Aug 9, 2012
Executives
Perry A. Sook – Chairman, President and Chief Executive Officer Thomas E.
Carter – Executive Vice President and Chief Financial Officer
Analysts
Aaron Watts – Deutsche Bank Securities, Inc. Edward Atorino – The Benchmark Co.
Barry Lucas – Gabelli & Co., Inc.
Operator
Good day, and welcome to the Nexstar Broadcasting Group’s 2012 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, maybe 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 in 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 A. Sook
Thank you, Tim and good morning everyone. Thank you all for joining us to review Nexstar’s 2012 second quarter results.
Tom Carter is here, as always with me this morning. As evidenced by this mornings earnings release, business has never been better for Nexstar with another record quarter, led again by strong growth across all of our financial metrics.
Nexstar generated record second quarter net revenue, and with the operating leverage inherent in our model, the revenue increase resulted in our highest ever second quarter broadcast cash flow, adjusted EBITDA and free cash flow. I’ll give the details on those results shortly, but I’d like to first spend a minute kind of reviewing how we got here and where we’re going as a company.
Last month, we announced the Newport station acquisitions and their economic benefits for the company. And it’s evidence that Nexstar will drive significant value from this acquisition without materially altering our leverage profile.
We have what I consider to be the industries most confident and focused group of managers and employees, and we’ve proven throughout our history that we can quickly and efficiently integrate and build new value from the acquired stations. Our recent Four Points management agreement also demonstrated how overlaying Nexstar’s management philosophies could very quickly improve operating performance, which allowed servers to get great value when they sold the group earlier this year.
The Nexstar team understands exactly what needs to be done to achieve the EBITDA and free cash flow accretion targets highlighted in our press release and call last month. Specifically, we expect the acquisition to generate approximately $55 million in additional EBITDA to Nexstar in year one.
And the additional station operations are expected to provide free cash flow accretion in the first year to approximately 45% over the levels expected to be generated by Nexstar’s and Mission’s existing operations today. And we’ll finance the transaction and refinance our cap structure efficiently through the new $645 million senior secured credit facilities for which we already have financing commitments.
So while the second quarter results again demonstrate the efficacy of our operating and financing initiatives, the addition of the new stations and their economic contributions to Nexstar over the near and long-term will allow us to again take advantage of scale, and much more fully leverage our infrastructure, our operating disciplines and our local market presence, with the net result being a company that generates far more free cash flow than we can today. In this regard, I’d remind everyone that since our 2003 IPO, Nexstar has generated a 37% compound annual growth rate of free cash flow for the two-year cycle starting with 2003/2004 through the two-year cycle that included 2009 and 2010, when we generated a total of $79.6 million in free cash flow.
The significantly higher levels of post acquisition free cash flow will allow us to rapidly de-lever, while offering us the currency for additional growth and other initiatives to build shareholder value. On the leverage front, we see the additional free cash flow positioning Nexstar to reduce leverage ratios pro forma for the acquisition to well below five times by the end of 2013, and dropping to their lowest levels ever in the Company’s history in the following years.
Tom and I will spend some additional time later on the call reviewing the key points of our Newport transaction, but in the over 30 year that we each have been in this business, we agreed that this is probably one of the strongest acquisitions that we have seen in terms of the immediate value it can bring to our company. Moving back to Q2, our 17.7% rise in second quarter net revenue was highlighted by a 6.7% growth in core, 77.7% rise in retrans revenue, and an 8.4% growth in e-Media revenue.
Our operating leverage and efficiencies continued to convert Nexstar’s solid revenue growth into cash flow as broadcast cash flow margins rose to 44.6% from 39.7% in the year-ago period. Again, we are benefiting from the scale and efficiencies, and we see this as a very positive read through for the addition of the Newport stations later this year.
Overall, 2012 is shaping up for Nexstar as expected, the improving ad environment combined with the substantial increase in retransmission revenues the continued growth of our e-Media operations and the benefit of what are projected to be record political revenues, will drive top line and free cash flow growth for the company this year. In addition as we managed the company for free cash flow, Tom and his team remained active in further reengineering the balance sheet, and during the first-half of 2012, we reduced net debt by nearly $36 million with the trailing eight quarter leverage now dropping to 5.25 times at June 30.
