Good day and welcome to the Nexstar Media Group's First Quarter 2022 Results Conference Call. Today's call is being recorded. I'd now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, Sir.

Thank you, Anna, and good morning, everyone. Let me just read the Safe Harbor language, and then we'll get right into the call. All statements and comments made by management during today's conference 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 by the forward-looking statements made during today's call. For additional details on these risks and uncertainties, please see Nexstar's Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission, as well as Nexstar's subsequent public filings with the SEC. 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 now my pleasure to turn the conference over to your host, Nexstar Founder, Chairman and CEO, Perry Sook. Perry, please go ahead.

Thank you, Joseph, and good morning, everyone. Thank you for joining us today. We appreciate you joining with us here today to discuss Nexstar's record first quarter financial results, which include the highest quarterly free cash flow in the company's history. With me on the call today are Tom Carter, President and Chief Operating Officer and Lee Ann Gliha, our CFO. I'll start with a summary of recent highlights and developments and developments followed by Tom's operation review and Lee Ann's financial review. So while the equity market is testing new levels of volatility, it was another boring beat consensus expectations, no drama quarter here at Nexstar, the type of performance investors should know to expect from us. Our outstanding results represent an excellent start to what we expect will be another year of record financial performance for our shareholders and for the NewsNation [ph]. First quarter, top and bottom line performance was driven by strong year-over-year growth across all of our revenue sources, as well as the first quarter cast distribution from our TV food network ownership, interests. Net revenue, adjusted EBITDA and free cash flow, all came in well ahead of expectations, continuing our track record of exceeding consensus expectations. A recurring theme, this earning season for companies across all industries and all market caps are Wall Street's concerns about the economic and business impact of supply chain issues, high inflation and rising interest rates. With that in mind, let me spend a few minutes reviewing why Nexstar is entering the second quarter from a position of strength, which we will build upon to create new value for shareholders this year and going forward. First 55% of our total net revenue is derived from distribution revenue, which is contractual. This is a recurring revenue source that provides us…

Thanks, Perry, and good morning, everyone. Operationally, Nexstar had a very strong start to the year. We delivered an all-time high first quarter net revenue of $1.21 billion, driven by strong year-over-year increases across all of our core and political advertising, distribution and digital revenue sources. Overall, television advertising revenue grew 8.3% versus Q1 of '21, and core television advertising of $428 million was a first quarter record and increased 4% over the prior year quarter. Healthy demand from advertisers, aided by the Olympics, resulted in solid growth in 19 of Nexstar's top 25 advertising categories, which more than offset continued weakness in automotive advertising. Our top-performing categories were entertainment, medical health care, travel, telecom and gaming, sports betting. In addition, Nexstar's local sales initiatives continue to deliver healthy levels of new business with our sales teams generating new to television revenue of $35 million, marking an increase of 27% over the prior year. Sports betting and gambling continue to be a top 5 category for us in the first quarter. Growth in the category was driven primarily by spending from land-based casinos and from sports betting advertising in states where online sports betting was recently legalized such as New York, Louisiana, Connecticut and Illinois, offset in part by declines in the first quarter of '21 in some states, where gambling and sports betting is more mature. Despite the public pressure on sports betting companies, we still believe this category has legs, and there are a number of large states such as Ohio, where we are virtually in every market in the state, which are expected to legalize online sports betting in the near term. As you know, Nexstar has a presence in approximately 80% of the states where legalized sports betting is or will be launched. So we remain…

