Nexstar Media Group, Inc. Q3 FY2021 Earnings Call

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

Thanks, Katie, and good morning, everyone. I'll first review the Safe Harbor language and 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 31st, 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's Chairman, Founder, and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joseph, and good morning, everyone. Thank you all for joining us to review Nexstar's third quarter financial results, which highlight the competitive advantages of our scale and reach, our continued success in achieving a faster and stronger than anticipated recovery in core advertising, and another period of double-digit distribution and digital revenue growth. Once again, our third quarter net revenue, adjusted EBITDA, and free cash flow were nicely ahead of consensus expectations, reflecting growing momentum across our Broadcast, Digital, and Network Divisions and their associated revenue streams. Tom Carter, Nexstar's President and Chief Operating Officer, is on the call with me as always this morning, and we're delighted to be joined by Lee Ann Gliha, who has taken the CFO reins from Tom back in early August. As I mentioned at recent Investor Events, Lee Ann is an accomplished finance leader with more than 20 years of experience in TMT Investment Banking and operations, and she was a sought-after candidate at other scale TMT entities. So we're very fortunate to have her on our team to support our next phase of growth. Together, we will review the quarter, our outlook, our plans for continued growth investments, leverage reduction, and capital returns, and our confidence in achieving our upsized pro forma average annual free cash flow guidance of approximately $1.33 billion for the '21-'22 cycle. I'll start with a summary of the quarterly highlights and recent developments, including our continued focus on accretive M&A and driving value through high return growth opportunities. Tom will then provide an operations review, and Lee Ann will finish up by covering the financial report. With many pandemic-related challenges behind us, we are beginning to actualize the value of the scaled program and platform that we have created, and it turned our focus from effectively managing through the pandemic to again aggressively pursuing growth. During the third quarter, we were able to leverage our platform via the accretive acquisition of The Hill, which has synergies across our businesses. We also benefited from increased gaming and sports betting advertising revenue from our extensive presence in approximately 80% of the states where sports betting is legal or expected to be legal soon. We launched our second owned and operated multicast network, Rewind TV, to nearly 50 million homes and partnered with SportsGrid to launch its multicast network in nine of our markets, with more soon to come. Also, in the quarter, we added 26 hours of programming to NewsNation's weekly schedule. Underpinning these initiatives was our continued focus on execution of our core businesses, as we generated $254 million of free cash flow before transaction expenses in the third quarter, representing year-over-year growth of 14%. Year-to-date, we have generated free cash flow of $916 million. Near-term, fourth quarter trends are pacing nicely ahead of expectations with 99% of our full year total advertising revenue budgets already on the books. With the benefit of our recent growth initiatives and the return of political advertising, Nexstar is positioned for what is expected to be record levels of revenue and free cash flow in 2022. We clearly remain on track to meet or exceed our increased pro forma average annual free cash flow guidance of approximately $1.33 billion during the '21-'22 cycle, which, with 41 million shares now outstanding, amounts to approximately $32.50 per share. With assets that have a nationwide reach of over 210 million people or in excess of 68% of all U.S. television households, LTM revenue of $4.8 billion, EBITDA of $2.1 billion, and free cash flow of $1.4 billion, we have achieved a scale that puts Nexstar in a category of our own. We are 50% bigger than our next largest competitor in terms of Broadcast revenue, and we will generate in 2022 free cash flow on par with ViacomCBS. This scale affords us the resources and synergy potential to pursue organic and inorganic growth opportunities which we may not have been able to consider before. As always, we view these opportunities through the lens of our long-term criteria of being accretive and complementary to our business. We will continue to look for acquisitions of stations in markets where regulations permit, also for content-driven television and digital assets, and other complementary businesses where our scale or other synergies can drive returns. At the same time, Nexstar's deep financial capacity allows for further leverage reduction and return of capital initiatives, all of which were prominent in our Q3 '21 playbook. In addition to the $138 million allocated toward accretive M&A in the third quarter, we allocated $80 million toward leverage reduction while repurchasing $140 million worth of our Class A common shares. We also returned $29 million to shareholders through our quarterly cash dividend. Through the nine months ended September 30, Nexstar allocated approximately $493 million towards share repurchases and dividends, marking a 29% increase over $383 million in total capital return to shareholders for the full year of 2020. All this was done while we maintained a total net leverage ratio of 3.4 times. Looking ahead with respect to political advertising, we expect 2022 to generate revenue somewhere between our 2018 and our 2020 political revenue results. Given our scale, we have excellent coverage of a substantial majority of the competitive races, being