The 2011-2012 free cash flow is expected to handsomely eclipse the $100 million level on a two- year basis. Nexstar generated total second quarter net revenue of $88.9 million, a 17.7% rise as I said from the year-ago period, with the increase being broad-based with strong growth in local, national, political, retrans and e-Media.
Nexstar’s continued leadership in new business development and the strength of the auto category resulted in a 6.7% rise in the second quarter core, local, and national revenue. That was 3.7% increase in local spot revenue, and a 15.1% rise in national spot revenue, even as we allocated additional inventory for the placement of political advertising which grew to almost $6 million in the second quarter.
The 2012 second quarter marks our 11th consecutive quarter of core television advertising revenue growth, and while we will see a rapid acceleration in political advertising activity in the second half of the year, Nexstar’s gross revenue growth in the second quarter excluding political was a robust 10.1%. In addition to the strength in core advertising activity including a 16% rise in automotive, Nexstar’s record second quarter revenue, EBITDA, and free cash flow highlight the continued growth in our key non-television advertising revenue sources.
Our Q2 core TV ad revenue growth was complemented by the 77.7% rise, pardon me, in retransmission fee revenue, and the 8.4% increase in e-Media revenue. In total, this higher margin core non-revenue grew by 55.4% year-over-year, and accounted for 22.2% of our 2012 second quarter net revenue.
Our continued focus on expense management and achieving further operating efficiencies resulted in record 2012 second quarter operating income of $23.5 million and a 92.1% rise in free cash flow to $19.3 million, bringing to $32 million our free cash flow total for the first half of 2012. By comparison, this represents a 61.6% rise over the $19.8 million in free cash flow that we generated in the first half of 2010.
Taking a minute now to look at the two-year cycle run rate, Nexstar generated $106 million of free cash flow over the last eight quarters, now that equates to over $1.75 per share in free cash flow on a fully diluted basis. And we see this trailing eight quarter run rate rising as we progress through the second half of the year.
Tom will now provide further details on our financials, at which time I’ll come back with some closing comments. Tom?
Thomas E. Carter
Thanks, Perry, and good morning everyone. I’ll start with the review of Nexstar’s Q2 income statement and balance sheet data, after which I’ll provide an update on our capital structure, and the proposed financing related to the Newport transaction.
As the press release states, we had an 11.8% – I’m sorry, 17.7% rise in net revenue to $88.8 million for Q2 of 2012 as compared to Q2 of 2011. Core revenue was $66.2 million, up 6.7%.
Local revenue was up 3.7% to $47.4 million. National revenue was up 15.1% to $18.8 million.
Our political revenue was up handsomely almost 200% to $6 million for the quarter. Retrans fee revenue growth continued its trajectory up 77% to $15.3 million.
Broadcast cash flow reflected our expense reduction and savings efforts, and increased 30% – almost 33% to $39.7 million. And adjusted EBITDA was up 35.7% to $34.5 million.
All of this totaled $19.3 million in free cash flow, a 90 plus percent increase over the same quarter of 2011. Nexstar’s second quarter corporate expenses were $5.1 million or 13.4% ahead of the year-ago.
The additional $600,000 of corporate expenses, the majority of the increase was associated with costs associated with the Newport transaction and the completion of our strategic review process, in addition to the addition of GoLocal personnel in 2012 compared to 2011. Station direct operating expenses consisting primarily of news, engineering and programming, and general, selling and administrative expenses net of our trade expense were $19.9 million for the three months ended June 2012 compared to $17.5 million for the same period of 2011, an increase of $2.4 million or 14%.
The increase was largely driven by higher variable costs associated with the significant rise in our core and political revenues, as well as the addition of our stations in Michigan, Wisconsin and Evansville, Indiana subsequent to the second quarter of 2011. On an unaffected station basis, the total station expenses were up only 1.7% year-over-year.
