrity and celebrating each team member's contributions and accomplishments. At Nexstar, ESG is an ongoing mission. We are in the early stages of integrating the philosophy and principles of ESG into our media businesses and are devoting the time, energy and resources necessary to keep ESG at the forefront of our thinking. We have always and continue to firmly believe that ESG is good for business and good for Nexstar. In this regard, we continue to codify environmental, human resources and other practices that we're doing into policies and have expanded our ESG disclosures on our corporate responsibility pages on our website. I hope you will take the opportunity to review these progress on this front. That concludes the financial review for the call, and I'll now turn it back over to Perry for some closing remarks before Q&A. Thanks very much, Tom. We continue to execute extremely well on our strategic priorities, including serving our local communities and driving increased content monetization while allocating growing levels of free cash flow to capital returns for shareholders maintaining modest leverage and pursuing accretive M&A and return focused investments in our business to drive future growth. Looking ahead, we have excellent visibility to delivering our new upsized free cash flow targets in the current cycle and a clear path for the continued near- and long-term enhancement of shareholder value. As we follow the successful strategies 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 new value for our shareholders. Our new guidance for pro forma average annual free cash flow for the '21-'22 cycle of $1.33 billion 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 overall market. Our strong free cash flow generation is allowing Nexstar to meaningfully increase its return of capital initiatives as reflected by our current authorization to repurchase up to an additional $916 million worth of shares and our 8-year track record of dividend increases of 20% annually or more. We look forward to reporting on our continued growth and accomplishments and on behalf of the entire Nexstar Nation, our Board and our management team, thank you for your continued interest, support and for joining us today. So now let's open the call to Q&A to address any areas of specific interest.

We'll take our first question from John Janedis with Wolfe Research.

Perry, I'll have to keep the champagne on ice. I had a couple of questions. One is, look, I know there's a lot of noise from last year between COVID and political advertising. But can you talk about what you're seeing in the underlying growth in the third quarter? And do you expect improvement in auto? And then separately, bigger picture with the networks, pushing sports viewership to their streaming platforms. How are you thinking about audience trends and revenue opportunities over the next few years? And to what extent your local programming serves as a retention tool?

Sure. First, regarding the third quarter, I spoke with the President of one of our representative firms yesterday, and they are forecasting a return to, and possibly exceeding, 2019 levels in core revenue. The automotive sector still faces some challenges due to supply chain issues. However, they mentioned that we are seeing an influx of advertisers. This marks a significant improvement from just two weeks ago in terms of pending business and their ability to meet or surpass 2019 levels for the remainder of this year. We are very satisfied with the third quarter projections from our management teams, which align with or exceed our collective forecasts, and now we need to execute. The underlying trend looks promising, and the pacing indicates continued progress. In terms of sports programming, there is more available across various outlets than ever before. Our focus remains on the aspects we can control, primarily our network affiliations and our local content. Our local content is crucial for retaining consumers, and it is the primary area where we can exert influence. We are committed to increasing and differentiating our local content across all platforms, including digital, mobile, and linear television. We acknowledge that the fragmentation of sports audiences is, in part, driven by how copyright owners choose to distribute content. While we have limited control over this aspect, we aim to maximize the opportunities we have. Despite a challenging environment for automotive advertising, we have performed well with Olympic advertising. Additionally, we have various projects like "Remarkable Women" and initiatives for Hispanic and African-American heritage months, which feature exclusive content that differentiates our offerings in the marketplace. In September, we will launch a campaign with Feeding America to raise awareness about food insecurity and hunger in the U.S. These initiatives tend to garner company-wide support across our stations and News Nation while attracting advertiser backing for public service efforts. These are the areas we will continue to prioritize and manage.

We'll take our next question from Dan Kurnos with Benchmark Company.