in approximately 80% of those markets. Let me give you the details. In the House, there are 88 competitive races, of which 75 are in states where Nexstar has a presence. In the Senate, there are races for 34 seats, with 29 races in Nexstar markets, including seven of the nine most competitive races. There are also 29 gubernatorial elections in our markets, of which 12 are expected to be competitive. All of which is to say, we are well positioned to do what we've done before. Historically, we've captured 12% to 15% of total U.S. broadcast political ad spending on television, and all signals indicate that 2022 will be a very strong political year for Nexstar. Our Q3 acquisition of The Hill presents Nexstar with a fast-growing and profitable political digital news platform that has nationally recognized brands known for delivering balanced political reporting, as well as authentic opinions and perspectives. Strategically, The Hill is highly complementary to our broadcast stations, our leading digital platform, and NewsNation, Nexstar's national cable news network, a source for unbiased news. With synergistic opportunities across all three of our business lines, Nexstar is leveraging our leading Salesforce and omni-channel approach to content distribution to expand The Hill's reach and revenue channels. We intend to further penetrate the political news market to grow audience share by scaling The Hill's content on NewsNation and across our local stations. We continue to make progress in scaling NewsNation's content offerings with a major programming expansion at the end of September, including two new shows, DAN ABRAMS LIVE, produced and hosted by veteran journalist and analyst Dan Abrams, and MORNING IN AMERICA, a live three-hour weekday morning news show hosted by award-winning former ABC News Correspondent and Anchor, Adrienne Bankert. One year since our launch, we've transformed the former WGN America cable asset from a syndicated programming network into a growing and profitable national news presence, reaching 75 million U.S. television homes and airing 13 hours of original news programming each weekday. NewsNation is fully distributed on Linear and OTT systems, and we've achieved CPM parity with the incumbent cable news networks. We are seeing new rating highs every week. In fact, NewsNation is the fastest-growing cable network on television. This reflects our pivot from a startup to a credible contender in just over a year. We are now promoting our expanding news programming and seasoned respected journalists, which has doubled the consumer awareness of NewsNation since our launch. While there's still much work to be done, we have great confidence in our long-term growth strategy for the network and the complementary opportunities related to our acquisition of The Hill. Our scale and reach have also enabled us to participate in the fast-growing sports betting and iGaming industries. Our gaming sports betting category has grown to be our third largest category in the quarter, with revenue increasing 66% on a year-over-year basis. This category is also responsible for the largest absolute year-over-year dollar gain among all of our categories. In fact, in states where sports betting is established, sports betting is typically our number one or number two ad revenue category. Yet with many more states ready to approve sports betting legislation over the next year, and iGaming and mobile gaming also becoming legalized and more prevalent, we see continued growth coming from this category. Reflecting this opportunity this quarter, we also helped launch SportsGrid Network, the nation's first-ever diginet devoted to sports wagering and fantasy sports. It launched on September 1 across digital subchannels in nine of our U.S. markets, with more to come in the near future. Our scale also helps us in our efforts to give back to our communities. As I mentioned on the last quarterly call, earlier this year, Nexstar established a partnership with Feeding America to raise awareness regarding the issues of hunger and food insecurity in the United States. This past September was designated as Hunger Action month, and Nexstar aired and published on our websites more than 1,000 stories highlighting local issues regarding hunger, food insecurity, and community efforts to help those in need. We estimate that the Nexstar Nation delivered more than $1.6 million in value to Feeding America during September, a clear demonstration of the power of our platform. This year marked the 25th anniversary of Nexstar's founding. Over this quarter of a century, the company's transformational growth and financial success highlights our enterprise-wide culture that is committed to localism and operational excellence. We built upon that foundation with our innovation, monetization and revenue diversification strategies, combined with a disciplined approach towards M&A, expense management, and capital allocation. Since our IPO, Nexstar's stock has returned over 1200% to investors and over a 200% TSR over the last five years. Looking ahead, we expect to generate continued year-over-year growth across all of our non-political revenue sources for the remainder of 2021. Nexstar's growing multiplatform audience and industry-leading distribution combined with the valuable sports betting opportunity, the upcoming 2022 election cycle, the return of the auto category next year, retrans growth, and the growth of NewsNation in ratings and revenue means we will continue to have excellent visibility to deliver on or exceed our free cash flow targets in the 2021-2022 cycle. Overall, we are confident that with all the actions that we have taken over the past year, they position 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 to our shareholders. With all that said, let me now turn the call over to Tom Carter for the operations review. Tom?