Following significant reductions in total debt over the past few years, and reflecting the strong cash flows expected throughout 2012, we continue to take actions to reduce leverage, and in early – early in the second quarter, call for the redemption of $34 million of the 7% senior Subordinated notes due in 2014. We refunded the redemption from cash from operations and a draw on our revolving credit facility.
The annualized cash interest savings, prior to the refinancing we’ll do in conjunction with the Newport station acquisition, amounts to over $850,000 annually. Our current levered free cash flow yield on a trailing two-year average basis is approximately 26%, and is expected to increase with the free cash flow expansion in the remainder of this year and next, as we realize the 45% free cash flow accretion from the Newport station acquisitions.
Turning to the balance sheet, I’ll review the key items as of 6/30/12. Total leverage, as Perry mentioned was 5.24 times versus the total permitted leverage of 7.5 times, and first lean leverage was 1.5 times versus the 2.5 times covenant.
Nexstar’s outstanding debt at June 30, 2012 consisted of $27 million outstanding under the revolving credit facility, and $147.4 million outstanding under the term loans. The second lean bonds amounted to $318.6 million, and the total of the combined two issues on the 7% senior sub debt was $116.1 million.
Total debt for the year as of 6/30/12 rather was $609.3 million, down from $640.4 million at fiscal year-end 2011, and we had $12.5 million of cash at the close of the quarter. As Perry mentioned, in total, net debt for June 30, 2012 declined by nearly $36 million since the end of 2011.
Total interest expense for the second quarter was $12.6 million compared to $13.3 million for the same period in 2011, cash interest expense for the quarter was $11.8 million compared to $12.8 million for the same period in 2011, as our debt levels and our average cost of debt continued to decline. Nexstar’s Q2 CapEx of $3.1 million compared to $2.8 million a year-ago, and we’re on track with our full-year 2012 budgeted CapEx of approximately $16 million to $17 million, which reflects our initiatives to accelerate local HD originations.
As has been our mantra, we’re successfully managing the top line, fixed and variable costs, and the balance sheet for cash, and remain to focus on further actions that can enhance value, and we expect to continue our free cash flow to deploy our free cash flow for debt reduction in the short-term. Now for a few financial highlights on the announced Newport transaction and the proposed financing.
In mid-July Nexstar and Mission agreed to acquire 12 stations in the associated digital sub-channels, as well as Newport’s Inergize digital media operations for $285.5 million which we paid in cash at closing. Consistent with Nexstar’s acquisition criteria and our past deals, the transaction will be immediately accretive to free cash flow upon closing, and as Perry has alluded to earlier, we project very significant financial benefits to Nexstar as a result of the acquisition and the refinancing.
With the strong free cash flow we’ve generated over the past several years, we have materially reduced the leverage, and this transaction will only nominally increase leverage for that equation. Additionally, with Nexstar’s significant free cash flow generation post closing, we see opportunities to quickly lower leverage to levels materially lower than where we will end up at year-end 2012 or at any point in the company’s history.
In the first year following the closing of the transaction, the Newport stations are expected to contribute approximately $110 million in incremental net revenue to Nexstar’s consolidated results. In 2014, we believe that combined entity could generate approximately $550 million in net revenue.
The purchase price represents a multiple of approximately 5.5 times the average 2011, 2012 broad cash flow of the acquired stations, after giving effect to the anticipated operating improvements in synergies identified by Nexstar. In evaluating the transaction in our existing operations, we have identified approximately $19 million in projected synergies.
Under Nexstar’s ownership, the stations financial results will benefit from additional retrans revenues as well as a wide range of strategic operating improvements, elimination of duplicative functions and more efficient sourcing. On just a 2012 basis, reflecting the benefit of the political cycle, the 2012 purchase multiple reflecting the Nexstar synergies is closer to five times.
So we’re confident of the accretion and the value adding benefits of this transaction. As such, we expect the acquisition to generate approximately $55 million in additional EBITDA to Nexstar in year one.
Most important to us, the additional station operations are expected to provide free cash flow accretion in the first year of approximately 45% over the levels expected to be generated by Nexstar and Mission’s existing operations, which will drive an increase in our leverage free cash flow yield to a similar extent. At the time of the acquisition announcement, we also disclosed the Nexstar and Mission secured commitments for a new $645 million senior credit facilities comprised of $570 million term loan B due 2019, and a $75 million revolving credit facility due 2017.