Thank you, Tom, and good morning, everyone. We delivered another strong quarter of results for our shareholders and remain very constructive on the opportunities ahead of us in 2022. Tom and Perry gave you most of the details on the revenue side, so I will jump to expenses. First quarter direct operating and SG&A expenses both increased primarily as a result of higher core political distribution and digital advertising revenues as well as a full quarter of expenses from The Hill. Total corporate expense was approximately $46 million, including noncash compensation expense of approximately $13 million, and this number included approximately $1 million of onetime expenses. This increase was -- or sorry, the decrease from what we expected was primarily due to lower legal fees than expected. First quarter CapEx was approximately $28 million. Spectrum repack CapEx totaled approximately $750,000, and we received $1.7 million of reimbursements from the FCC. CapEx was lower than expected in the first quarter, primarily due to delays in receiving equipment due to supply chain disruptions. First quarter total interest expense declined 4% to approximately $69 million. Cash interest expense was approximately $66 million and compared to $68 million last year, due primarily to lower first lien borrowings by approximately $347 million of face value, offset by higher LIBOR of approximately 15 basis points over the quarter and refinancing a portion of missions revolver with which occurred in the second quarter of 2021. Our first quarter operating cash taxes were $3.2 million, reflecting a small first quarter state tax payment. Now we recorded $193 million in distributions from equity investments related to our 31% ownership stake in TV Food Network in the first quarter, which represents a $15.3 million increase over the prior year quarter. Looking ahead, we project corporate overhead, exclusive of stock comp…

[Operator Instructions] And we'll take our first question from Dan Kurnos with the Benchmark Company.

Great. Thanks. Good morning, Excellent quarter, Perry. I'll leave the course value [indiscernible] questions for everybody else. I know it doesn't sound to be in the case there and just ask one on retrans. Given the real strong start to the year and what we've heard from kind of all of you guys now as the MVPD upside, you guys have guided gross to kind of mid-to-high singles for the year. Is there to either the gross or the net outlook given kind of the strong start to the year? And then on political, obviously, given the draft leak and everything else and what we've seen from fundraising even in the last couple of weeks, in the last few days, I guess, I should say. We've seen some forecast out there around '22, looking more like '20 rather than '18. So I don't know if that's the right benchmark. It's too early in the cycle, but just help us think through how much closer we might be getting to that yardstick?

I'll take the political question. And we obviously, if you follow the company, you know that, we like to underpromise and overdeliver on our political forecast because, obviously, we don't control the money until it's raised. But everything would indicate that it will be a record off-year midyear -- midterm election for us from a revenue perspective. And we think it will be substantially ahead of 2018 but we are not yet ready to go there to say that it would be to the 2020 levels. But as you know, more than half the money will come in a 6-week period between Labor Day and Election Day. And so until we get closer to that date, anything that we would do would just be to fuel speculation. So we're comfortable with what we said on the call thus far. And I'll let Tom talk about the distribution revenue.

Sure. Dan, thanks for the question. Yes. We're pleased with the distribution performance and with -- especially with regard to attrition saying at moderated levels and, quite honestly, levels that were better than we had budgeted for. But it's a little too early for us to change our guidance with regard to the entire year after the first quarter. So I think we're going to stick with where we were, which was kind of mid-single digits.

Okay. And maybe just Perry or Tom, just if I could sneak one more in just on capital allocation, just given sort of the uncertainties out there, but also perhaps the opportunities that might provide. I know you guys have a long track record of generating shareholder value with any deals you've done, there's certainly been plenty of speculation out there. I'm just wondering if there's any kind of difference and change of balance on how you would allocate capital? Obviously, stock working today, but if the market continues to be a little bit more finicky, just how we should think about your cash boarding and repurchase activity versus M&A appetite?

Yes. Look, I think we're -- I think as we've always said, from an M&A perspective, that's going to be a priority for the company. That's how it's created the most shareholder value historically and how we expect to continue to create shareholder value going forward. And so that's -- if we can find good accretive transactions that are complementary to our existing business, that will be what we use our cash for. I think absent that, we definitely will look at opportunistically, do we use the dollars to pay down debt? Or do we use the dollars to repurchase shares? I think you probably noticed we have a little bit of an extra cash balance on our balance sheet as at the end of the quarter. We also noticed our stock -- where our stock is today. So from that perspective, we obviously are very -- looking forward to making sure we're allocating that capital in the right way, that's going to be the best for our company and our shareholders.

I appreciate it. Thank you very much guys and congrats on the quarter.

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

Thanks and good morning. Maybe just first, you held free cash flow guidance for the 2022, 2023 cycle. Lea Ann, I think when you were listing off some of the cash guidance line items, the one that really seemed to move the most was cash interest, I think, going from about $300 million to $320 million. that's kind of small in the context of your free cash flow overall, though. So just wondering if those are the sort of things that are keeping you a little more conservative at the moment? Or if it's anything else like the ad market?