Thanks, Perry, and good morning, everyone. Our solid third quarter and year-to-date '21 results reflect the resiliency and adaptability of our businesses and our long-term strategies to leverage our scale to drive top-line growth. We're extremely proud of the consistent strength of our operating results and the more than 12,000 members of the Nexstar Nation across the country who, while serving their local communities, have consistently demonstrated their ability to offset the pandemic challenges, putting Nexstar on a path to continued success and growth. As Perry said, our Q4 operating results are pacing strongly, and we expect to end 2021 on a solid note before entering 2022, which will be a year of growth given our internal opportunities, including the return of the political ad cycle. As we further look into 2023, there will be an upside benefit that year from the large percentage of retransmission distribution agreements that we will complete during 2022. Operationally, Nexstar's strong rebound in 2021 continued in the third quarter with net revenue rising 3.5% over the prior year to $1.16 billion. As we more than offset approximately $120 million in year-over-year decline in political advertising. Nexstar's third quarter net revenue, excluding political, increased approximately 16%, reflecting our success in leveraging the unrivaled multiplatform consumer reach and engagement of our content to deliver continued strong growth across all of our non-political revenue sources. Our top line growth combined with expense management led to third quarter adjusted EBITDA and free cash flow before one-time expenses, of $413 million and $254 million, respectively. Nexstar brought over 35% of our Q3 net revenue to the unadjusted EBITDA line before one-time transaction expenses and we brought approximately 61% of every adjusted EBITDA dollar to the free cash flow line. Core television advertising reflecting accelerating rebound demand from our premium local and national marketing solutions led to a 13.3% year-over-year increase in revenue for this segment. As we've done consistently for many quarters, Nexstar's local sales initiatives continued to deliver healthy levels of new business, with our sales teams generating a record $34.8 million of new third quarter new to television revenue, marking a 37% increase over the prior year and a 6% rise over Q2 of '21. Excluding auto, 2021 third quarter advertising revenue exceeded pro forma 2019 levels, and with the significant ongoing growth of the gaming and sports betting category, we expect Nexstar's positive ad trends to continue in the fourth quarter and next year. In the third quarter, total revenue in Nexstar's top 10 ad categories paced 12% ahead of the prior year. We recorded gains in nine of our top 10 categories with the biggest dollar gains coming in gaming and sports betting services and the retail category as consumers returned to in-person shopping. We are seeing the broad-based rebound continue in Q4. 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 and capitalize on fast-growing categories. Nexstar is positioned to be a primary beneficiary of the return of auto advertising as supply chain and labor issues ease and manufacturers begin to promote new models in electric vehicles. Third quarter '21 distribution fee revenue rose 15% year-over-year to approximately $619 million. This growth reflects distribution agreements renewals in 2020, representing approximately 18% of our subscriber base, and other increases and stabilized subscriber trends across our platform that remained consistent with our expectations and support the ongoing distribution fee and net retrans margin trends. We continue to have good visibility into our contractual distribution economics, with over 85% of our Big four affiliations contracted through December 31 of '22. We expect continued retransmission revenue growth reflecting contract renewals representing a mid-to-high single-digit percentage of our subscribers in '21 and approximately 60% of our subscribers in '22 that will result in a higher growth rate of this revenue source in '23. Third quarter '21 total digital revenue increased 46.8% to approximately $81 million, with digital profitability up substantially over the prior year's period. The positive results reflect our actions over the year to discontinue or deemphasize certain less profitable digital operations, as well as the strategic operational realignment we affected last fall. Our top line increase was driven by strong year-over-year growth in our local digital advertising revenue and agency services business and contributions from last year's acquisition of BestReviews, as well as a small period of contributions from The Hill in the third quarter. Nexstar's integrated content and audience development strategies continued to deliver impressive audience engagement statistics across our network of 120 local websites and 284 local news and mobile weather apps. Distribution, digital, and other revenue growth continued to contribute to our ongoing revenue diversification push. In the third quarter, distribution, digital and other revenue accounted for 62% of net revenue, a testament to the diversification of our revenue streams. The success of our revenue diversification efforts is evidenced by the fact that in the third quarter of 2019, distribution, digital and other revenue accounted for approximately 55% of net revenue. Looking forward, we expect continued growth from all of our non-political sources in the remainder of '21, with similar high levels of overall revenue diversification. We continue to build on Nexstar's digital strength from 2020, when our properties delivered record growth in audience engagement, ranking number one in local news every month of the year and reaching all-time highs across key performance indicators, including average monthly users of 91 million, total pageviews of 7.8 billion, total multiplatform 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 of this year of mid-seven-figure expense savings resulting from the strategic operational realignment of our broadcasting and digital operating subsidiaries, we should see continued cash flow growth from digital. Overall, we're excited not only by the strength and results of our existing platform but by the many organic and M&A growth opportunities in front of us, which will enable Nexstar to continue our record of delivering growth in free cash flow, maintaining modest leverage, and delivering attractive capital returns to our shareholders. Looking ahead, we have excellent visibility to achieving our free cash flow targets in the current cycle and a clear path to continue 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 our fixed and variable expenses, optimizing the balance sheet, and pursuing selective value-enhancing M&A. Our discipline in these areas has added consistency and visibility to results while creating new value for our shareholders. With that, it's my pleasure to turn the call over to Lee Ann for the financial review and update. Lee Ann?