The new credit facilities will be used to fund the transaction refinancing the existing credit facilities, and to redeem all of our 7% senior subordinated notes due 2014, which I said a minute ago, we’re approximately $116 million outstanding at 6/30/12. Following the expected record levels of free cash flow in 2012, total leverage will rise by only about half turn due to the exact – due to the acquisition, and is expected to be well below five times at the end of 2013 with our leverage multiple dropping to sub-three times level by the end of 2014 as we pick up another year, and the benefits expected of political advertising.
So pro forma for the completion of the transaction, our capital structure will include $325 million outstanding under the 8.875% notes, the new $575 million term loan credit facility and borrowing under the $75 million revolver. With the addition and the integration of the identified synergies, interest coverage on our debt is expected to be the best ever in the company’s history.
I would note the credit facilities in the commitment allow us significant flexibility in terms of what the final capital structure looks like depending on the market conditions outstanding at the time as we move closer to closing. We have the ability to manipulate some of that first lien debt into other debt instruments if the market is favorable at the time.
One of the attractive elements of the new credit facility is that in addition, subject to certain restrictions, Nextstar will have the flexibility to deploy our free cash flow for other shareholder enhancing actions in the future. The transaction is expected to close later this year or early next, and it subject to Federal Communications Commission approval, the expiration of the applicable Hart-Scott-Rodino waiting period and other customary closing conditions.
Obviously, any change in the closing schedule would affect the general guidelines we’ve discussed here, including revenue and cash flow accretion to Nexstar’s consolidated results, though we believe our timetable is very realistic. That concludes the financial review for the call.
I will now turn it back over to Perry for some closing remarks before Q&A.
Perry A. Sook
Thank you very much Tom. I think beyond our terrific 2012, Q2 results, our remarks today are focused on demonstrating that over the near and long-term, Nexstar has very efficiently build and diversified its operations, and the scale afforded by our expanding platform is paying strong dividends in terms of our overall growth, and reflected in our margin strength.
When I started the call, I indicated that business has never been better for Nexstar, and with the second-half results being bolstered by the Olympics, continuing strong auto trends, and demands on inventory for political and issue advertisers, our second-half is looking very bright indeed. Looking forward, our excitement for Nexstar’s prospects get even brighter as we complete the Newport station acquisitions.
The exciting thing about the Newport deal is that the leverage associated with the deal on day one is marginal, and after operating the group for just two years, our credit leverage will drop to the lowest levels ever. In our eyes, this is a compelling fact set for current and future equity holders.
We’ve able to fund our platform build since our 2003 IPO, without materially altering our diluted share count which stands at approximately 30 million shares. I’ll leave you with some simple math based on the way we’ve discussed free cash flow over the last several quarters.
Since our 2003 IPO, Nexstar has generated 37% compound annual growth rate and free cash flow for the two-year cycle starting with the 2003, 2004 cycle through the two-year cycle of 2009 and 2010. And as I said earlier on the call, we generated during that two-year cycle, $79.6 million in free cash flow.
Our current trailing eight quarter free cash flow is $106 million, and that can be expected to increase approximately another 15% by year-end. Looking again at our shares, if we do just the $75 million in free cash flow in 2012, that amounts to $2.50 per share in free cash versus our current level of $1.70 per share.
With our visibility on 2012 growth drivers, both Tom and I remain confident we can meet and exceed this level. We believe Nexstar’s current free cash flow valuation does not accurately reflect those operating results or our positive prospects which has never been better, and with the benefit now of having the flexibilities to significantly reduce leverage.
I’d like to thank you all again for joining us this morning. Our prepared comments have run just a bit longer than usual as we wanted to address the Newport station acquisitions and our expectations.
So now let’s open the call to Q&A to address your specific areas of interest. Tim.
Operator
(Operator Instructions) we will pause for just a moment to assemble the queue. We will take our first question from Aaron Watts with Deutsche Bank.
Aaron Watts – Deutsche Bank Securities, Inc.
