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

Thanks, Shelby, and good morning, everyone. Let me just go through the safe harbor language, and then we'll get right into the call. All statements and comments made by management during today's call other than statements of historical fact may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Nexstar cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected in the forward-looking statements made during the call. For additional details on risks and uncertainties, please see Nexstar's annual report on Form 10-K for the year ended December 31, 2020; and Nexstar's subsequent public filings with the Securities and Exchange Commission. Nexstar undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, it's my pleasure to turn the call over to your host, Nexstar Chairman, Founder and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joe, and good morning, everyone. Thank you all for joining us to review Nexstar's second quarter, which highlights our success in achieving a faster and stronger-than-anticipated recovery in core advertising, another period of double-digit distribution revenue growth and profitable digital revenue growth. Overall, our record in second quarter net revenue, net income and adjusted EBITDA were all well ahead of consensus expectations while free cash flow represents the timing of our 2021 operating cash tax payments, largely related to operating results exceeding the prior estimates. Our solid second quarter and first half of 2021 reflect the resiliency and the adaptability of our business and our long-term strategies to leverage our scale to drive top line growth through increased content monetization and diversification. We're extremely proud of the consistent strength of our operating results and of the more than 12,000 members of the Nexstar Nation across the country who, while serving our local communities have offset many of the challenges presented by the pandemic, putting Nexstar on a path for continued success and growth. With our year-to-date operating results pacing ahead of internal forecasts, this morning, we increased our pro forma average annual free cash flow guidance for the '21-'22 cycle by $60 million to approximately $1.33 billion or approximately $31.50 per share. Tom Carter, Nexstar's President, Chief Operating Officer and until next week, CFO, is on the call this morning with me, and we'll review the quarter, our outlook, our plans for continued capital returns and our confidence in achieving our upsized pro forma average annual free cash flow guidance for the '21-'22 cycle. Before getting into the quarterly highlights, we're very excited to welcome Lee Ann Gliha, an accomplished finance leader with more than 20 years of experience in TMT Investment Banking and company operations, who will…

Thanks, Perry, and good morning, everyone. I'll now review Nexstar's Q2 income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance. Second quarter net revenue increased 23.7% to $1.13 billion. Excluding political, second quarter net revenue increased approximately 26%. Total television advertising revenue increased 35.1% to $432 million, reflecting a 42% rise in core ad television revenue to 200 -- I'm sorry, to $424 million and the anticipated year-over-year reduction in cyclical political advertising to $8.5 million. Distribution fee revenue increased 15% to $616 million, reflecting distribution agreement renewals and Mission Broadcasting's acquisition of WPIX in New York, both of which occurred at year-end 2020. Digital revenues increased 57% to $73 million, with digital profitability up substantially over the comparable prior year period, reflecting the successful alignment of our digital operations and contributions from our 2020 December accretive acquisition of BestReviews. On a same-station basis, net revenues -- total net revenues were up 20%. Net revenues ex political were up 22%. Core advertising revenue was up 38%. Distribution fee revenues were up 12.5% and digital revenues were up 25%. The increase in reported second quarter direct operating expenses net of the trade expense and SG&A expenses primarily reflect higher revenues related to the recovery in core and digital advertising as well as expenses from our fourth quarter 2020 station and digital acquisitions. As a percentage of total net revenue, combined second quarter direct OpEx and SG&A expenses declined 415 basis points reflecting Nexstar's ongoing emphasis on expense management and driving efficiencies across the organization. Second quarter pro forma fixed expenses, excluding program expenses, were up 4% over the same period in 2020 as we started to add back certain expenses that were suspended in 2020 in response to the…