Thanks, Tom, and good morning, everyone. I'm thrilled to join the Nexstar team. As a banker, I've covered the broadcasting and broader TMT sector for a couple of decades, and I've known Perry and Tom for more than one of those. I'm a huge fan of what they've built and the returns they've generated for shareholders. I look forward to helping facilitate growth for the next 10 years, just like Nexstar has had over the last 10. I've listened to hundreds of these earnings calls from the other side, so it's interesting being on this side this time, so this is my first one, so everybody go easy on me. Since Tom has provided most of the color on the revenue line items, I'm going to fill in a few blanks and then start as a good CFO should on providing you some color on our expenses in the quarter. Net revenue for the quarter was up 3.5%. On the same-station basis, net revenue was effectively flat and up 11.5% excluding political. Core revenues on the same-station basis were up 10%, distribution revenue was up 13%, and digital revenue was up 10%. Third quarter direct operating expenses, SG&A, and trade expenses all increased, primarily as a result of higher revenues related to the recovery in core and digital advertising, as well as expenses from station and digital acquisitions, including a partial quarter of expenses from The Hill. Total corporate expense was approximately $47 million, including non-cash compensation expense of approximately $12 million and additional legal expenses. During the quarter, we recorded one-time transaction costs of $2.7 million, primarily related to the acquisition of The Hill. CapEx was approximately $36.3 million and was slightly above our third quarter guidance, as our guidance reflected a CapEx figure net of insurance proceeds and other allowances and timing adjustments, some of which are reflected in other line items on the cash flow statement. Spectrum repack CapEx totaled approximately $1.6 million, and we received approximately $5.6 million of reimbursements from the FCC during the quarter. As a reminder, we anticipate being fully reimbursed for all CapEx related to spectrum repack as those activities wind down later this year. Third quarter total interest expense declined 9% to approximately $70 million, cash interest expense was approximately $67 million compared to $73 million last year, due primarily to lower first-lien borrowings and a lower interest rate. Third quarter operating cash taxes were $74.6 million and came in slightly higher than our guidance of $70 million, largely due to a higher forecasted EBITDA and updated tax estimates. We've recorded $15 million in distributions from equity investments related to our 31% ownership in TV Food Network in the third quarter, as that entity continues to produce strong results. Year-to-date, these distributions have amounted to $222 million. Looking ahead, we project corporate overhead exclusive of stock comp and transaction costs to be approximately $32 million in the fourth quarter, and we expect corporate overhead in the line with $125 million area for the year, slightly above our prior guidance due to the inclusion of some ongoing legal expenses that are no longer accounted for as one-time in nature. Non-cash comp is expected to be approximately $30 million for the quarter and less than $50 million for the full year. Transaction and other one-time expenses are currently expected to be nominal in the fourth quarter. Operating cash taxes are expected to be approximately $76 million in the fourth quarter, and we project operating cash taxes of less than $325 million for the full year, on improved profitability and revised estimates. Cash CapEx should come in around $45 million in the fourth quarter and $142 million for the full year, but when considering net reimbursement not included in the CapEx line item, the figure will be close to $135 million previously indicated for the year. We expect Nexstar's cash interest expense to approximate $65 million for the fourth quarter and $267 million for the full year, reflecting interest expense savings related to lower outstanding borrowings and the decline in LIBOR rates. For the fourth quarter of 2021, we anticipate recording approximately $80 million in TV Food Network distributions and approximately $240 million for the full year. Turning to the balance sheet, Nexstar's outstanding debt at September 30th, 2021 was $7.55 billion. Total net debt amounted to approximately $7.4 billion, down from $7.5 billion at December 31st, 2020. Net debt for first lien covenant purposes is $4.6 billion. Subsequent to quarter-end, we repaid another $30 million of our Term Loan B. Our net first lien covenant ratio at September 30th, 2021 was 2.14 times compared to 2.28 times at year-end 2020, which is well below our first lien only covenant of 4.25 times. Our total net leverage for covenant purposes at quarter end was 3.42 times compared to 3.60 times at year-end 2020. For all the factors enumerated earlier by Perry and Tom, we're excited about the prospects for 2022 and 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 2021-2022 cycle or approximately $32.50 per share, which, based on yesterday's close price, represents a free cash flow yield of 21%. In the third quarter, we effectively returned $4.25 per share, which on an annualized basis reflects the yield of 11%. Year-to-date for the third quarter, we have returned $493 million to shareholders. Last week, we announced the $0.70 per share fourth quarter dividend and disclosed that, subsequent to the end of the quarter, we repurchased another $50 million of shares with $721 million left under our share repurchase authorization, bringing the total this far in the year to $572 million of capital returned to shareholders. The remainder of our free cash flow went to make acquisitions on CapEx and repay debt. As we move forward, we will continue to evaluate the right capital allocation to create the highest shareholder value as we have always done. With that, I'm going to turn it over to the operator for questions. Operator?