Another solid quarter, everyone. Digital used to be a topic that generated some concerns, but it now appears to be gaining positive momentum, particularly after you have streamlined and optimized the portfolio. You mentioned in your prepared remarks how BestReviews is performing. It would be helpful to get more details on that and your thoughts on potential mergers and acquisitions to enhance it, as well as the growing diversification strategy. Perry, you announced the expansion of News Nation programming, which wasn’t unexpected. Could you discuss its performance, what you are observing, why you are proceeding with that, and what the next steps are from here?

Dan, I'll take the digital question, then I'll let Perry address News Nation. Specifically from BestReviews, it's performing as expected. Double-digit revenue growth, improved EBITDA. We are making a good amount of investment in BestReviews as well. The number of reviews that they have done so far this year is about fivefold of what it's done historically. So we're feeding the pipeline. And if you go on local websites from Nexstar, they're not all up and running yet, but by the end of the third quarter, we'll be across all websites on Nexstar, and that's obviously our own fulfillment and our own delivery of those customers. So that's a very good economic equation for us. So we're very excited about that because it also begins and kind of gives us an entry point into the consumer retail space. It's an affiliate model, so it's not advertising-driven or advertising-centric. So it's kind of a diversification from a digital perspective. And I think you'll see more of that going forward. But really, what it comes down to is the biggest difference in our performance and our profitability after we cycled out of some of the prior businesses that we're in is we're a media company. We generate content, and we distribute it. we shouldn't be any different in digital than what we are in linear television or on broadcast, which is making good consumer content that's valuable and then monetizing it on as many different platforms as we can. That's what we're doing on digital. I think we got away from that to a degree for a period of time. And new management in digital has helped us refocus on that. And I think that's a winning financial proposal from our perspective. As you can see from the engagement numbers, from the user numbers, et cetera, we're continuing to make great progress and be kind of leader of the pack from that perspective as it relates to digital. Perry?

We have several ongoing conversations regarding follow-on acquisitions, including one scheduled for later today and another later this month that align with our content strategy. In September, we announced an expansion for News Nation, which includes launching a morning show and bringing Dan Abrams to prime time, both of which were well received by our advertisers. We have achieved significant milestones. As I mentioned in our last call, we are now achieving the same cost per point in the scatter market as CNN, which I thought would take years. Although our rates are lower due to smaller viewership, being seen as a peer in the news industry is a notable achievement for Sean Compton, Michael Corn, and their team in a relatively short time. Our distribution on OTT platforms has reached nearly full capacity, which I also thought would take longer than a year, thanks to the efforts of our distribution team led by Dana Zimmer and her team in Philadelphia. We are set to launch a major promotional campaign for News Nation after Labor Day, reaching 68% of the country through our owned stations, along with significant ad spending on social media and other channels, created by the team at Leo Burnett in Chicago. Our primary goal is to increase awareness. When we launched News Nation, only 10% of the country knew about it; now we're at 16%, which means 84% of the audience is still unaware. That's our top priority. I have confidence in our content quality, and I believe we're building on a strong foundation. We're ahead of our structural goals, and we plan to further develop our programming after launching our shows in September, covering Monday through Friday except for the hours of 10:00 a.m. to 5:00 p.m. Our focus for 2022 is to complete the 24/7 broadcast schedule for weekdays, and then we will tackle weekends as we move into 2023. I'm very pleased with our progress and the talented people we are attracting to key management roles. There’s noticeable recognition of our efforts, with many expressing interest in joining us. We feel we have great momentum, and although the current numbers are small, we started with profitability, which we expect to grow as our audience increases.

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

It is clear that Nexstar has evolved into this very solid national company. I'm wondering, as you review it, and maybe at the 25-year point, it's good to look back and forward, discuss the key advantages you feel you gain with your exceptional national footprint and the impact on your stations individually and collectively beyond enabling the national platform enabled in support for News Nation. For example, perhaps any greater exposure to regional and national spot ads or any other changes you would view? And how do you look at the benefits you get from the platform you've created?