Hey, guys.
Perry A. Sook
Good morning.
Aaron Watts – Deutsche Bank Securities, Inc.
Apologize if I missed this, but did you give sort of an unaffected revenue growth percentage. I think you gave expenses, I was.
Thomas E. Carter
I did. The net revenue – total net revenue on an unaffected station basis was up 11.8%.
Core revenue on an unaffected station basis was up 2.2%. And broadcast cash flow for unaffected stations was up almost 27%.
Aaron Watts – Deutsche Bank Securities, Inc.
Okay, got it. Thank you.
And maybe you could give a little bit more color about the ebbs and flows of the categories away from auto, what you were seeing in the second quarter?
Perry A. Sook
Sure, Aaron, obviously automotive was up double-digits, 16% as we’ve reported. Fast food and furniture were slightly down.
Radio, cable, other media was up for us. Paid programming, medical healthcare, schools and instructions were basically flat.
Service industries various was up, and department and retail stores slightly down. As we look at – and in the third quarter, at this point automotive for us is pacing.
If I look at business on books for the third quarter versus the same day last year, automotive is pacing in excess of 30% ahead of the prior-year. Furniture is up, medical healthcare is up double-digits as our radio, TV, cable, insurance, banks and savings and loans, and package goods, advertisers.
Categories that are kind of flat in the third quarter with business on books would be paid and schools and attorneys and home repair, and lottery business. So that’s kind of a snapshot of both the top 10 categories for second quarter and also third quarter pacing’s as of today.
Aaron Watts – Deutsche Bank Securities, Inc.
As you think about what you’re seeing from those pacings in the third quarter, is it still kind of steady with what you saw in the second quarter, slightly better in terms of tone, worse?
Thomas E. Carter
I would say better. We went into the third quarter with the best pacing of business on books for any quarter in the year.
Some of that is Olympics, our spot and e-Media revenue as of the opening ceremonies was approximately $5.86 million on the books. That will grow throughout the length of the games.
But that’s 42% ahead of where we were in 2008 for the Summer Olympics in Beijing. Our NBC sales teams as well as our VP of sales put together a concerted effort to deliver a very strong Olympic performance.
But I think that the third quarter for us looks much more positive even in July, which has the benefit of no Olympic revenue to speak of really, and July was a very strong month for the company. So I think we’re not seeing any slowdown, and I think, probably the more the inverse of that, the third quarter looks better to us than second quarter did certainly on the way in.
Aaron Watts – Deutsche Bank Securities, Inc.
Okay, great. Thanks Perry, thanks Tom.
Operator
(Operator Instructions). And we will take our next question from Edward Atorino with Benchmark.
Edward Atorino – The Benchmark Co.
Hi, did you give an Olympic number, did I miss that?
Thomas E. Carter
I Just gave it Ed, we have on the books both spot and e-Media, $5.86 million as of the opening ceremonies, that’s about 42% ahead of the 2008 Summer Olympic from Beijing.
Edward Atorino – The Benchmark Co.
And did you give a political number?
Thomas E. Carter
We did. It was approximately $6 million for the second quarter.
We did not give a third quarter guidance on political.
Edward Atorino – The Benchmark Co.
Sorry. I still have a dead line there.
Seem pretty strong trend going forward.
Thomas E. Carter
Obviously we expect political to accelerate dramatically in the third quarter and fourth quarter as well.
Edward Atorino – The Benchmark Co.
Okay, thank you.
Operator
And let’s take our next question from Barry Lucas with Gabelli & Co.
Barry Lucas – Gabelli & Co., Inc.
Thanks and good morning, Perry maybe if you could just quantify or provide a little color to how much benefit did you get from the primary and runoff in Texas with Cruz?
Perry A. Sook
We saw political revenue that was basically displaced from first quarter to second quarter. And I guess the best way to say it is, if you look at our political number as of 6/30/12, we are exactly on our budgeted number – our internal budgeted number of eight to some odd million dollars here.