Thanks very much, Tom. We continue to execute extremely well on our strategic priorities, including serving our local communities and driving increased content monetization while allocating growing levels of free cash flow to capital returns for shareholders maintaining modest leverage and pursuing accretive M&A and return focused investments in our business to drive future growth. Looking ahead, we have excellent visibility to delivering our new upsized free cash flow targets in the current cycle and a clear path for the continued near- and long-term enhancement of shareholder value. As we follow the successful strategies we've established in terms of building the top line, maintaining close control of fixed and variable costs and optimizing the balance sheet. Our disciplines in these areas have added consistency and visibility to our results while creating new value for our shareholders. Our new guidance for pro forma average annual free cash flow for the '21-'22 cycle of $1.33 billion underscores the strength and resiliency of our operations and ability to continue delivering free cash flow per share that is among the highest in the overall market. Our strong free cash flow generation is allowing Nexstar to meaningfully increase its return of capital initiatives as reflected by our current authorization to repurchase up to an additional $916 million worth of shares and our 8-year track record of dividend increases of 20% annually or more. We look forward to reporting on our continued growth and accomplishments and on behalf of the entire Nexstar Nation, our Board and our management team, thank you for your continued interest, support and for joining us today. So now let's open the call to Q&A to address any areas of specific interest. Operator?

[Operator Instructions]. We'll take our first question from John Janedis with Wolfe Research.

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

Sure. First, as it relates to third quarter, I was on the phone with the President of one of our rep firms yesterday and they're projecting that they will deliver -- they'll be back to and perhaps even exceed 2019 levels on core revenue. The automotive category is still somewhat challenged due to supply chain disruptions. But in his words, we see advertisers coming out of the woodwork. And I will tell you that, that is an improvement, a substantial improvement outlook from just -- 2 weeks ago in terms of pending business and their ability to achieve and overachieve '19 levels for the balance of this year. So we're very pleased at the third quarter projections that our management teams have put together. They are at or above our forecast on a collective basis, and now we just have to execute. But the underlying trend feels pretty good and the pacing would support that. As it relates to sports programming, obviously, there is more sports programming available on more outlets than ever before. And all we can control was the ones that we're involved with, which are our network affiliations, but more importantly, our local content. And I think you hit the nail on the head. From our perspective, our local content is the sticky part of what we deliver to the consumer. And the only thing we're in control of, quite frankly. So we continue to focus on increasing the amount of local content, differentiating the amount of local content and providing local content across all of our platforms, digital, mobile as well as the linear television. So that's the business we'll continue to focus on and continue to grow. And so some of the diversification or dispersion of sports audiences is somewhat of a self-fulfilling prophecy based on how the copyright owners decide to distribute that content. We can't do a whole lot about that. We can maximize the opportunity that we have. And we've done very well with the Olympic advertising in a challenging environment in terms of having auto ad support there. But we also have other projects that we work on, like remarkable women and Hispanic and African-American heritage months and all things like that, that are station projects with exclusive content that we think provides a differentiated offering into the marketplace and differentiated content for advertisers. So we have one coming up in September with Feeding America, which will be a total company full month of September campaign to raise awareness for food and security and about hunger in America. So when we lean into these kinds of things, we tend to get the whole company behind them, support from a content perspective across the stations and News Nation and then also advertisers support for public service initiatives. So those are the things we will continue to focus on and try to do, and those are the things in which we're in control.

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

Great. Another solid quarter, guys. On the call, digital used to be a pain point sometimes of a conversation. It now seems like it's starting to get some momentum in the other direction here, especially as you guys have really pruned the portfolio and optimized it. I guess, you mentioned in your prepared remarks just about the -- how BestReviews is doing. Maybe just a little bit more color there would be helpful. And how you think about either M&A to augment it, sizing that and kind of the growing diversification strategy there. And then Perry, obviously, you guys announced, I think, really no surprise the expansion of News Nation programming. Maybe just talk about performance, what you're seeing there, why you're kind of pressing ahead with that and sort of what we think are kind of the next steps from here?

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

And in terms of follow-on acquisitions, we have a number of conversations ongoing, including one that will happen later this afternoon and another one will happen later this month that would be thematically building on that content and news adjacent content that would power our portfolio. As it relates to News Nation, we have announced an expansion in September, which would be creating a morning show and then also bringing Dan Abrams to prime time. And both of those announcements were certainly cheered by our advertiser base. We've accomplished a couple of things. And I think I may have mentioned this on our last call, we're getting the same cost per point in the scatter market as CNN, and I thought that would take years to achieve. Now we're obviously getting smaller rates because our ratings are smaller. But that we're considered a peer group in the news space is a significant accomplishment for Sean Compton and Michael Corn and the team in a short period of time. And we have virtually full distribution on the OTT platforms, which, again, I thought would take longer than less than a year to achieve and that's owing to the strength of our distribution team, Dana Zimmer and her team in Philadelphia that work very hard to make sure we were well positioned out of the gate. So we have a major promotional campaign that will kick off post Labor Day for News Nation on our owned and operated stations reaching 68% of the country as well as double-digit millions ad spend commitment outside of house on social media and other platforms and crafted by the folks at Leo Burnett in Chicago, one of the iconic brand-building agencies in the country. So we feel all of that, the additional programming, taking up additional…