Yes. No, I think that's absolutely right. I mean we -- the LIBOR curve continues to move against us. We've -- I think in the -- both for 2022 and 2023, the outlook is for higher rates going forward. So that's one of the factors going against us as well as obviously a little bit of increase in terms of the taxes as a result of improved expected performance. But I think that we're good where we are for right now. And as the year progresses, we'll continue to revisit that.

And then, Perry, we talked a little bit about NAB about retrans rates. And I'm kind of backing into some rates this quarter of probably over $5 on average per sub. I know there's some markets where you have some mix of stations, so that's not necessarily a big for rate. But it does seem like retrans is getting to rates that was probably not contemplated a few years ago. Your big 4 affiliate network friends are also driving those rates a lot higher. Do you all think that there is a ceiling out there as sports rights continue to go up, do you feel like stabilization of the ecosystem supports a lot of rate increase ahead? Just love to kind of get your view as to where we are in the rate cycle?

Well, first of all, we certainly contemplated the rate you spoke about a few years ago. And what I've said is that recently, I have moved the goalpost as to what I think is in the art of the possible. Given how valuable live local news is to the bundle and to the consumer and to the value proposition that we present in our communities, I think we can go further than perhaps I thought we could 3 or 4 years ago. So -- is there a ceiling? Ultimately, it's a negotiation. So it's what the market will bear and what 2 parties can agree to. But I think we can go further than certainly where I thought we could ultimately reach a few years ago and certainly well beyond the numbers that you stated earlier in your question.

And then lastly for me, Fox said this morning, they expect to keep their key sports content exclusive to the linear broadcast and to not license it like some of the other big 4 networks have. Going forward, do you see a difference in your relationship maybe with Fox and those companies that are launching a la carte streaming services with broadcast content on it? And could that affect the way you think about reverse comp?

Well, as I've said historically, we have good relationships with all of our network partners. But one of the things we pay for is exclusivity in that content on a market-by-market basis. And to the extent that content is less and less exclusive, it would follow that it would have less and less value. Now each network provides more programming or less programming than the other. So those discussions are nuanced. But obviously, we're paying for the rights to bundle the network programming with our local programming for resell to advertisers and to distributors. And to the extent that, as I said, some of that programming is less exclusive, then it inherently has less value to us, and we'd be willing to pay less for it.

And we'll take our next question from Alan Gould with Loop Capital.

Two here. Tom, you mentioned that the sports gaming in the more mature markets offset some of the growth in the older markets. What are you seeing? Can you quantify what change you see as sports gaming becomes more mature in a marketplace? And secondly, can you discuss what sort of a crowd-out effect we should expect from the political advertising as the year goes on, what crowd-out effect as noncore?

Sure. I'll take the political question, and then I'll throw sports betting to Lea Ann. We will see some crowd out in the fourth quarter, but our expectation is that we will see growth in Q3 and Q4 over '21 levels even with the crowd out. And then we're just talking about how much growth will we see. But I think we're very confident and optimistic with regard to the back half of the year overall, even with a pretty sober view on auto advertising. So I'll let Lee Ann tackle sports betting, no pun intended.

Yes. Well, that will be good fun. I like that. I think sports betting, -- I think I've said this in quarters past, it's just too early and there's just like a lot of different moving pieces with new states coming online and the different operators doing different things in the markets. But what continues to be a driver for us is new states launching. Obviously, Tom talked about New York, Louisiana, Illinois being good markets for us. So we continue to have as we look at sort of top five states, three of them are states that launched early on in the process. So we continue to see spend, but we're obviously in a little bit of a dynamic market here and are focused on new states as they come online, and we think we mentioned Ohio could be large. I think California has got something on the ballot. So there's a number of other states that we will look forward to seeing growth in going forward.

