Aug 4, 2010
Management
Perry Sook - President and Chief Executive Officer Tom Carter - Chief Financial Officer
Analysts
Bishop Cheen - Wells Fargo James Boyle - Gilford Securities, Inc. Matt Swope - Gleacher Aaron Watts - Deutsche Bank Jonathan Levine – Jefferies Edward Atorino – Benchmark Lance Vitanza - CRT Capital Andrew Finkelstein - Barclays
Operator
Good day, and welcome to Nexstar Broadcasting Group’s 2010 second quarter conference call. Today’s call is being recorded.
All statements and comments made by management during this conference, other than statements of historical facts, may be deemed forward-looking statements within the meaning of Section 21 of the Securities Act of 1933 and Section 21A of the Securities and Exchange Act of 1934. The company’s future financial conditions and results of operations as well as forward-looking statements are subject to change.
The forward-looking statements and comments made during the conference call are made only as of the date of today’s conference call. Management will also be discussing non-GAAP information during this call.
In compliance with Regulation G, reconciliations of this non-GAAP information to GAAP measurements are included in today’s news announcement. The company does not undertake any obligation to update forward-looking statements reflective of changes and circumstances.
At this time, I’d like to turn the conference over to your host, Nexstar President and CEO, Perry Sook. Please go ahead.
Perry Sook
Thanks, Howard and good morning everyone. Thank you very much for joining us to review the 2010 second quarter operating results for Nexstar Broadcasting Group.
Tom Carter, our CFO, is on the call here with me this morning, and after our brief remarks open the phone lines for your Q-&-A. Nexstar’s focus on building brands by leveraging localism has been proven to be a blueprint for both near and long-term growth for the company.
Our record second quarter and first half 2010 results reflect the strength of our core television operations and the ongoing success of our quadruple play of revenue drivers as the company again achieved growth in all financial and operating metrics, and solid increases from all of our revenue sources for the quarter. Our Q2 financial results benefitted from the broad-based advertising recovery and acceleration of the growth of national revenue and our success in garnering leading shares of political billings in our markets.
Our 19.9% rise in second quarter net revenue was impressive given that we significantly exceeded the industry revenue performance in last year’s second quarter. And with our focus on managing the business for cash and paying down debt, we generated 53% growth in second quarter broadcast cash flow, a 62% increase in Q2 EBITDA, and 118% rise in free cash flow all of which highlight what we feel as the tremendous operating leverage in our business model.
Importantly, while we clearly demonstrated our positioning for emerging from the adverse session with a highly diversified business model is yielding strong year-over-year revenue margin and cash flow growth, the best part of our return to growth and de-leveraging story will be evidenced in the second half of this year. Our third quarter bookings to date are pacing ahead of where we were at the same point in both Q1 and Q2 and we continue to see strong demand on inventory from national and political advertisers which is driving higher rates at our stations.
Nexstar generated total second quarter net revenue of $74.5 million, which as I mentioned was a 19.9% rise from the year-ago period. The increase being broad based as illustrated by strong growth in both, local and national as well as political, retrans, e-MEDIA and mobile revenues and another quarter of contributions from our management services contracts.
During the second quarter, we generated 13.6% year-over-year increase in aggregate local and national revenue, and when you include political, our revenue increase for the quarter was 24.6% in total television ad revenue. Speaking to the strength of our core television operations, market positions and news operations, we posted a 32.6% year-over-year increase in national spot revenue and a 7.8% rise in local spot revenue.
Our increase in total revenue drive from retransmission consent fees, e-MEDIA revenues and management fees was 12.8%. In total, the high margin revenue from retrans, e-MEDIA and management services increased to $11.1 million in the second quarter and in addition to the core revenue growth we are expecting, we also see continued growth from those forces in the back half of 2010.
Beyond the top line, our continued focus on expense management and achieving further operating efficiencies contributed to excellent year-over-year cash flow and margin growth, excluding one-time charges and gains in 2010 and 2009 second quarters, our 2010 second quarter operating income increased 255% to $15.5 million. In addition, our BCF margin improved to 41.2%, an increase of 880 basis points and our adjusted EBITDA margin grew to 36.3%, an increase of 940 basis points versus the prior year.
Reflecting the significant year-over-year operating income and growth and a reduction of capital expenditures, our 2010 second quarter free cash flow rose to $10.9 million from $5 million in the comparable year earlier period. Looking at our balance sheet, Tom and his team have continued to be very active in the six month, year-to-date period with further progress in reducing debt and improving liquidity and Tom will review those specifics in just a moment, but let me first review some of the other quarterly and recent highlights.
Second quarter retransmission consent key revenues were $7.3 million, consistent with Q1’s quarterly record level and exceeding Q2 of ‘09 levels of $6.4 million by 14.1%. Q2 e-MEDIA and mobile revenue came in at $3.3 million surpassing last year’s second quarter by 12.4% and marking the 15th consecutive quarter of growth for Nexstar's community web portal strategy.
In the second quarter, we also recorded $500,000 of management fee revenue from our services agreement to manage the Four Points Media Group. Under that agreement, we are entitled to earn performance-based incentive compensation above the base management fee which we anticipate recording in the back half of this year.
Nexstar generated $4.0 million in new local direct advertising in Q2 ’10 representing 9.4% of our local billing and we improved this metric by 9% compared to what we did in Q2 of ’09. Our second quarter political revenue reflected very heated Pennsylvania and Arkansas primaries, and an Arkansas run-off election surrounding the contentious house and senate races there as well as an open Pennsylvania gubernatorial seat.