So, there was money, a lot of West Texas was leading toward the Dewhurst camp, so we didn’t see a tremendous amount of money in West Texas, but we did in some of the other marketplaces. Right now our political activity is obviously in Missouri with the contested primary and then a very contested senate race to the finish line of the general election, and Pennsylvania as well, where both Obama and Romney have been active as well as PAC money has been pretty substantial as well.
And if you look at political for the first-half of the year, our spending is almost evenly split between candidate money and issue and PAC spending, and if you benchmark that back to 2008, only about 15% of our political ad spend through the first-half of 2008 and even 2010, but 2008, the last Presidential election year was an issue in PAC spending. So that side of the equation has increased dramatically.
Barry Lucas – Gabelli & Co., Inc.
Great, thanks. One more quickie, given all the encouragement that we’re getting on the balance sheet, and where leverage is likely to be in 2013 and 2014, year-end, you look at the station availability, the market, it sounds to me like you’re not necessarily done yet?
Perry A. Sook
I think that we will continue to look at acquisitions opportunistically, and if we can find acquisitions that are free cash flow accretive to the company and leverage neutral or nominally leverage changing, we would continue to look to engage and spread the intellectual capital of the company. On the other side of that, we are engaged in discussions to sell some of our smaller and non-strategic assets, and believe that that can be done at accretive multiples to the company as well.
But I can tell you, and Newport was a perfect case in point there where stations that we might have liked to fold into the portfolio, but not at the price at which they were offered because they would not have met our free cash flow accretion test. So we’ll continue to be ambitious, but very selective.
Barry Lucas – Gabelli & Co., Inc.
Great, thanks Perry.
Perry A. Sook
Thank you Barry.
Operator
And we will take our next question from Edward Atorino with Benchmark.
Edward Atorino – The Benchmark Co.
The issue of displacement or whatever you call it, does come up on almost every call with all the political money and the Olympic money, our advertisers simply maybe shifting dollars forward putting it back in the budget, paying the price to get the time, how was that all playing out, and you can, maybe put some dimension on what’s going on there?
Perry A. Sook
Well as you know better than half of the political money will be written in the six weeks prior to the election, and that’s where there is really the inventory crunch in demand of October in the first week or so of November. To this point this year, we’ve not had a displacement issue.
When you are looking at company’s net revenue of approximately $172 million, and $8 million of that is political. It’s not played into the first half of the year.
We anticipate that post Labor Day and certainly in October, November, first week of November, that would be an issue. The political advertisers tend to focus around news programming and locally originated programming.
They feel that’s a much more lean-forward experienced. So to the extent that you have advertisers that are core advertisers participating in those programs, you try to find them a home in other day parts and do right by your core advertisers that are going to be there, 52 weeks out of the year.
So it’s hard to put a mathematical, theoretical number around it because to do that, you have to assume constant demand, and obviously, demand fluctuates every day, and then some of these markets, particularly the contested markets, we will be updating our rate cards, three and four time a week. We’ve already had some of that in our Green Bay station with Wisconsin runoff election and all the attended publicity and activity around that.
But, again we will expect that we’ll play out – I would say advertisers are going to stay away. They stay away from news in October, but they don’t stay away from the television station.
And we’ve plenty of other day parts that we can hopefully accommodate and make everybody happy.
Edward Atorino – The Benchmark Co.
And then just one the categories you highlighted as being up is CPGs. Is P&G sort of coming back in terms of ad spending?
I understand they had cut back or maybe they didn’t. I don’t know.
Perry A. Sook
Yeah. It’s hard to put a real trends line on it, and again that business is on the books for us for third quarter, slightly ahead of where we were last year, but it – as a category, it’s less than 2% of our revenue.
So it’s not a mover in terms of top ten, but it is nice to see the trend line positive for the third quarter with little over $1 million on the books, which is 6% or 7% ahead of where we were last third quarter.
Edward Atorino – The Benchmark Co.
Okay. That would be better.
Okay. Thanks a lot.
Pardon my voice.
Operator
And at this time there currently no more questions.
Perry A. Sook
All right, well thank you very much everyone for joining us. We look forward to gathering in early November to discuss our third quarter results, and look forward to bringing you more good news.
Thanks again.
Operator
That concludes today’s conference call. We appreciate your participation.