And we think that the local broadcasters are really at an advantage here. Because as sports betting moves into new states, you can target those states. And for example, I think I mentioned we're in every market in Ohio, say two. And we're in basically every market in North Carolina. So when sports betting firms target those states, they don't have to buy nationally to their goals, they can buy locally. And we think that we're in 80% of the states where sports betting either is legal or expected to be legal, that we will benefit disproportionately from that.

Absolutely. And can you just remind us what percentage of your core sports betting represents these days?

It's like 5% or 6%. So I'm trying to find the numbers here on my -- yes, it's a little -- that's about 7% for the quarter. That's gaming and sports betting altogether.

[Operator Instructions] We'll now take a question from Craig Huber with Huber Research Partners.

Great. Can you guys maybe just talk a little bit further about the advertising environment, just expand upon what you said before? And I'd be curious if you could maybe give us a core advertising pacing number for the second quarter year-over-year. I mean is it being up 2%, 3%, 4%? I mean how is that looking so far? Maybe talk about auto as well, if you would, please?

Sure. I'll start and then others can add. We actually saw a slight acceleration in April results versus increases over the prior year versus our Q1 finish broadcast, digital and networks were all up versus the prior year versus their percentage increase versus the prior year in Q1. So we think that's a positive sign. Obviously, April is in the books. And I would say, thematically, the quarter from a core and category perspective, looks a lot like first quarter. I mean, automotive is trending slightly down from the prior year, but not as much as maybe some others have reported. And the other categories that have been driving our growth of entertainment and gaming and services and all of that continue to drive that. So in the first quarter, 6 of our top 10 categories showed increases to the prior year and 19 of our top 25. So we don't see things thematically that much different in second quarter than that we have 1 month of the quarter in the books. So we see continued growth in core along the lines of what we saw in first quarter.

So basically, all the macro issues out there so far, you're not don't feel like you're feeling the pinch on that. I mean your numbers speak for itself, your commentary does, but just inflation, higher interest rates, obviously, the Ukraine issue, supply chain issues, obviously hurting to certain categories and stuff. But you're powering right through that your advertising is quite strong. It's a message you're saying here.

That was all there -- that was all there in the first quarter, and we posted the results, we did. So it's all there in the second quarter. We're living with the current rate of inflation, the price of gasoline, 5% mortgages and results are what they were in the first quarter, nothing really has changed as we have moved into second quarter. So when you track 50 categories, some are going to be up, some are going to be down on a comparative basis. But again, if I look at our pacing throughout the quarter, it looks a lot like first quarter in terms of where we think we'll end up.

Great. And my last question, if I could. For the digital side of things, maybe if you could talk a little bit further about the organic revenue growth there and maybe separate between the local side versus national and how the performance is -- went in the quarter and maybe what your outlook is in the second quarter, please?

Sure. Well, as I think we mentioned, local was very strong from a local digital perspective, seeing double-digit increases, both in our digital agency services, which is our selling broad websites as well as our owned and operated websites. National was less robust in the first quarter because of some of those issues. The Hill, in particular, with the Ukraine conflict, saw a decrease in advertising for a period of time at the beginning of that. Subsequent to that, over -- in the last half of April and early May, the advertising revenue has returned there because people -- advertising just didn't want to be associated with that news. So I would say thematically that local is performing as or better than expected, and national is probably slightly behind our expectations, but still positive.

[Operator Instructions] And we'll now take a question from Jim Goss with Barrington Research.

One question I have involves the ATSC 3.0 in terms of the monetization devices you plan to use. For example, you brought up the notion of improving and correcting GPS signals. How would you get paid for that, delivering information and sort of a consultancy or some other way? And on a related basis, I think you framed out in the past that all of the things you're going to do with this new technology could have a potential opportunity over time on the scale of retrans if I'm not mistaken. Could you tell me if that was a correct recollection?

