Q2 2019 Earnings Call
Please standby.
Good day, everyone and welcome to the <unk> second quarter 2019 earnings call.
This call is being recorded.
Oh speaker for today will be Dave Lougee, President and Chief Executive Officer, and Victoria, Harker, Chief Financial Officer.
At this time I would like to turn the call over to John Geneva, Senior Vice President of capital markets and Investor Relations. Please go ahead Sir.
I think you have any good morning, and welcome to our second quarter earnings call them up.
Today, our president and CEO , Dave Lougee, and our CFO Victoria Harker.
You can't mismatched performance and results.
After that we'll open the call for questions.
Hopefully you've had the opportunity to review this mornings press release.
If you have not yet seen a copy of the release its available on TEGNA Dot com.
Before we get started I'd like to remind you that this conference call and webcast includes forward looking statements and our actual results may differ.
Factors that may cause them to differ are outlined in a resi see filings.
This presentation also includes certain non-GAAP financial measures, we have provided reconciliations of those measures to the most directly comparable GAAP measures in the press release and on the Investor Relations. Fortunately our website with that let me turn the call over to Dan.
Thank you John and good morning, everyone.
As you saw in earnings release. This morning, our second quarter performance was strong with all of our key operating metrics, finishing in line with the guidance, we announced last quarter.
Our subscription business continues to provide us with a high degree of visibility and the strength and durability of our future cash flow streams, and we continued to execute on our capital allocation and M&A strategy as exhibited by the acquisition of a dispatch broadcast group's dominant stations, which I'll discuss in more detail later.
We remain committed to creating long term value for our shareholders by bringing technical operational expertise to the stations we acquired.
Expanding our presence and strong political advertising markets and serving customers through innovative content and marketing marketing, leading advertising solutions across multiple platforms.
For the second quarter cabinets told reported company revenue was $537 million up 2% year over year and in line with the guidance of low single digit growth, we provided last quarter.
Our revenue growth was driven primarily by advertising marketing services, and a 13% increase in subscription revenue, which more than offsets the $22 million reduction in political advertising compared with last year.
As a choice will discuss later, our underlying advertising and marketing services revenue should continue to improve sequentially up 3% in the second quarter with demand from advertisers broadening across several categories.
We've also had an active quarter and year on the M&A front, we announced an agreement with this batch broadcast group to acquire leading NBC and CBS affiliate stations Wthr and W. BNS and Ohio's Premier Sports radio stations on June 11th.
Well. The addition of these stations we have further built out our portfolio of leading big four affiliates and brands in top markets.
When the next door in dispatch acquisitions are completed TEGNA will own or operate 62 stations in 51 markets, reaching 39% of all us households.
Also we closed on the previously announced acquisition of the approximately 85% of multi cast network to Justice network and questions that we had not previously owned.
Through this acquisition, we provide unique AD supported programming to millions of television homes across the country and serve an increasing number over the year viewers.
I'm going to turn to our subscription revenue business. It continues to provide us with growing and predictable predictable cash flow, which is supported by both ongoing rate increases in existing agreements and step ups and renewals.
We are particularly enthusiastic to enter a period in which the vast majority of our subscribers are up for renewal.
Specifically, 85% of our subs will be renegotiated and repriced between the fourth quarter of this year and the end of next year.
And on the other side of the net Retrans equation, we now have clear visibility into that as well with the recently announced CBS agreement through 2022, we now have long term affiliation agreements in place covering nearly 99% of our households.
Turning now to political we continue to strengthen our position for next year's presidential elections, right strategic acquisitions and strong foothills footholds in key battleground states.
Our announced acquisition over the next Star Tribune divestiture station. This provides us with 11 stations in eight markets, including two stations each in Pennsylvania, and Iowa, both Big Presidential Battleground States, obviously and following the close of the dispatch stations, where we added dominant number one rated stations in Indianapolis and Columbus, Ohio, TEGNA stations will cover two thirds of all TV homes in Ohio.
Our portfolio, a very strong stations, including those in these many battleground states are prime to benefit from expected record levels of expenditures next year.
And as a reminder, we still expect to subscription and political revenue as I just discussed to make up approximately half of our total to your revenues beginning with a 1920 cycle and an increasing percentage thereafter, a dynamic that will allow us to drive shareholder value regardless of any cyclical variability in the spot advertising market.