We also saw significant issue pack and party spending in the quarter, which collectively drove an 8.5 fold year-over-year revenue increase to $6.8 million. By way of comparison, we did $3.6 million of gross political revenue in Q2 of ’08, so the recent results served to confirm our high expectations for political advertised spending on our stations in the back half of 2010.
Taking a look now at category data, Nexstar was up in 17 of our top 20 advertising categories and we generated a 16% overall increase in revenue from our top 10 categories in 2010 in the second quarter. This was led by a 37% year-over-year increase in automotive ad spend.
The auto gains were across the board from both local dealers to corporate dealer groups spending, and this is our fourth consecutive quarter of improvements in the category. Just as in Q1, auto represented approximately 19% of our core billing for Q2.
The upswing is extremely broad based and it includes both domestic and foreign brands, local dealers as well as the dealer groups. Based on the trends we’ve experienced and our Q3 pacing, we see continued upside as we head toward the second half of the year and we think the demand combined with the expected political billings, we also expect a further positive impact on our inventory utilization as well as our rate.
I’ll now turn the call over to Tom. He’ll provide further detail on our financials and debt reduction, after which I’ll come back to talk briefly about our outlook in the third quarter.
Tom.
Thomas Carter
Thanks, Perry. Good morning, everybody.
I’ll review and reiterate some of the key Q2 line items on the company’s income statement and balance sheet. Core revenue, local and national ad spend was up 13.6% to $59.4 million.
Political revenue was up 750% to $6.8 million. Retrans revenues were up 14% to $7.3 million and e-MEDIA was up 12% plus to $3.3 million, a note on adjusted EBITDA, which increased 61.7% to $27 million.
During the quarter, Nexstar incurred $1.6 million non-cash charge related to the previously disclosed re-pricing of employee stock options, which is over and above our typical $300,000 quarterly run rate for non-cash option expense. These amounts are excluded from both, the three and six-month adjusted EBITDA for 2010 and 2009.
The exact amounts for all four periods are included in the free cash flow reconciliation table, which is on the last page of this morning’s release. Reported income from operations in the three months end of June 30, 2010, $14 million was impacted by the non-cash charge related to that re-pricing of the stock options while income from operations in 2009s second quarter benefited from a total of $4.7 million in net gains related to asset exchange and asset disposal, and was impacted by $200,000 charge related to a contract termination.
On a normalized basis, excluding these one-time charges and gains in 2010 and 2009 second quarters are reflecting our typical $300,000 quarterly run rate for non-cash option expense. The 2010 second quarter operating income increased 255% to $15.5 million.
Overall, Nexstar’s second quarter 2010 corporate expenses totaled $5.6 million, which included the aforementioned $1.6 million one-time option expense change and this compares to $3.7 million in the year-ago period. The increase also includes an accrual for cash incentive compensation in 2010, which was not a factor in 2009.
Excluding the non-cash compensation expense and the bonus accrual, corporate overhead would have been lower in 2010 than in the year-ago period. Station direct operating expenses consisting primarily of news, engineering, programming, selling and general administrative expenses, net of trade were $36.7 million for the three months ended June 30, 2010 compared to $35.2 million for the same period in 2009, an increase of $1.5 million or 4.5%.
The increase in station direct operating expenses in SG&A expenses for the three months ended June, 2010 was primarily attributable to $900,000 in increased national local sales commissions related to higher local, and national and political revenue for the same period, as well as $300,000 of incremental fees related to our outsourcing agreements associated with our JSA in Peoria and Rochester. We are proud of the fact that absentees revenue variable expense increases, station direct operating expenses were up less than 1% for the quarter.
As Perry mentioned at the outset of the call, we remained active in reducing debt, improving liquidity, extending bank maturities and eliminating pricing increases on certain pieces of our capital structure and during the second quarter, Nexstar repurchased $2 million of its outstanding 7% senior subordinated PIK notes due 2014 and $2 million of our outstanding 13% senior PIK notes due also in 2014, both of which happened in the open market. These repurchases follow the open market purchase of $1 million of the 13% PIK notes in the first quarter and the repurchase through the cash tender offer, and concessive solicitation of approximately $34.3 million of these notes with a portion of the proceeds at the April 2010 refinancing.
Subsequent to the quarter end, we have also repurchased an additional $5.6 million of the 7% notes divided between the cash and the PIK portions, also in the open market. In conjunction with the April notes offering, we extended our senior security credit facility amendments and apply the net proceeds remaining after the tender offer together with borrowings and cash on hand, to refinance the existing senior secured credit facilities and for general corporate purposes.
Under the terms of the new agreement, the principal amount available under revolving credit facility was reduced to $75 million; $65 million available for Nextstar and $10 million for Mission and the term loan was reduced to $100 million, allocated $61 million to Nextstar and $39 million to Mission. These credit agreement amendments also permitted incremental Term Loan B facilities of up to an additional $100 million, permit Nexstar and Mission under certain circumstances to incur additional indebtedness and make restricted payments, in each case in part to repurchase or extinguish existing debt.
The new credit agreement eliminates the requirement that Nexstar maintain a consolidated minimum interest coverage ratio and a consolidated minimum senior leverage ratio and adds the requirement that we maintain a consolidated maximum first lien ratio, based on the aggregate fist lien indebtedness maintained by Nexstar and Mission. It also changes the maximum and minimum covenant levels applicable to each ratio.
Additionally, the credit agreement removes mandatory quarterly principal payments based on a computation of excess cash flow for the preceding 12 months. Moving on to the capital structure in the balance sheet as of June 30, we’ve included a chart in the press release that details various levels on the various pieces of the capital structure.