The primary advantage of our scale is significant. Since we completed our acquisition of Tribune in October 2019, last year marked our first full year of integrating operations and realizing the promised synergies, although these efforts were somewhat overshadowed by the pandemic. Now, people are beginning to recognize the earning potential of our platform. The greatest advantage of our scale lies in distribution; reaching 68% of the country provides a strong leverage in negotiations to expand or increase distribution revenue. We consistently share content across our platform, not only with News Nation but also with other interested stations. We maintain a 24% Washington Bureau that supports News Nation and our owned and operated stations. Additionally, we have a team in Tokyo covering the Olympics for both News Nation and our station group, including NBC affiliates and custom content for non-NBC affiliates that highlight local athlete profiles. This initiative is generating substantial revenue, yielding over a 10:1 return on the investment in sending personnel there, as we have sponsors for this custom content outside of the traditional broadcasts. Moreover, regarding our workforce, we have proactively supported our employees during the pandemic by avoiding layoffs, forced unpaid leave, or salary cuts. This commitment has not gone unnoticed and distinguishes us in the media industry, especially among larger corporations. It's also proving to be an effective recruitment tool, allowing individuals to start in smaller markets, transition to larger ones, and potentially join a national cable news network without leaving the Nexstar family. The positive impacts of our employee treatment during the pandemic will likely enhance our recruitment efforts moving forward. In addition, the strength and breadth of our balance sheet and financial stability as a large, diversified company provides us with insights that are often not as visible within the Washington D.C. area or the Northeast corridor. Operating across 38 states allows us to connect with the community at a local level, where we truly engage with the public. We're also just starting to build a national sales presence, which will become clearer over the next one to two years. We operate a leading digital platform, recognized in the top 10 by comScore, and our linear platform reaches 68% of the country. Additionally, our cable news network has a footprint of 75 million homes. When combined, these assets present an exceptionally strong market opportunity, and we are only beginning to explore their full potential. Our dedicated team is actively working on this, so expect more updates in the future.

Okay. Great. Just a couple of smaller things too then. Once you cover that 10 to 5 spot time frame on News Nation that would resolve the rights issues. Would you think of having a News Nation app or some other distribution form that might be additive? And...

Yes. We have a News Nation app today, and we are putting considerable resources into that. I want the app to be as important as the linear channel in terms of breaking news and covering stories, especially now when we're not on the air 24/7. Your question may be around is there a streaming or direct-to-consumer opportunity with News Nation content? And we have discussed that. We think with not a whole lot of incremental spend we could treat because there's so much content and only a fraction of it makes it on the air that we could take some of this other content that doesn't make it to air from around the country and develop a streaming opportunity for News Nation. But again, I want to make sure we get our launches right in September, and we're on a firm footing there. We are starting to see growth in the linear platform, and then we can begin to focus on the electives, but I want to make sure we nail the required coursework first.

And then the last thing, point of confirmation, are the Mission stations totally included in your retrans negotiations and affiliation agreements providing scale benefits in both directions.

No. Regarding retrans negotiations, we cannot negotiate on behalf of stations we do not own in markets where Nexstar operates. We can, however, negotiate on behalf of PIX in New York, as Nexstar does not own a station in that market, which is allowed under FCC rules. Currently, that is the only Mission station we negotiate distribution revenue for.

We'll take our next question from Steven Cahall with Wells Fargo.

Perry, you said that speculation about your retirement is, in fact, just that speculation. I admit, I was one of those speculators and maybe incorrectly. So just to put a finer point on it. Does it mean you have no retirement considerations at this point? And would expect to extend your contracts? And maybe on that topic with Lee Ann joining in her background in banking, should we maybe expect any shift to the capital allocation priorities, and in particular, maybe a bit more of a focus on nonstation M&A? And then, Tom, just in the free cash flow guidance, I was wondering if you could speak to what you've got in there for auto recovering over the next 12 months. And maybe the bigger question is, does it really even matter with political crowd out and the retrans acceleration next year is auto a material part of that free cash flow guidance?