Thank you. Our first question will come from John Janedis with Wolfe Research.

Thanks, good morning. Perry, going back a few months ago, there was a lot of concern that having the NFL on the streaming services would impact your business. So can you give us an update on what you're seeing now that we're deep into the season? And then on the core advertising front, as you know, there's been a lot in the press about supply chain issues impacting advertising. Have you seen anything, or are your people on the ground hearing of any upcoming challenges related to that? And is there anything that stands out in terms of large markets versus small or national versus local?

Let me start first with the NFL. I mean, obviously, all of the NFL games, with the exception of FOX, are on streaming platforms now, and I think the overriding positive of NFL viewership this fall has been, firstly, more competitive games, and secondly, fans in the stands. I think it enhances the viewing experience, and I think that's what's driven the overall ratings increase. You know, the ratings for NFL telecasts continue to be measured in the millions, and the streaming component of that is a fraction. And John, I didn't quite get the last two pieces of your question. Could you run those by me again, please?

On the advertising side, now with a lot in the press around supply chain issues, it sounds like you're not seeing anything just based on the comments coming out of 3Q into 4Q. Are you hearing anything for 4Q? What are your people on the ground talking about as they talk to local customers, and is there anything to call out in terms of large versus small markets or national versus local advertising?

Yeah, we're not seeing much of a difference now between large versus small. I think everything is fairly homogenized. There's no material differences in market size or regionality at this point. You know, I do think that the results that we've turned in have been despite the supply chain issues that have been prevalent, affecting categories like furniture, appliances, electronics, and certainly automotive. But, you know, good news on the automotive front, you know, the GM plant here, not too far from our offices in Arlington, which produces most of the Escalades, Yukons, and Suburbans, has just added overtime shifts to catch up with the demand. So we anticipate that the automotive category will remain a headwind in the fourth quarter and perhaps the first quarter of next year, but should probably turn to a net positive tailwind by the second quarter and certainly the second half of next year. Tom, do you have anything to add?

John, just looking at the comparison of '21 to '19. In Q3 and in Q4, 14 of the top 25 categories are up. You know, Perry mentioned some of the others, including furniture, autos, electronics, etc. that are being affected, but the rest of them are more than making up for that from a growth perspective. So, we're seeing growth over '19 excluding auto and growth over '20 excluding auto.

All right, thanks.

Thank you. Our next question comes from Dan Kurnos with The Benchmark Company.

Great, thanks. Good morning and welcome, Lee Ann. Just to follow up on John's question, and Tom, thanks for the additional color there. Just as we think about going into Q4, obviously, Perry, you called out sports gambling as a huge category now. You know, we're not quite, you said, ex-auto; we're back to 2019 levels. In Q4, do we get, you know, I guess, does that number improve in Q4 with accelerating trends? Do we get back to 2019 levels even with auto? Maybe not quite there would be my first question. And then secondarily, you know, you guys now have a $400 million plus digital business. I kind of ballpark your website, maybe at a quarter of that; it's still $300 million standalone. So, I guess maybe can you give us sort of your long-tail thoughts on how big that gets? How do you think about monetizing? Obviously, right now, everything has synergies. But do you consider having kind of a much larger digital standalone operation sometime in the future? Thanks.

Well, sure. I mean, as it relates to our top 10 product categories for the third quarter, everything was up anywhere between 104% to 166%, and 141% over the prior year. So major increases, with automotive down about 10%. So, you know, I don't know that you'll see much of a change thematically into the fourth quarter other than, if you remember, the fourth quarter last year was obviously a huge political quarter. There was some inventory displacement, and we have that inventory back. Political is active, but obviously won't be anywhere near that order of magnitude. So, we feel very good about fourth quarter, and we feel very good about the transition into 2022.

And with regard to digital, digital will continue to grow; we see more opportunities there. With content acquisitions like The Hill that can be utilized across our spectrum, you know, the multiplatform carriage that we have, I think you'll see us do more content acquisitions and less technical acquisitions or the actual plumbing. I think we feel good about our distribution from a digital, from a linear cable, and from a broadcast perspective, and we'll be able to monetize that. I think you'll see a nine-digit digital revenue for Q4, and that will, I think, serve us well beginning into 2022.

Look, digital advertising surpassed all of television advertising now in terms of total dollars. So, we told our management team that there's no reason that this shouldn't happen at this company here. So, I think you'll continue to see, as Tom said, we'll build on a content-first strategy to build the broadest base of content and distribution to allow us to compete for the largest amount of dollars. So, I think you'll see continued investment and continued growth from digital, and you know, we look to build that to a point where, over time, the revenue potentially could rival that of the ad support for the broadcast stations. So, that's obviously where the growth is, and as my dad used to say, it helps to hunt where the ducks are.

Love it, Perry. Thanks, guys. Appreciate it.

Thank you. Our next question comes from Steven Cahall with Wells Fargo.

Thanks. Maybe first just to follow up on advertising. You made the comment that Q4 is pacing strongly. Just wanted to clarify, is that a comment specifically related to advertising? Or is that about the business more broadly? And maybe you could give us a sense of how much The Hill contributed in the quarter and will contribute in the fourth quarter? And then I have a quick follow-up. Thanks.

I would say the advertising market continues to improve. Total advertising - total Broadcast advertising will be up Q3 over Q4 on a core basis. It won't be back to 2019 levels just yet, but we continue to make progress in that regard. So from that perspective, I would say, you know, we're - it is improving, but we're still being weighed down by auto from that perspective. Lee Ann, do you have any specific comments on The Hill?

Yeah, on The Hill, in terms of the contribution, it was only really a very small percentage of the quarter that it was in there. So it was like a little over $5 million of revenue from The Hill.