We made significant headway on downsizing some of the most expensive pieces of our capital structure and then all we reduced that by $16 million during the quarter. Total leverage at June 30, 2010 was 7.5 times down from 8.5 times at March 31, 2010 on a pro forma basis and versus the total permitted leverage covenant of 9.5 in the credit agreement.
First lien leverage was 1.2, down from 1.45 at March 31 and versus a 2.5 covenant in the credit agreement. Nextstar’s outstanding data June 30 consisted of first lien debt comprised solely of $100 million outstanding amount under the term loan, as we eliminated all borrowing and the revolver.
$317 million net debt, under the 8 7/8 second lien senior secured notes. This is semi-annual cash pay with a maturity of 2017.
The other debt outstanding, the 7% cash pay portion of the notes was $47.1 million at June 30. The PIK portion was $135.1 million and again that’s a PIK security through January 15 of 2011, $50 million were still outstanding under the 11 3/8 notes and the 13% senior sub notes balance was reduced to $5.3 million, again this is cash pay through -- went cash pay on January 15 of this year, that was reduced through the tender offer as well as some open market purchases.
Total debt on hand at 6/30/2010 was $654.5 million and cash was approximately $8 million. Total interest expanse in the second quarter of 2010 was $13.9 million compared to $8.9 million for the same period of 2009.
Cash interest expense for that quarter was $10.7 million compared to $5 million for the same period in 2009. Nexstar’s Q2 CapEx of $4.9 million compares to $6.2 million in the second quarter of last year.
CapEx on a year-to-date basis was $8.7 million and we project further total CapEx for the year to come in at approximately $12 million, just one note of the $4.9 million in Q2 CapEx approximately $0.5 million of that was offset by casualty insurance proceeds during the quarter. Overall, we are successfully managing operations in the balance sheet for cash and remain focused on further actions that can enhance the share holder value largely through the allocation or free cash flow to reduce indebtedness during 2010.
That concludes the overall financial review for the call and I'll turn it back over to Perry for some closing remarks before Q-&-A.
Perry Sook
Alright, thanks Tom, great report. Q2 was another quarter of record performance and also a quarter of very solid performance for Nexstar.
As we continue to aggressively innovate through our practice of leveraging localism and developing new revenue streams, our businesses are running with increased efficiency across all functional areas that all results in a very strong operating leverage and helping free cash flow growth in our model. As a result, we continue to make a good progress as we work to de-leverage the balance sheet as Tom just mentioned.
We remain highly confident that 2010 will be a breakout record year for the company and across all of our markets we are a primary beneficiary of growth overall and advertisers spending with a strong continued demand by national advertisers and good work by our national Rep Firm, resurging in the auto category, incredible levels of political and issues advertising and continued growth of total revenue from retrans, e-MEDIA, mobile and management fees. So with core net revenue in the back half of 2010 facing ahead of plan, we are indeed on track to deliver record free cash flow for 2010.
As a reference point, our previous record for free cash flow was $28 million in 2007 and in 2010 year-to-date for the first six months of the year, we have generated $19.8 million of free cash flow. Clearly, the second half of this year will allow us to build on our recent successes and we will do so with an eye toward creating more value for our share holders.
Thanks for joining us this morning and now, Howard let’s go to the phone lines to address Q-&-A and specific areas of interest.
Operator
(Operator Instructions) Our first question or comment comes from the line of Mr. Bishop Cheen from Wells Fargo.
Your line is open.
Bishop Cheen - Wells Fargo
Hi Perry, hi Tom, thank you for the detailed update. Let me go to a question with the balance sheet.
First, Tom so it looks like you totally repaid whatever was left on the revolver in Q2. I know a lot of the refinancing happened in the early part of Q2.
So, you had like $69 million of revolver out before the refinancing and there is nothing currently drawn on it right now?
Thomas Carter
That’s correct.
Bishop Cheen - Wells Fargo
Okay, and then as you look forward because you are in this up-cycle with momentum building. Do you foresee any need to draw on the revolver as you go through the back half of 2010?
Thomas Carter
The only potential would be, obviously for working capital or for limited, we have some limited capacity of draw under the revolver for restricted payments and other debt repurchases, but it is somewhat limited. I don’t see it being material.
Bishop Cheen - Wells Fargo
Okay, and then as I understand it then, the last piece of PIK paper is still left PIK I think though July of next year is the 7% PIK tranche...?
Thomas Carter
It starts accruing cash pay in January. The first actual cash payment is in July of ‘11.
Bishop Cheen - Wells Fargo
Okay, so it becomes full cash pay in mid next year. So, we are still picking through January and then the first cash coupon payment is actually made in July, is that correct?
Thomas Carter
That is correct.
Bishop Cheen - Wells Fargo
Okay. So you’ve done a lot on the higher coupon stuff on the balance sheet and I know you have fairly limiting constraints via the second lien notes plus a term facility, but as you take your leverage down this year and I think you have demonstrated in the past, you dramatically can’t de-lever in a more normalized up-cycle like we are having in 2010.
As you take that down, do you foresee any flexibility to do equity enhancements, either onetime dividends, quarterly dividends, stock repurchase, etc..?
Thomas Carter
That’s not really on the radar screen. We have some capacity to do a limited amount of that, but again it’s not meaningful and it’s nothing that we talk about to any greater degree.
Bishop Cheen - Wells Fargo
Okay, great. Thank you very much.
This is very helpful.
Operator
Our next question or comment comes from the line of Mr. Jim Boyle from Gilford.
Your line is open.
James Boyle - Gilford Securities, Inc.
Good morning. Tom, what debt leverage range would be a reason will go for Nexstar in the out years?