I'm not going to say that I am Nexstar and Nexstar is me, if that's what you're seeking. But I founded this company, and there are several things I want to see through here. We have spent 24 years building what we have so far, and now we are obviously shifting toward maximizing the monetization of our assets, including our spectrum, which will take some time. There are a lot of things I want to see through, and I don’t want to negotiate over a conference call with those who will be my counterparties. However, I can say that there is interest in extending the relationship beyond the current contractual date, and I’m in no rush to get to that. We have plenty to do. I believe you will see me be around beyond the end of the current contract, health permitting. That’s about as much as I can share on that. I’ll let Tom address the other points you raised.

With regard to auto going forward, yes, we do project auto recovering in 2022. I'm not going to give specifics with regard to what percentage recovery, et cetera, but we will see that. I would say that the unintended benefit of all of this is auto, was a mid-20s percentage contributor to total advertising revenue historically. Right now, I want to say it's in the mid- to high teens. We don't see it going back to the mid-20s going forward because a number of categories gaming and sports betting in particular have arisen during this last 18 to 24 months. And those aren't going away as well as other categories, service, in particular, that we see continuing to be strong. So auto recovery is part of the projection. I wouldn't say it is the driving factor in the projection because you're right, political will be very robust in 2022 and the addition of that will more than exceed any incremental addition from auto.

Just as an aside, the service category is now our #1 revenue category digitally, which probably is intuitive when you think about all of the help-wanted campaigns that are going on out there. But it has planted auto as our #1 category, and that's due to that category growing, not necessarily auto diminishing.

We'll take our next question from Kyle Evans with Stephens.

Within Core, could you talk about what you're seeing a little more specifically with regard to local, national, any regional differences and News Nation? And I have one follow-on.

There are some regional differences; New York seems to be lagging in its recovery, while Los Angeles has been performing exceptionally well all year due to the strength of our station. Other West Coast locations are also somewhat behind. Certain areas in Texas are more active and open for business. Overall, the situation varies from market to market. In Q2, our broadcast numbers, both local and national, showed significant growth, with local performing stronger than national. However, I've noted improvements in the national outlook in recent weeks. Regarding News Nation, we aimed for specific revenue in the upfront and achieved considerable CPM increases as we've shifted from entertainment programming to News Nation programming. We also reserved some inventory for the scatter market, anticipating that our new shows would generate positive sales numbers, which aligns with our sales team's strategy. Even our Chicago radio station turned a profit in the second quarter. Overall, every business unit within the company had positive cash flow in Q2, and I would characterize the performance as broad-based.

Great. And then maybe just any high-level updated thoughts you might have on the 2022 political cycle?

It is becoming increasingly intriguing with the retiring senators in battleground states like Ohio and Pennsylvania and the uncertain situation in California regarding a recall. We did not anticipate that the political climate in 2022 would surpass that of 2020, but we are quite close. We continue to be positively impressed by this dynamic and the associated fundraising efforts. Recently, I met with our Government Relations team in Washington, and both Republican and Democratic representatives believe that these elections will focus on control of the House and Senate, leading to potentially unprecedented spending in those races. Although we won't have a presidential election impact, we currently have a few million dollars allocated for the California recall election, and we might triple that amount as the polls narrow. None of this was factored into our forecast for this year's political spending. We will analyze each race as usual and monitor fundraising, but there will always be unexpected factors that bring in more funding. While we still do not predict surpassing 2020 levels, our outlook for the total funds we expect to see in 2022 keeps improving.

We'll take our next question from Craig Huber with Huber Research Partners.

Yes. My first question on retrans subs. Last quarter, I believe you said it was down year-over-year in the low 5s. And I think you said the trends are stable. So I assume that means down roughly 5% in the second quarter year-over-year.

The second quarter would show a sequential improvement on a trailing 12 basis compared to the first quarter, which isn't unexpected because the second quarter of last year is when we saw the majority of the disconnects relative to COVID.