Great. And then, Lee Ann, I think this is an easy enough one on you. But you know, you're new to Nexstar, but certainly not to the industry. I think you've said you see your role as more than just paying down debt and paying dividends. So, when you think about some strategic growth areas for the business, either organically or inorganically, where you'd like to look at allocating capital, could you give us any more color on that? Thanks.

Yeah. Look, I think you know, I - obviously, there's a lot of things that we could be doing with this platform. And I think it's really continuing to pursue what we've been doing in the past, which is to continue to make station acquisitions where we're able to do that from a regulatory perspective. It's continuing to invest in content, both from a television perspective and then also from a digital perspective. And then, I think it's the other sort of question mark area of, you know, are there other businesses out there that could be complementary to the assets that we have, to kind of continue to grow? That includes, you know, what we can do with our spectrum. So I don't think it's going to be too far afield from what you've seen and what we've said. But you know we know we need to continue to grow this business because we want to have the same sort of returns the next 10 years that we did for the last 10 or better.

Thank you.

Thank you. Our next question comes from Aaron Watts with Deutsche Bank.

Good morning, everyone, and Lee Ann, welcome to Nexstar. Two questions for me. The first question is on your network partnerships, and I appreciate that you don't have to focus on this for another 12-plus months given where you are in the cycle. Curious if some of the actions taken by your partners to bolster their streaming services make you see an opportunity during the next round of network renewals to push back on increases in reverse comp. And relatedly, how should we think about where the margin is today on retransmission fees and where it might be heading over the next few years, especially in light of the new long-term NFL broadcast deal and perhaps the desire from those networks to have you help pay for that?

I would say, you know, first of all, we've always helped the networks pay for the NFL and the Olympics, the NCAA and pretty much all the other a la carte sports offerings out there. So, no change in that. Our desire to decrease fees, or certainly decrease the rate of increase of the fees in negotiating efforts, has not changed and will not change in upcoming negotiations. We obviously do take note of the fact that the networks are oftentimes competing with themselves with their streaming offerings, and therefore competing with us. And that, you know, therefore that means, less exclusivity to what we're buying from the networks, and that comes at a cost or should impact the cost, we believe. But I would say, you have to look at our mix of stations because we have some very large markets, CW and MyNetwork stations that pay very little to no reverse compensation. Therefore, when you look at the numerator and denominator of retrans revenue and network payments, we are at and I think for the foreseeable future as far as I can see, continue to be above a 50% margin. And I think that would bring us to an approximate 50% margin for our Big four stations and obviously higher than that on our non-Big four. I think we're relatively unique in that regard. So, I don't think you can mark us to the market or mark the market to us in terms of retrans margins because of the uniqueness of our station portfolio.

Okay, that's helpful, Perry. Thanks. And if I could sneak one more in and maybe this is for Tom or Lee Ann. Tom, you mentioned where your free cash flow production is headed and the IG rated company you'll be keeping with that, you certainly will have the capacity to drive your leverage down further to achieve investment grade ratings if you want it to. Is there a desire to go in that direction to capture the benefits of cheaper cost of capital, longer duration financing? Not that I would obviously ever want to lose you guys in IG land.

This is Lee Ann. I don't think we're intending to try to drive towards an investment-grade rating. I think our - as we've said before you know our target is around 3.5 times. And in the past, what we've done is, if there's been a nice deal, we've levered up a little bit, but then repaid the debt really quickly to get back down to that leverage level. So, I think we'll probably see more of the same.

No, I think we've benefited from our business model, which obviously the high-yield market embraces from a free cash flow perspective. So, yes, we would receive some benefit from being investment grade, but I'm not sure it's really commensurate with the amount of capital that would have to be allocated to debt reduction to get to an investment-grade rating, which would be substantial. So, I think we're in a happy kind of place now from being able to price our debt at attractive levels at this leverage juncture.

All right, great. Thank you very much.

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

Great, thank you. My first question is on auto, of course. I think you said auto was down 10% year-over-year in the third quarter. What's it pacing at for the fourth quarter and have you seen a major difference on the national side of auto versus a local dealer side?

No, actually, our Tier 3 revenue, because some people are advertising services, and some people are advertising collision repair and body shops and things like that. You know, our Tier 3 revenue is pacing on par, maybe slightly better than Tiers 1 and 2. I think what we saw throughout this year is automotive revenue on the books that was, perhaps for supply chain issues, somewhat canceled off as the quarter went on. We're going into the quarter with less revenue on the books, so less to cancel, and we think we'll probably end up in and about the same area that we did for the third quarter as a category.

Okay. And then would you also – I appreciate that. Would you also care to just let us know what you think the pacing number is for overall core ad revenue on a year-over-year basis in the fourth quarter?

Yeah, it's a positive number. And again, it's a different number for Broadcast, Digital, and Networks. But, I mean, all three taken together, each individually are positive and all-in, it's a positive single-digit number.