Thomas Carter
I would say probably, and Perry can chime in here with his own opinion, I would say somewhere probably between 4.5 and 5.5, around the 5 level. That’s also being, I would say, somewhat realistic with regard to the odd-even year cycle and our ability to get there and to stay there for a sustained period of time.
James Boyle - Gilford Securities, Inc.
Okay and Perry, you mentioned 17 of the top 20 increase; which three categories didn’t increase in Q2 and were any of them top ten?
Perry Sook
The only two top ten that did not increase in Q2 is the similar report from Q1. One is paid program; obviously, we pulled back from our reliance on that revenue stream as there is more demand for our 32nd inventory, so the long form commercials because they are not necessarily as viewer friendly, so that category was down.
Then telcom telecomonce again, because this is the last quarter you’ll hear that report in any major way, because in our telcom numbers, primarily in a Southwest markets, we had the last quarter of Alltel spending prior to their merger with Verizon.
James Boyle - Gilford Securities, Inc.
Okay, and you mentioned Q3 moved ahead of Q2, Q1. Is that being driven by the top ten ad categories, especially auto or is it still pretty much everything?
Perry Sook
All categories seem to be robust in Q3 as well and core revenue will continue to be up in the same vein as you’ve seen from us in the first half of the year. Obviously, when you add political into that, our core plus political increase will substantially exceed the 24.6% you saw in Q2 release this morning.
James Boyle - Gilford Securities, Inc.
So it seems like you are going to be better than 20%, are you going to be better than 25%?
Perry Sook
I think that’s a reasonable assumption.
James Boyle - Gilford Securities, Inc.
Okay and given this double-digit revenue growth in the core, is that due mostly to higher sell out or to higher average advertising rates?
Perry Sook
Well, it’s both. I mean advertisers are spending more money and we have a fine amount of inventory, so we are selling more inventory but we are also selling it at higher rates.
I think when you look at delivering a 13.6% increase in core revenue over Q2 of 2009, on top of an 8X increase in political revenue, our stations have done a great job of managing their inventory to maximize utilization and accommodate everybody.
James Boyle - Gilford Securities, Inc.
And given your first half of this year, the adjusted EBITDA margins are higher than the first half of ‘08, what range do you think is conceivable for all of 2010, given ‘08s full year was 33.8% for adjusted EBITDA margin.
Perry Sook
Well, again we showed, as I mentioned in my comments, a BCF margin north of 40 and an EBITDA margin in the mid 30s, given that are the only expenses that will vary in the back half of the year are our variable expenses, commissions and JOA profit sharing payments. The incremental revenue dollars flow at a 70% plus margin to the bottom line once you’ve got your fixed cost.
So, I think it’s reasonable to assume that those margins will trend upward in the back half of the year, leading to a result that is better than what you saw on second quarter when the full year is calculated.
James Boyle - Gilford Securities, Inc.
And final question on political, it used to be, you had two up and down kind of cycles, Summer Olympics are always bigger than Winter Olympics and presidential political year was always bigger than mid-term political year. Obviously, 2010 looks like it’s just going to kill 2008, given you are up 89% just currently.
Has political essentially gone to a point now where that old cycle no longer existed, just seems like keep raising more money every cycle and they keep spending more money every cycle?
Perry Sook
Well, I would agree with the last part of your premise, Jim. I noticed in one of the trade emails that I get every morning that the AFL CIO this morning said they were taking the caps off of the $53 million spending that they anticipated for the mid-term elections.
I will tell you that in our Q2, in fact in the first half of this year, party spending and pack spending which usually makes up 10% to 15% is in excess of 35% of the total spending pool. So, we don’t know yet if that is a sustained trend, but it is certainly a marked difference from the last three even year election cycles that we’ve gone through that the pack and party spending has been this high, this early and we think that’s obviously part of what’s leading to the dramatic increase when you compare our numbers to 2008, even back to 2006.
I’ll also tell you that all politics is local and we are blessed in this even-year cycle with our geography in Pennsylvania and in Arkansas, and a contested Governor’s race in Texas for the first time since Ann Richards ran back in the day. So, our geography is also lending to these kinds of increases over anything we’ve done in our history.
James Boyle - Gilford Securities, Inc.
It used to be TV, used to take about 80% of political ad spend, do you think that’s still roughly the vast majority case these days with all this extra spending?
Perry Sook
Yes, I do. Again, our numbers are up by those kinds of exponential amounts.
So, I think that our share is maintained. The political consultants will tell you that the Internet is a great tool for political fundraising, but it is not a good tool for political advertising.
I mean, I believe again, political advertisers are looking for reach in a broad-based delivery of their message. So, the inventories on our television stations are much desirable to them than our inventory online.
James Boyle - Gilford Securities, Inc.
Okay, logical. Thank you.
Operator
Our next question or comment comes from the line of Mr. Matt Swope from Gleacher.
Your line is open.
Matt Swope – Gleache &Co
Good morning guys.
Perry Sook
Good morning.
Matt Swope – Gleache &Co
Tom, can we go back to the capital structure for a second. Could you tell us the current leverage through the second lien?
Thomas Carter
Hang on just one second. Let me do a quick calculation.
Matt Swope – Gleache &Co
Sure.
Thomas Carter
Matt Swope – Gleache &Co
The reason, just why you are calculating, the reason for the question is you don’t have a maintenance covenant there, but you do have an incurrence covenant there and just thinking about where you go next with the capital structure, how you compare versus at 5.5 times may speak to your flexibility to do more, secondly in debt to think about taking out some of the near maturity stuff.
Thomas Carter
My back of the envelope calculation has it just below 5 times.
Matt Swope – Gleache &Co
Okay. And how do you think about that, I mean obviously that number is going to go lower as you report the third quarter, and then the fourth quarter.