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

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

I'd say, first and foremost, the major benefit of the scale. And again, the scale came together in October of '19 when we closed on Tribune and last year, during the pandemic was our first full year of the integration and realization of the synergies that we promised and I feel that was somewhat masked by the overall overhang of the pandemic. But I think people are seeing now the earning power of the platform. But the number one beneficiary of scale is in distribution. When you reach 68% of the country, that's a very powerful tool in negotiations to expand your distribution or increase your distribution revenue. I would also say we have -- we share content all the time across the platform, not only with News Nation, but with other stations that might be interested in the content as it applies locally. And we've got a 24% Washington Bureau that serves News Nation and the -- and our owned and operated station group. And we also have 7 people in Tokyo covering the Olympics for News Nation and our station group. Our NBC affiliates as well as custom content for non-NBC affiliates, where an athlete might have raised or gone to school in that marketplace and those kind of profiles. And we're generating an incredible amount of money. It's better than a 10:1 return on the investment of sending those people there because we have sponsors for this custom content outside of the actual linear broadcast. So I also think in terms of people, when you look at how we treated folks during the pandemic, we had no layoffs, no forced unpaid leave, no salary reductions. And I think that our people realize that may be unique in the marketplace, the media marketplace, certainly among the major companies.…

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

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

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

No. As it relates to retrans negotiations, we cannot negotiate on behalf of stations we don't own, in markets that we -- that Nexstar operates in. We can and we are in New York, negotiating on behalf of PIX because Nexstar does not own a station in that marketplace. And that's permissible under the FCC rules. So that's the only mission station at this point for which we negotiate distribution revenue.

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

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

Well, I'm not going to say that I am Nexstar and Nexstar is me, if that's what you're seeking. But I founded this company, there are a number of things I want to see through here. We spent 24 years assembling what we have thus far. And now we're obviously pivoting toward the highest monetization opportunity of our assets, which includes our spectrum, which will take some time. So there are a lot of things I want to see through here. And so I don't want to negotiate on a conference call with those that will be my counterparties, but suffice it to say there is interest in extending the relationship beyond the current contractual date. And no hurry to get around to that from my standpoint. We've got lots to do. And -- but I think you'll see me be around beyond the current end of the current contract god willing and health supporting and all of that. But -- so I think that's probably about as far as I can go on that. I'll let Tom speak to the other points you raised.

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

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

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

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

Well, I can -- there are some regional differences, I think New York continues to kind of lag behind the recovery. Los Angeles, given the strength of our station has just been killing it all year. Other stations on the West Coast are, again, a bit lagging behind. Little part of the country in Texas are kind of open for business and just going at it. So -- but there's no -- there's no roughly. It's really situational market by marketplace. But if I look at the -- our numbers in Q2 for broadcast, both local and national were up substantially. We see more strength in local than national, but then I gave you commentary on national rapidly improving their outlook just over the last couple of weeks. So -- and as it relates to News Nation, we took the amount of money we wanted to take in the upfront, and I think we wanted to -- and we got substantial CPM increases over the entertainment programming, where News Nation programming is replacing that. I think we held back money -- held back inventory for the scatter market, waiting for our new shows to debut and then being able to sell off of those numbers, which -- all of which we hope to be positive. So that was the strategy of our sales team, which I agree with. But we -- even our radio station in Chicago made money in the second quarter. So we had positive results, News Nations, stations, digital our diginets as well as radio. So there wasn't a business unit in the company in the second quarter that didn't have positive cash flow. And so it's -- I would say it's broad-based, Kyle, let me put it that way.