Yes, Jim. We think that over time, and that means probably end of this decade, that total revenue from monetization of an ancillary uses of our spectrum we believe could rival current distribution revenue, which for this company, is something north of $2.5 billion this year. So we think it's a substantial value creator, and we think it's the greatest opportunity to create value in our business today as we know it, which is why we talk so much about it, why we're focused so much on it. I looked at two demonstrations at NAB. One was, as you mentioned, on correcting GPS signals. And when you think of just look out your office window and anything that you need -- you need to know where it and need to know where it is. I mean that addressable market is potentially huge. The other demonstration I saw centered around distributed power. So that has all sorts of applications. It could just be B2B and utilities talking with itself and -- but it also could be utilities talking with consumers and offering incentives during peak periods of the day to raise your thermostat and get $25 off your bill and there's just it gets real wonky, real fast, but the opportunities, we think, are myriad. We see ourselves as having the toll road that other folks can drive on to execute their vision as to what they can do with this spectrum. The bit path consortium that we invest in and are part of put together kind of a developer's toolkit, which we view as being basically open source, which has got all of the dongles and the birds nest and all the things that are part of the necessary toolkit to be able to enable uses of the spectrum. And so we see it as being an open source and let the market decide the highest and best use of the spectrum, but we see ourselves as operating the turnpike.

Okay. Well, that's a great analogy, the toll road idea. If -- but in terms of the way you would collect those tools, have you have you gotten as far as thinking of how that sort of thing could work or any examples you've come up with to this stage?

Sure. I mean, we could lease a sliver of our spectrum in every market that would reach 68% of the country to Netflix that they felt that they needed higher speed delivery or were being throttled by conventional providers. And that's a point to every point, wireless mobile on the go and it would just be straight out lease payments. But I don't know -- although I wouldn't rule it out, we might invest in some of these businesses with use cases, but I think, again, we make money today leasing out our spectrum on an ancillary basis for Diginet, either ones we own, that we monetize vis-à-vis advertising or we just lease slivers of our spectrum to others for Diginet distribution. So I think the future is potentially analogous to that. And again, spectrum is generally valued on a per pop basis and retrans is valued on a per sub basis. So the comparisons are not wholly dissimilar. But again, we think that when you look at the connected car and digital signage and telemedicine, interactive television, I mean, there's just any number of potential use cases. What we want to do is let the market decide the highest and best use of the spectrum, provide the tools for developers that want to develop for this market. And then like I said, we'll determine the business relationship, I think as these use cases come about. But you don't need -- you just need the ATSC 3.0 signal on the air to be able to monetize it. Now you're somewhat restricted during a transition period because of the lighthouse situation of not having extra spectrum to be able to create on one and then shut off the other. And then here we go. Right now, we're kind of lighthousing each other's 1.0, 3.0 signals to be able to develop the transition. But ultimately, that's why I say, by the end of the decade here, we are hopeful that -- there are all kinds of opportunities, whether it's education and distance learning. And just -- again, I think of us as the wireless interconnector of the Internet of Things. And when you think about that, it's how -- how many different things can you think about? And I think there are a lot. So we are bullish on ATSC deployment and will lead the industry with stations reaching 50% of the population with the 3.0 signal available by the end of this year, and we will continue to hopefully be at the forefront of development of the business case, the use case and the monetization efforts as well.

Okay. Great. One other question. I'm just sort of curious, you've carved out a neutral situation with NewsNation. And I'm wondering if you would be in a somewhat unique position, if not or at least rare positioned to maybe hold panels where you'd have points of view from -- different points of view on the spectrum, political spectrum that might attract parties from both sides of the competitive landscape you have.

Jim, do you mean from a revenue or from a content perspective?

No, from a content perspective that might interest viewers. I think one of the issues with carving out neutral is it could be tellable to anyone, but a lot of the viewers tend to go to whatever base they tend to focus on, whether they're liberal or conservative, you would be position in the middle and may be able to get people from either side. And I wonder if that might be a way to create content that can create advertising opportunity that would be met attract viewers from the other competitors?