As you get more capacity against that 5.5 times incurrence, do you consider doing more debt there to take out some of the 2013 and 2014 maturities?
Thomas Carter
I would agree with your premise that it gives us more flexibility, and what we do with those funds are something we’ll have to determine once we get there.
Matt Swope – Gleache &Co
Maybe just to go through the nuts and bolts of what you can do rather than what you might do, how much flexibility do you have to go after the 11 3/8 notes at holdco?
Thomas Carter
There is a 7 times incurrence test at the 7% notes, the 11 3/8s are at holdco and so we have the RP capacity and part of the RP test is we have to be able to incur an additional dollar of debt and that’s a 7 times covenant at the 7% which would then require an RP to get to the 11 3/8.
Matt Swope – Gleache &Co
Got you, so you’re little limited before you get below 7 times, although that looks like that’s coming. And then obviously you’ve been kind of buying away in the open market at the 7s and have almost got the 13s out now.
Is there any limitation on how much more buying you can do of the debts, the notes at the holdco?
Thomas Carter
We do have limitation in the credit agreement that limits us and how much we can do based on an excess cash flow calculation.
Matt Swope – Gleache &Co
And if we just look at that number today or maybe June 30, how big would that have been as far as your capacity to do that?
Thomas Carter
That’s not a number that we have in the public domain.
Matt Swope - Gleache &Co
Okay. Well you stated, you did some buy more back after the end of the second quarter.
Thomas Carter
That’s correct.
Matt Swope – Gleache &Co
Got it, that’s sort of makes sense. And then Perry, something that you’ve talked about at the past has been maybe the potential for a more kind of management service agreements.
Is there anything going there that you can fill us in on?
Perry Sook
We continue to have discussions with a number of parties about a number of topics, that’s certainly one of them, those discussions are ongoing but nothing to report at this point.
Matt Swope – Gleache &Co
And then another high-level question, and this maybe ties back to your leverage a little bit, but what do you think on the M&A front, Perry? Are you starting to see any movement there and is that something as your leverage comes down over the course of the year that you could be involved in?
Perry Sook
We continue to look at things that are out there and there are things out there that could be acquired, but we’re evaluating even accretive acquisitions versus the concept of paying down our debt and we’re seeing continued superior returns in paying down debt as use of our capital, but we continue to run those calculus models with every opportunity that’s out there, whether it’s a one off or something of a larger scale, but we continue to believe that for the foreseeable future, the best bank for our buck is continuing to pay down debt and de-levering the balance sheet.
Matt Swope – Gleache &Co
Got it. Thanks guys.
Operator
Our next question or comment comes from the line of Mr. Aaron Watts from Deutsche Bank.
Your line is open.
Aaron Watts – Deutsche Bank
Perry, on one hand we are hearing a great outlook from you and a lot of your peers, we’re seeing ad budgets get boosted up from advertisers, but then on the other hand we hear about shaky consumer sentiment and other concerns with the direction of the overall macro economy. Political obviously provides you a nice insulation to those issues and it doesn’t sound like just from your comments you’re seeing any real break in the positive momentum from the start of the year.
So, how do you think about sort of the concern that we read about in the press with regards to your core advertising going forward?
Perry Sook
Well, I can tell you that we’ve touched a lot of our markets. I’m going to be in our Louisiana station this afternoon and tomorrow visiting and asking those same questions and with our senior management team we are doing these channel checks literally constantly.
It’s interesting, because I get calls and Tom gets calls from investors and analysts saying, not that you are seeing any slow down, how big is the slow down in the back half of the year and I can tell you that quite frankly we are just not seeing it. My concern is that there is a potential we can talk ourselves into a double-dip recession, but there has been no real change from even the first quarter of the year, in terms of unemployment and the general economy and I don’t know why the change in sentiment has gone from ebullient to more gloomy, but I could tell you that in the markets that we are in, people are opened for business, they are doing business.
I think there is more confidence out there in the business community. I haven’t seen hiring yet, but I have seen people extend advertising commitments, sign on for new programs.
At this point, last year when we would go to talk to advertisers, we would first have to coax them out from under their desk before we could have a conversation. So, on a comparative basis, I think that we are seeing continued momentum and there is real no sign of weakness by category, by geography, it is we think it continued broad-based recovery and as far out as we can see which is literally through the end of the year, our pacings are continuing to be substantially ahead of where they were at this point in the prior year and that’s the best yardstick we have to measure at this point.
Aaron Watts – Deutsche Bank
Okay, that’s good to hear. I guess the other question I had, just recognizing how important your news operations are to what you do.
If I think back not too long ago, there was a lot of choppiness in the late night arena which was going on at NBC and the impact that had on everyone else including CBS in the late night and what that meant for your late news. I’m just curious if what you have seen now versus when all that was going on, did you get a bounce back at any of your NBC affiliates, have your CBS affiliates kind of normalized with late night settling and I’m just curious how that looks?
Perry Sook
We do chart internally quarter-over-quarter and year-over-year percentage contribution by affiliate and I can tell you, I’m sitting here looking at the graph of ABC, CBS, Fox and NBC and the charts of Q2 versus Q2 of ‘09 have been virtually unchanged. It is all about the local news operation in terms of revenue share and market rank by and large.
I think that we have more saleable inventory, people are more used to buying long order on NBC at 10 o’clock than they were on the Tonight Show. I think that that has provided a comfort level and I think our NBC stations continue to perform well, and I think it’s a more normalized environment, but if I look at the contribution by affiliate year-over-year, in our universe it remains virtually unchanged.
Aaron Watts – Deutsche Bank
Okay, thanks a lot.
Operator
Our next question or comment comes from the line of Jonathan Levine from Jefferies. Your line is open.