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

Well, it continues to become more interesting as time goes on with the retiring senators in battleground states like Ohio and Pennsylvania with the uncertain situation, with the governor in California and whether they'll be a recall and all of that. So we did not project in our guidance that '22 political would eclipse 2020, but we're fairly close. But the -- we never -- we continue to be positively impressed with that dynamic and the fundraising that's going on. And it's obvious, I met with our GR team in Washington a couple of weeks ago and both the Republican and the Democratic GR representatives expect that these elections are for control of the house, control of the Senate, which in some ways, more money could be spent there than we've ever seen in those races before. We won't have a presidential overlay, But I look at California right now, and we've got a couple of million dollars for the recall election. We'll probably do 3x that as the polls continue to tighten. And so we had none of that forecast that, that was going to happen in our political for this year. And that continues to be the thing. We'll project race by race as we always do, check the fundraising, but then there's always the unknown that ends up bringing more money in. So we still don't project that we'll eclipse 2020, but our outlook continues to improve in terms of the actual quantum of dollars we'll see in '22.

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

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

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

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

Well, it's become a top 10 category for us very quickly, and I don't think we're going to give a percent of total revenue. But it's -- we expect it will move into the top 5 here as more states are approved for sports betting. And that it could become a double-digit percentage contributor to our revenue. It's about half that now. But it's obviously the fastest-growing category we have on a year-over-year basis.

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

Yes.

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

Again, it depends market by market. And obviously, the shortcomings of Nielsen with their samples declining below minimum levels due to COVID and no access to houses with meters to fix them or turn them on or do whatever. But I would say as a rule across 116 team markets. Our numbers are higher than they were 2 years ago. They're down from the peak. They were at their peak at this time last year, second and third quarter, we were seeing substantial double-digit increases over the prior year, but we're -- and we decline from that level to -- but the steady state is still higher than where the ratings were 2 years ago. That's an average across all of our markets, but I think it applies particularly in our major markets.

[Operator Instructions]. We'll take our next question from Alan Gould with Loop Capital.

I've got two questions, one for Perry and one for Tom. Perry, you referenced the digital spectrum. Have you got -- do you continue to get much interest from the digital players for the access and use to that digital spectrum? And Tom, you mentioned leverage at the end of the year would be well less than 4x, heck you're closer to 3x and 4x right now. Any thoughts on leveraging up even more to be more aggressive on share buybacks given the limitation to, say, broadcast acquisitions right now?

So I'll let Tom answer the second question first, and then I'll speak briefly to your first question.

Sure. Well, it probably didn't escape you that the pace of stock buybacks increased in the second quarter relative to the first quarter. I would say that's probably a pretty good indicator of where we see that activity going, especially in light of improved free cash flow relative to original expectations. But at the same time, I think we are still more opportunistic than I think people would probably give us credit for. So it's a little bit depending on stock price, et cetera. But do we have a substantial amount allocated in the second half of the year for stock repurchases? Yes, I would say our leverage will go back up in the fourth quarter as we lose -- based on a trailing 12-month basis as we lose political advertising from Q4 of 2020. So we're still going to be -- we'll be below 4x. It will be increasing above the 3.3x we're at now. We will continue to make modest principal repayments, but the vast majority of the available free cash flow and I think of available free cash flow as free cash flow minus dividends will go to stock repurchases.

And I don't know that at this point in time, we imagine a scenario where we would borrow money to buy back stock. That just doesn't feel like it's part of our DNA at this point. But we will continue to be opportunistic. As it relates to Spectrum, we have, at this point, TV stations -- by the end of this year, we will have TV stations build out that cover approximately 1/3 of the country. And by the end of 2022, we expect Nexstar stations with the -- NextGen or ATSC 3.0, covering 50% of U.S. TV households just in our portfolio regardless of what others do. So we have to build the tollway before we can charge anybody to drive on it. And so I think if we get to half of the country next year and with others, maybe that aggregate number of 3.0 spectrum that's available, is something north of maybe 70%. I think then you can begin to build use cases. I mean we've got -- in conjunction with other broadcasters, who you will be hearing from in the next couple of weeks, we have a test -- an automotive test going on in Michigan, early stages of just looking at the art of the possible. So we continue to believe that this is a substantial value lever for our company and the industry. But first, we've got to enable ATSC 3.0 signals or NextGen TV signals in our marketplaces, and we're being aggressive in building out our platform to at least 50% of the country by the end of next year. We'll be able to receive that signal, which means that's the spectrum and the bandwidth and the part of the map that we can then begin testing and building use cases for.

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

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

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