Sure. Well, we are doing that today. And if you watch our prime time programming, we will have people on from opposing points of view to discuss and make their points with our hosts and moderators offering to kind of referees and where appropriate, injecting their own opinion, but clearly labeled as such. I would tell you though -- I mean, the opportunity of NewsNation is not only that, but it is to cover the stories that other networks aren't covering. We were the first on the scene and the first to interview the carwash operator in the recent drama with the former correction worker as well as the convict she was on the run with. That wouldn't have been possible with our contacts in Huntsville, Alabama, where the jailbreak occurred in Florence and then in Evansville, Indiana, where we obviously have station presence. And we were interviewing people live on the air when other cable networks were doing phone interviews with anyone that could get a hold of. And that's where our local course knowledge really plays in. A couple of weeks ago was truck week on NewsNation, where we profiled the American trucker, talked about the trucking industry. It's important to the country, talked about women entering the workforce of being big rig drivers. And you're not going to see those stories on other cable news networks. We're covering a large part of the country and stories in a large part of the country that perhaps others don't pay attention to. So we think that's where we can really show our stuff as well as being unbiased and political. And we will have a show on the air before the end of the year called The Hill because we own the digital asset, The Hill, and that will be necessarily kind of a Washington D.C. panel type show. But I don't think you'll see the entire lineup made up of those. But we think a smart mix. We had our highest demographic ratings 5 to 11 p.m. last week since we started. And every week, we see green shoots in one program or another. The ratings are small, but they're growing, and I said don't focus on the ratings, focus on the growth. And this is a long -- this is a marathon. It's not a Wind sprint. But I'm proud of what we put on the air every day. I've never been embarrassed by a second of what's going on over the year. We think it's a great environment for viewers, smart viewers to come and be informed and not handed to, and we also think it's a smart environment for advertisers because the content itself is professionally produced and definitely not toxic.

Great. Thanks so much.

[Operator Instructions] We're hearing no more questions, operator. Thank you very much to everyone for joining us this morning. I'm sorry.

Actually, you do have some callers in queue. We'll take a question from -- follow-up from Craig Huber with Huber Research Partners.

Just wanted to -- Perry, your comments about uses of spectrum down the road here. Obviously, you're saying you're going to -- you think you'll be at 50% reach of the U.S. population by the end of this year. Your TV in total, as you've said, reached about 68% or so. When would you expect to start inking maybe your first contract on this new use of renting out the spectrum? How far optic is possibly?

Well, we make about $80 million a year on ancillary uses of our spectrum right now. So we're already monetizing and it flows through the distribution line or in the case of is that advertising flows through the advertising line. So it's not as if it's laying fallow today, and that's with a mix of 1.0 and 3.0 spectrum available. But as I said, I think you'll see -- and I think I mentioned on our last call, if you look at the overlay of Scripps and their spectrum and Nexstar and our spectrum, we have an unduplicated reach of 92% of the United States population. I think you can build a business on that. And so we are in the early stages of having conversations about things we could do together that wouldn't require a consortium or a committee or anything else. So you've got to have 2 parties to agree. But I do think that you'll see once we have -- get the 50% on our own and could reach maybe 90% of the population with a partner or 2, I think then you'll begin to see use cases, and I think that's going to be within the next 2 years.

We'll take our next question from John Kornreich with J.K. Media.

Did I miss the Food Network distribution amount of the first quarter? And then I have a couple of follow-ups on that.

Yes, the food network distribution amount in the earnings release. And you can see, it's $193 million. It was up $15 million.

And that was up in -- and that was up $15 million?

Yes.

Okay. Does that represent roughly 90% or so of what you're going to eventually receive for the year?

So the distributions are lagging, right? So that relates to the earnings for the Food Network from the prior year. So it does -- it represents the distributions that is analysis the partnership.

If you look historically, the first quarter has been less than 90% of the total.

Less than?

And I don't know exactly what the number is, but my guess is it's probably closer to 75% or 80% of the total.

Okay. And finally, the distributions that are made by Food Network, do they represent virtually 100% of all air free cash flow? Or do they retain something?

It's based on their pretax earnings and we get 31.3% of that.

Of the pretax earnings? Okay. That's it.

And there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you, operator, and thank you all for joining us today. In periods of market uncertainty, one thing has remained true thoughtful investors who have taken advantage of market volatility to buy Nexstar shares have never been disappointed, given our consistent financial outperformance, our industry-leading free cash flow generation and our low leverage. So thanks, everyone, for joining us today. We look forward to speaking with you again when we report our second quarter results. Have a great day.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.