Jonathan Levine - Jefferies & Co.
Thanks. Most of my questions have been answered, but I was wondering if you could talk a little bit more in terms of political and the trends and how would you think about it for the third quarter and the fourth quarter in terms of, I guess overall levels for the full year as well as how you see that kind of playing out, specifically in the fourth quarter?
Perry Sook
Sure. I mean, if you look at the political advertising revenue compared to 2008, which was our last election cycle, in the first two quarters of the year we have virtually doubled what we did in the first two quarters of those periods.
So, that gets you to a pretty heavy number if you do that linear extrapolation for Q3 and Q4, we are 90 days from the mid term election and that would require a lot of money to go on the books. But we feel pretty comfortable that our political revenue for the year will start with a number of it – it was very high in the 30s or perhaps even starting with a four into the 40s in terms of total political revenue for the year.
So, hopefully that’s helpful to you and that’s probably above guidance we have given previously, but at this point the trend seem to be very strong, Tim Bush our Co-COO tracks fund raising down to the candidate level and the amount of money that people have raised is substantial and they are now starting to spend it in a material way in Q3 and in Q4. So, that’s a neighborhood that I think we are comfortable in with political revenue for 2010 compared to the prior years.
Jonathan Levine - Jefferies & Co.
Okay and then just a one question in terms of local and national, the year-on-year growth for local is positive, but seems to be trailing. What you are saying in national, it seems to kind of be accelerating.
Can you talk a little bit what you are seeing in the third quarter?
Perry Sook
Continuation of those trends and again yeah at a certain extent it’s a math problem right, because our national revenue was down 40% and it’s up 40%. We are not back to were we were doing that math two years ago, but national took the biggest dip, it has seen the biggest resurgent, it’s still not back to what we would consider to be normalized level and local continues to grow.
That’s the area where we spend the bulk of our effort in building our businesses and local saw the least amount of decline in the recession and is obviously, I guess you could call that tougher comps, but we continue to build. I can tell you that our local projection for third quarter increases is equal to or greater than what you saw in terms of an increase in Q2 of ‘10 versus Q2 of ‘09 and national continues to rebound, we haven’t yet lapped ourselves to get back to more normalized levels
Thomas Carter
And that’s just one thing I was going to bring up. We, from a comp perspective, we started to see recovery in national in September ’09 and really grabbed hold in the fourth quarter of 2009.
So, I think that’s were the comp start to catch up with us just in terms of the recovery, so you may see a little bit of that in Q3 but only a month or so of that from a national perspective and then it will be more pronounced in Q4.
Jonathan Levine - Jefferies & Co.
Okay, that’s very helpful. Thank you.
Operator
Our next question or comment comes from the line of Mr. Edward Atorino from Benchmark.
Your line is open.
Perry Sook
Morning, Ed.
Operator
You may need to mute your phone, sir. Okay, I will return him to the queue.
Our next question or comment comes from the line of Mr. Lance Vitanza from CRT Capital.
Your line is open.
Lance Vitanza - CRT Capital
Hi, thanks guys. I have three questions for you.
I apologize that the first one you may have touched on earlier, but are your covenants generally set on a trailing 12-month basis or do they look to the past two years?
Perry Sook
12- months.
Lance Vitanza - CRT Capital
12 months, okay. With respect to the political in the back half, obviously there is going to be a lot of it, but what ability do you have?
I know there are some limitations; my understanding is there are some limitations on your ability to increase rates. Could you talk a little bit about you ability to use the political to take rate up and how that plays into the crowding out of the local and the national?
Perry Sook
Sure. For federal or federally-elected candidates, the regulations require that you offer them the lowest unit rate per class of time.
We have bifurcated our rate card into a five-grid system. So, grid five is immediately [Inaudible] gird one is fixed in their gradations in between.
Now for non-federally elective candidates and for issue, party and PIK money, they are exempt from those restrictions. So, you literally can charge what the market will bear in terms of unit rates for any class of time.
Lance Vitanza - CRT Capital
So, it sounds like anybody who is talking about crowding out ought to be at the same time able to take advantage of that in raising the rates.
Perry Sook
If you know how to work your inventory and your rate card, you should absolutely be able to see a substantial increase in rate. Political advertising is generally targeted at local news programming because that is viewed as an active participatory viewing experience versus entertainment programming that is more passive, and so there are areas where you know that the bulk of the money is going to flow.
We are literally on top of our rates, as I said in politically active markets on a daily bases to make sure that we are able to accommodate everybody, that we limit our need to refund money to political advertisers because of the way the system would work and to make sure that for non-political advertisers, we have offered them, made good inventory that is equal to or better than what they are not able to clear because the politicians have crowded them out.
Lance Vitanza - CRT Capital
Okay, terrific. Thanks for that and then lastly, I recognize that you are focused quite rightly on your balance sheet, but just in terms of thinking about the stock for a minute, I mean there is no volume in your stock.
What are you doing or what are you planning to do at some stage to correct that?
Thomas Carter
Well, that’s a multi-part question. I mean, we have 10 million shares in the public domain, they are in the public float and I think our average share volume is in the 50,000-60,000 share per day range and we recognize that that’s not a significant volume.
So, I would say this is not so much a criticism or an observation of Nextstar as it is of the sector, there is just really not a meaningful amount of stock to buy and what needs to happen and what we are hopeful that will happen is there will be consolidation of a bunch of these mid market companies and there will be bigger companies with stronger balance sheets and more equity and debt into the market places that will justify for people the work that they need to do to be able to evaluate these companies.