Okay. And then also, can you just speak a little bit more about sports betting? Obviously, it's grown rapidly here for you. What percent of your core advertising is that? How optimistic are where that can be 2 or 3 or 4 years from now?

It has quickly become a top 10 category for us, and while we won't disclose a specific percentage of total revenue, we anticipate it will rise into the top 5 as more states approve sports betting. This could lead to it contributing double-digit percentages to our revenue, which is currently about half that amount. It is clearly the fastest-growing category we have on a year-over-year basis.

And then my other housekeeping question, in the past, you've said you expect net retrans for this year to be up low double digits and for next year to be up mid to high single digits. Is that still reasonable in your mind?

Yes.

Okay. Very good. And then my last question, I don't know if you have this at your fingertips, but I'd be curious to hear about your local news ratings, how that's tracking here not so much year-over-year, but versus where it was 2 years ago before the pandemic?

It varies from market to market. Obviously, there have been issues with Nielsen due to their sample sizes declining below necessary levels because of COVID, along with the inability to access homes with meters for maintenance. However, generally speaking, across 116 team markets, our numbers are higher than they were two years ago. They have decreased from last year's peak, which we saw in the second and third quarters with significant double-digit increases compared to the previous year. While we have declined from that peak, the steady state remains higher than the ratings from two years ago. This average applies to all our markets, but it is particularly relevant in our major markets.

We will take our next question from Alan Gould with Loop Capital.

I have two questions, one for Perry and one for Tom. Perry, you mentioned the digital spectrum. Are you still receiving a lot of interest from digital players regarding access to that spectrum? And Tom, you noted that leverage at the end of the year would be significantly less than 4x, and it seems you're closer to 3x than 4x right now. Do you have any thoughts on increasing leverage further to be more aggressive with share buybacks, especially given the current limitations on broadcast acquisitions?

I'll let Tom address the second question first, and then I’ll provide a brief response to your first question. Tom: Sure. It's clear that the rate of stock buybacks increased in the second quarter compared to the first quarter. This likely indicates our outlook for that activity, especially given the improved free cash flow compared to our original expectations. However, I believe we remain more opportunistic than what some may think. Our approach depends somewhat on stock price and other factors. We do have a significant allocation for stock repurchases in the second half of the year. I anticipate our leverage will increase in the fourth quarter as we move away from the influence of political advertising from Q4 of 2020. We will still be below a 4x leverage ratio, but it will rise above the current 3.3x. We will continue to make some principal repayments, but the majority of our available free cash flow, defined as free cash flow minus dividends, will be directed toward stock repurchases. At this moment, we don't foresee a situation in which we would take on debt to repurchase stock, as that doesn't align with our approach. However, we will remain opportunistic. Regarding Spectrum, we currently have TV stations in operation, and by the end of this year, we'll have built out stations that cover about one-third of the country. By the end of 2022, we anticipate that Nexstar stations equipped with NextGen or ATSC 3.0 will reach 50% of U.S. TV households, irrespective of other players in the market. It's essential for us to establish the infrastructure before we can charge for its usage. If we successfully cover half the country next year, combined with other efforts, the overall availability of 3.0 spectrum could exceed 70%. At that point, we can start developing use cases. Alongside other broadcasters, who will be sharing updates soon, we're conducting an automotive test in Michigan, still in preliminary stages, exploring possibilities. We firmly believe that this represents significant value potential for both our company and the industry. However, our first priority is to enable ATSC 3.0 or NextGen TV signals in our markets. We are committed to aggressively building our platform to achieve at least 50% coverage by the end of next year, which will allow us to receive that signal and start testing and creating use cases based on the spectrum and bandwidth we have access to.

That concludes today's question-and-answer session. Speakers, at this time, I will turn the conference back over to you for any additional or closing remarks.

Thank you very much for joining us this morning. We look forward to reporting back in early November on our Q3 results. Have a great afternoon.

This concludes today's call. Thank you for your participation. You may now disconnect.