So just the core TV ad revenue year-over-year is up some number less than 10% is what you're saying?

A single-digit number, yes. And obviously, you have to exclude political out of that, right.

Right, okay. Very good. And then your retrans subs, please. Was that number for the quarter down by roughly 5% year-over-year?

It was down less than 5%.

And then how would you say that was versus the prior one or two quarters? Is the trend line slightly better?

That's - the positive trend has continued, yes.

Okay, my last nitpick question on the digital side. Excluding the two acquisitions, how much was digital revenues up year-over-year? You guys mentioned in the press release where the local side did pretty well. Thank you.

On a same-station basis, digital revenue was up about 30%.

Thank you. Our next question comes from Jim Goss with Barrington Research.

Thank you. One question about NewsNation. Congratulations on achieving CPM parity with the others. Given the combination of that and your neutral stance, do you have an opportunity to get competing political ads from both sides wider than some of the other networks might? And what is the mix of national versus regional ads within that service? Is it all national? Or do you have regional opportunities?

It's all national, except as you know, most cable networks give back two minutes an hour to the local cable interconnect to sell so. But all of our revenue is national delivered by Dave Rotem and his national Salesforce. As it relates to political, we did about $1 million in political last year on NewsNation and that was just with our three hours of primetime. With our acquisition of The Hill and the fact that we're doing 13 hours a day of live programming Monday through Friday, we would expect we'll do certainly as well in political next year. Although, again, politics in the mid-term elections is all local. There's no real national referendum; it's issue ads, it's state and local races, Senate House Governors. So that inherently would be much more a linear broadcast rather than a linear national cable play regarding political ad revenue, but we'll get some.

Okay. Now, that's why I asked about the regional potential. The other question I had is about Rewind TV. Is there – and can you frame the potential significance? Is it very minor, or is there some importance, looking at the economics of it between program availability and cost versus your audience access and distribution potential?

We basically bifurcated the syndicated programming that we own for our diginets and made Antenna TV, which is now Nielsen rated and doing very well. It is something like if it were a cable network, it would be in the top 65 cable networks in terms of total audience delivery. And we just rated it by Nielsen earlier this year. Antenna TV is focused on 50s and 60s sitcoms, and Rewind TV, we just kind of bifurcated the programming and made that more of a 70s and 80s sitcom network. And right now, it's virtually distributed in just our next platform, but reaching approximately 50 million homes. We'll grow that distribution over time. Primarily now the advertising is direct response, but it has the easily has the potential to be a double-digit million revenue contributor on top of what we do with Antenna TV in 2022.

Okay, thank you very much.

Thank you. Our next question comes from Alan Gould with Loop Capital.

Thanks for taking the question. I've got two questions. First for Perry. Politically, anything you can read into how political is doing this year versus 2018? And read into what that might imply versus 2019 and what that might imply for next year? I know you said between 2018 and 2020. But any chance 2022 could beat 2020? And then I'll have a question for Tom after that.

Well, I don't want to be irrationally exuberant here as it relates to political. But as you look at our footprint and the races, I mean, we're going to have - we're going to participate in 30 of the 34 Senate races, and the ones we think will be particularly competitive next year will be Florida, Ohio, Pennsylvania, North Carolina, Georgia, and Nevada, Wisconsin, Governor, 31 of 36 races again, Florida, Pennsylvania, Kansas, Maryland, Michigan, Georgia, Wisconsin. And in the House, we've literally participated in 355 of the 435 races. So, we think we'll do very well. We are not guiding to a number that would equal or exceed 2020 in terms of total ad revenue, where we generated over $600 million in revenue. But I think that as the year goes on, and of course, you know, it's political is kind of a wild card in terms of who's in, who drops out, what races change, where the money flows, but I think that we'll be a lot closer to 2020 than maybe most folks are thinking, but we're not guiding to a number equal to that or greater than that for next year.

Thanks, Perry. And then for Tom, Tom has a word in the press release I haven't seen since pre-pandemic that is visibility. I mean, you're talking about visibility, talking about a big political year, 20% plus free cash flow yield, and you're going to have a lot of incremental revenue and cash flow coming out of political. You've been consistently buying back about $150 million worth each quarter this year. Would it make sense to increase it now in anticipation of what you should be generating next year?

Well, I think that would be probably a little bit out over our skis. You know, typically, we have not borrowed to buy back stock or to, you know, pay dividends, which would take us doing that to increase it. Basically, we're spending what we bring in from a debt and from a return of capital to shareholders perspective. So, I would not anticipate that being the case. But I would tell you that you know, our cash flow is a little bit countercyclical relative to other broadcasters, largely due to the fact that we get the large Food Network distribution in March of every year. So our free cash flow in Q1 will be significant and countercyclical to what you would think of for a broadcaster having a modest first-quarter EBITDA and free cash flow, it will be our may not be our largest for the year, because of political in Q4, but it'll be larger than a typical broadcast free cash flow. So you'll see more availability, and our resources will increase in Q1, and we'll allocate that when we get to that point.