So, I would say this is not so much a criticism or an observation of Nextstar as it is of the sector, there is just really not a meaningful amount of stock to buy and what needs to happen and what we are hopeful that will happen is there will be consolidation of a bunch of these mid market companies and there will be bigger companies with stronger balance sheets and more equity and debt into the market places that will justify for people the work that they need to do to be able to evaluate these companies.
Lance Vitanza - CRT Capital
Well, that all sounds terrific, but it’s fairly pie in the sky. Is there is nothing that you can you do on your own in the near term to help with the issue.
Thomas Carter
I really don’t see it changing quite frankly in the near term, because again we are not going to issue equity and why would we at this point. We don’t have use of proceeds.
We do think though that if you look at the free cash flow just in the back half of this year and then for the next two years. It’s a substantial, substantial number and we think that a reduction in debt is a dollar contribution of the equity side of the balance sheet and that share price appreciation will happen naturally as we de-lever even if the total enterprise value or multiples don’t change, the equity will be the more valuable.
That may attract people that would like to see that kind of appreciation and I don’t want to say it’s a sure bet, but I mean there is nothing complicated about paying down debt with your free cash flow and sticking to that business model.
Lance Vitanza - CRT Capital
Okay. Thanks a lot guys.
Operator
(Operational Instructions) Our next question or comment is a follow-up from Mr. Bishop Cheen from Wells Fargo.
Your line is open.
Bishop Cheen - Wells Fargo
Thank you. I just need clarification on something that was said and I know you have been using a lot of reference points, different reference points on the growth, but did I understand when you said that what you see right now is that the Q3 increase in the non-political will be equal to or better than the Q2 increase in your core non-political?
Perry Sook
I think that what I had said, Bishop or what I had meant to say, if you look at gross television ad revenue which is local, national and political the increase in Q3 will be substantially ahead of the 24.6% that we saw in Q2 in terms of growth.
Bishop Cheen - Wells Fargo
But you are including political in there, correct?
Perry Sook
The trends are equally strong for local revenue and national revenue, but I do expect if we are going to accommodate the amount of political revenue we think that there will be out there in Q3 and that we are already seeing start to manifest itself, that could tap down those comps to the prior year. And as Tom mentioned we started to see a bounce off the bottom in national in September.
We weren’t up nationally in September, we were less down but that will make the comp just a tad bit tougher, but dramatically double-digit growth in the core revenue in Q3 plus political is absolutely the direction that we see …
Bishop Cheen - Wells Fargo
Okay, that’s what I was looking for, because I think rightly or wrongly when we analyze it, we try and back out the political because like Q3, it’s going to be a lot larger than Q2. So, we try and get like a bead on what your core national and local spot revenue is going to be and then do a separate analysis on the size of the political.
Perry Sook
I think we are highly confident that the core revenue will be a double-digit increase excluding political in Q3.
Bishop Cheen - Wells Fargo
Okay, and then the other clarification that I may have misunderstood. When you said that the way you’re political is growing, did you say it’s going to be two times ahead.
The way it grew in the first half of 2010, did you say it was twice the size of the way it was in the first half of ‘08?
Perry Sook
Yes, if you look at our political revenue for the first two quarters of ‘10 versus the first two quarters of ‘08, we literally booked doubled the number of political revenue two-year period over two-year period.
Bishop Cheen - Wells Fargo
Okay, but you are not suggesting that we extrapolate out and use that same magnitude for the full year of 2010.
Perry Sook
I am not suggesting that you not do that, but we haven’t done that. We haven’t guided to that.
I mean, that’s a very heavy number and I just don’t know that in 90-days, we can write that much additional revenue. So, that’s not the guidance we are giving, but as I said high 30s, perhaps in the low 40s is an area that we certainly believe is in the art of the possible and most likely probable.
Bishop Cheen - Wells Fargo
Right and that’s on a gross basis on the political?
Perry Sook
Yes sir, that is correct.
Bishop Cheen - Wells Fargo
Okay, and then the last clarification. Q3, ongoing the current Q3, you have bought back $5.6 million.
I take it face of the 7% PIK notes.
Thomas Carter
7% PIK and some of that is cash pay as well?
Bishop Cheen - Wells Fargo
Of the PIK and cash pay, and is there like an average discount that you were able to buyback from the open market?
Thomas Carter
Yes, it’s around 90 and that will be more fully detailed when the Q is filed which we anticipate happening on Friday.
Bishop Cheen - Wells Fargo
Okay, so that was my last question. The Q will come out on Friday.
That’s great. Thank you, guys.
Perry Sook
Thanks Bishop.
Thomas Carter
Thank you.
Operator
Our next question or comment comes from the line of Mr. Andrew Finkelstein from Barclays.
Your line is open.
Andrew Finkelstein – Barclays Capital
Hey guys, thanks for taking my question. A couple of questions; first Perry, you guys have really been the leaders on retrans.
I was wondering if you had any thoughts on CBS recently signing with Comcast for 10 years, some of the analysts had speculated maybe $0.50 going to a dollar. It seems like it’s a long time to sign up that kind of an agreement with rates accelerating and so I was wondering what you thought there and would it have been better where you hoping to work more closely with the networks in their [own to] get a deal for a broader group of the affiliates?
And then maybe what does that mean for any sort of reverse comp?
Perry Sook
Okay. Well, as far as CBS is signing up for 10 years with Comcast, I am sure that both parties would not have agreed to that unless it was a deal that they were agreeable too.
I don’t have any information and really would not add any value by speculating on the reasons behind it or the rates that are paid. We have 16 agreements up this year in Nexstar and half a dozen of those are meaningful in terms of their size and contribution, but those 16 agreements are still on 2005 economics, 1.0 economics which the good news for us is that in the discussions I have been having with the major MSOs who are up at the end of this year, there is an understanding that it is a different neighborhood than it was 2005 when we were the only ones negotiating and asking for payment in exchange for distribution.
So, I feel very positive about our retrans revenue stream continuing to grow and there are escalators and our other contracts that kick in on calendar year basis primarily and so it is a continued stair step up Do I think $0.50 to a dollar is achievable? Absolutely, we’re getting that today, so that is in the range of the payments that we do receive today from the 213 different MSOs that we do business with for distribution.
So, as it relates to reverse comp, I do think that all of the networks have expressed a desire for their affiliate stations to pay them more than they are currently paying them, I do think that will happen over time. I think it will be about as gradual as network compensation declining which it went from a high watermark to zero over about 10 years.
So, I do think that the affiliates will pay a higher programming fee or payment to the networks than they do today for the various things that we pay the networks for today. I do think that, that is manageable and I think that that in concert with the networks getting retrans cash for their owned and operative stations, hopefully once and forevermore will take off the table, the concept of networks going straight to cable, because they now have superior distribution to be able to command the premium and the dollars that they do in the ad market, and the dual-revenue stream to compete with cable which has always been the goal.
So, I think that the structural change in the business will ultimately be a long-term positive and given the fact that if you look at the broadcast model today, if you look at Nexstar’s model today, half a dozen years ago we had one revenue stream, which was selling advertising. Today, we have four distribution revenue, our television ad revenue, our e-MEDIA revenue, our mobile revenue and that’s before we get into ancillary uses of the spectrum.
In our company, relatively uniquely, we have a management services agreement which we will begin to record a substantial amount of earned incentive compensation before year end in addition to the base management fee that we do, and I can tell you our partner will be very happy to pay it because it means we’ve achieved record BCF levels for their company as well. So, I hope that’s answered all of your questions.
There may have been one in there that I missed and if so please feel free to come back to me.
Andrew Finkelstein - Barclays Capital
Okay. Just a follow-up, if you are getting $0.50 to a dollar now, where do you think the broadcasters can get that retrans for let’s say over the next three to five year in the next round of deals or what do you think is fair value?
Perry Sook
Well, what I think… Andrew Finkelstein – Barclays Capital Dollars in site..?
Perry Sook
So, what I think is fair. Do I think that we get into the dollar, dollar 50 per sub range relatively, consistently and sustainably over the next two retrans cycles, absolutely.
When you look at the viewership, if we were paid based on, if we as local television stations, distribution revenue was allocated based on viewership rather than currently vertical integration, we would be getting $3 and $4 per month because we are the number one viewed channel on the cable system as opposed to some of the other cable channels. It will take a while to get there, but do I think that that is in the art of the possible over the next couple of cycles, I absolutely do.
Andrew Finkelstein – Barclays Capital
Okay, great. And then just switching gears a little, I don’t know if anyone asked on the call, but just on auto, we’ve all heard the national guys doing great.
Can you tell us more about what you’re seeing out of the dealer side and the local?
Perry Sook
Sure. In our company, and that’s really all I can speak to, the local dealers represent approximately one-third of our ad spend, the dealer associations and manufacture money represents two-thirds and in the second quarter our entire automotive category was up 37% and the local dealers were up 31%.
Andrew Finkelstein – Barclays Capital
Okay. So, I mean it sounds like local is not growing as fast, but with that much growth out of the local dealers, I would think the local growth rate should be pretty good.
Perry Sook
Well, certainly, I mean for local dealers who have been there and they are the ones selling the cars. For their revenue to be up 31% Q2 versus Q2 of ‘09, I think it’s substantial.
What you are seeing that the reason that the category is increasing at a rate faster than that is dodge, doubled their spending because they had cut it in half the year prior. We’ve seen 75% increase from Toyota, obviously for structural reasons, Ford dealers are up 25%, General Motors is up by 50% in the company and then smaller, the Jeep dealers and the Lincoln-Mercury dealers and the Chrysler dealers and the Lexus dealers are all up anywhere between 25% and 89%, that’s kind of a return to spending.
For local dealers, who again didn’t decline as much as the dealer group and factory money did in the recession, but for local dealers to be spending up 31%, I mean that’s money out of their pocket beyond the allocation to the dealer association or the factory holdback, I mean that’s a pretty strong expression of confidence and I’ll take 31% from the local car dealers any day.
Andrew Finkelstein – Barclays Capital
No, that’s great. And then last question, just with the political coming down the road and the resurgence and a better economic environment, is there any risk to the pacing number that it’s more just front loading at this point?
I’m sure you’re taking a look at that issue and we risk like a fall off as you go further into the quarter?
Perry Sook
Yes. We do look at that, we have looked at that.
I don’t think the pace number is illusory, I mean we watched it all the way through second quarter and where we finished up was on top of where we were pacing, so it’s not just an early booking obfuscation of the actual business results. We do have better visibility than we did, but when we build our forecast, it’s on an account by account basis, so it’s when the money comes in is important but it’s not as important as how much money each account we project to spend and what our good reasons are for why that would happen.
So, I don’t think that there is anything illusory about the pacing numbers here, they continue to be strong.
Andrew Finkelstein – Barclays Capital
That’s good to hear. Thanks a lot.
Operator
(Operator Instructions)
Perry Sook
I think that we’ll sign off at this point. I think we’ve gone a little over an hour and that’s a long conference call for the company.
We appreciate everyone taking the time to join us. Again, our Q will be filed on Friday and we look forward to getting together with you again in three months’ time to report on the third quarter operating results for Nexstar.
Thanks again.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program.
You may now disconnect. Everyone, have a wonderful day.