I think the x-factor in all that is going to be what M&A opportunities that are currently percolating bubble up to the surface. And, you know, I think that will determine the capital allocation, which is something that the three of us talk about literally almost every day.

Okay, thank you.

Thank you. Our next question comes from Connor Murphy with Deutsche Bank.

Hey, guys. How are you? Can you just talk a little bit about how your conversation with national advertisers has evolved? Now that you have NewsNation, The Hill as sort of a suite of digital and national news products? I guess secondly, you know as we think about heading into the '22 political cycle, should we expect a big marketing push over the next couple of quarters to build even more awareness for NewsNation to drive incremental ad spend on those platforms next year? And then on top of that, better positioning NewsNation ahead of obviously a bunch of distribution deals you have coming up at the end of '22? Thank you.

We'll start and work our way backwards through all of that. NewsNation is, you know, already distributed on the MVPDs that are up for renewal in 2022. It'll just be a question of what enhancements we can make to that from a rate per distribution perspective. Most of the virtual MVPD deals expire at some point next year or in 2023. We participate in all of those or most of those now. So again, it's all about what we can do to upgrade. You will see a continued promotional push; our awareness number is up to 21% of the country. But as I'd like to say, that means 79% is still a greenfield opportunity for us in terms of NewsNation. Anecdotally, the Salesforce for The Hill secured a $2 million order from Google in the fourth quarter, that would not have happened likely without our ownership and the ability to advertise our portfolio as a portfolio to Google. But that did result in an incremental $2 million revenue that was not in their plan. So, I think that's a preview of coming attractions of what we can do. We're still in the early phases of the integration with The Hill; we realized most of our synergy targets, but you know, people are still not yet on our payroll and benefit plans; that all happens in the first of the year. We're about to name a new General Manager for The Hill, kind of an individual with Washington insider experience, which we think will be hugely beneficial in elevating our visibility in the ad community there. So, you know, we're excited about our prospects for The Hill and continue improving the BestReviews as well as NewsNation. So, you know, I think all taken together, you'll see more of the proof of your concept of an integrated sell as time goes on in 2022.

Okay, thank you.

Thank you. Our next question comes from Monica Liu with Onex Credit.

Thank you. Congratulations on the quarter and on your new role, Lee Ann. I wanted to follow up on your comment about the increase in direct operating expenses. It appears that it has increased by a certain percentage of revenue. I understand you mentioned some of the contributing factors, but could you repeat them? Additionally, are you seeing the rising reverse retransmission also impacting the increase in operating expenses as a percentage of revenue? Thank you.

Yeah, so I think a couple of things there. So just what I said before was that it was primarily a result of higher revenues related to the recovery in core and digital advertising. So, you know, commissions and everything is kind of in that number, as well we had some new expenses from some acquisitions like The Hill and others. I think as a percentage of revenue, if you look at it quarter-over-quarter, Tom and I were talking about this last night, you know, 2020 had a lot of political revenue in it. So the margin looks better in that quarter because there's just more revenue in that quarter.

Okay, thank you.

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

Yes. I have a follow-up if I could ask. The new standard ATSC 3.0. Maybe if you could just update us somewhere Nexstar is with that? What's the longer-term business plan there? And how significant could that be to you guys on the revenue side?

Sure, we expect to have about 30 markets reaching approximately 30% of the U.S. by the end of this year. By the end of next year, we anticipate having 50 markets broadcasting with an ATSC 3.0 signal, covering half of the country. This is part of the Nexstar platform and portfolio. Essentially, we need to establish the infrastructure before we can monetize it. Our goal is to enable ATSC 3.0 sets, which are available in stores now, with more affordable options anticipated in 2022. We're involved in initiatives to explore how to use the spectrum effectively. Spectrum is typically valued based on population, while retransmission is assessed on a household basis. I believe that in 10 years, we will generate as much revenue from ancillary uses of our spectrum as we currently do from distribution. This process will take time, but we view it as the equivalent of mineral rights for television broadcasters. There are various applications such as autonomous vehicles and internet backhaul, among others, where each of our broadcast towers can serve as a Wi-Fi hotspot to address rural broadband challenges in smaller markets. We see great potential here, but we must complete the infrastructure build-out to fully utilize the ancillary spectrum. Through spectrum rental and our diginets, we are currently generating over $80 million in revenue. This is just the beginning, as we believe the real revenue potential will emerge with the 3.0 signal. This transition will allow us to enhance viewer experience by delivering more content and higher quality signals, promoting growth opportunities for both existing customers and advertisers. We're committed to leading the way in transitioning to ATSC 3.0 and testing various use cases that we are currently exploring.

That's great. Thanks, Perry.

Thank you. I'm showing no further questions at this time. I will now turn the call back over for closing remarks.

Well, thank you very much everyone for joining us today. We look forward to joining you in the New Year to update you on our fourth quarter results, but most importantly to update our free cash flow guidance for the '22 and '23 two-year cycle. So thanks for joining us, and we'll look forward to talking with you soon in the New Year.

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