Now I'd like to share some updates on our strategic Tonsan in program initiatives in the second quarter.
As part of our ongoing commitment to constant innovation and building on the success of the bomber podcast, we announced last quarter TECNIS vault Studios released two new crime podcast projects true crime particles and Bardstown Bill on build on real life cases investigated by our award winning reporters and are tailor made for the wide and diverse audience of true crime fans, which is a large group. These programs leverage our vast library of news archives or exclusive IP as I'd like to refer to it that across all of our markets.
Our lives socially driven daily glass live show continues to experience strong audience growth across both traditional and digital platforms for the May sweeps. The show posted 17% growth in women 20, 554, and a 54% growth in Facebook video views.
On the journalism front, we continue to earn nationwide recognition with TEGNA stations, receiving 10 National Edward R. Murrow Awards for excellence in local journalism more than any any other group.
Taken also received 91 regional Edward R. Murrow awards, the most in its history.
This is a true testament to our commitment to excellence in journalism and we remain dedicated to maintain his key differentiator of our business. Our clearly stated purpose is serving the greater good of the communities, we serve and I would argue that our passionate commitment to local journalism and the first amendment has never been more important to our democracy than it is today.
We have and will continue to innovate to seek opportunities to take it Bert advantage of emerging trends and consumer TD behavior.
And our commitment to ongoing investments in high quality monetizable content have positioned us to capitalize on these trends.
While we are pleased with all the strategic initiatives have delivered to our customers and shareholders to date, we continue to look for new ways to augment our portfolio, which reaches audiences nationwide.
Funding.
I would like to highlight our announcement from last week.
And as part of our sales force transformation, we will be taking our national sales in house with the creation of a new unified single in House National sales organization. Beginning next month. This change will better align our sales efforts to go up and go to market strategy as we embrace automation of the business that is more commoditized and free up our talented sales force to develop more solutions and results for our national clients.
In closing I'm very pleased and our accomplishments in the first half of 2019, one we've announced or closed on nearly a billion and a half of acquisitions that are immediately accretive to free cash flow to as a result, we have also added five political battle battleground markets three the advertising market has improved through the first half of the year with several of our top categories positive during the quarter and the outlook for the third quarter is a continuation of this improvement due to the combination of increased demand and also due to market share gains because our content and sales transformation initiatives are working for.
We have increased visibility on net retrans by renewing our CBS agreement through 2022, and now have big four agreements covering nearly 99% of our paid subs going out to 2021 and beyond.
Head of the large retrans renewals life cycle I spoke to earlier and five we are in the early stages of leveraging our own archive content across multiple platforms.
All while remaining on track to hit our financial and leverage guidance I'll now pass the call over to Victoria to cover our financials in more detail.
Thanks, Dave Good morning, everyone and thanks for joining us as Dave mentioned, we're excited about all of the growth initiatives Weve execute on this quarter organic as well as M&A.
In my remarks, I will cover the expected impacts of both as well as update you on our planned capital allocation going forward.
But before I cover our consolidated financial results I'd like to review just a few special items for you, which I just a small impact on the quarter.
These include $5 million in acquisition related fees, and severance cost of $1 million, partially offset by $4 million and reimbursements for spectrum Repacking.
Non operating items included in income gain of $7 million, primarily related to the write up of our previous investment in the Justice network in class triggered by our acquisition of the remainder.
Now onto the second quarter consolidated financial results keep in mind that most of my comments today are focused on taking us performance on a non-GAAP basis, providing you with clear insight into our financial drivers business trends and operational results.
Also as a reminder, our revenue results this quarter do face a tough year over year comparison due to $26 million political advertising last year, the comments cyclical even odd year trend.
You will find all of our reported data and prior period Comparatives in our press release.
Now for revenue results.
Total company revenue for the second quarter on a reported basis was.
2% year over year right in line with our low single digits guidance.
As you've seen from our press release. This is primarily driven by subscription revenue.
Which grew $27 million during the quarter.
When excluding political advertising impact total revenue revenue was up fully 7% year over year well in line with our prior guidance.
This is a direct result of our subscriber growth trends, which continue to be stable. These high margin subs produce annuity like cash flows which allows clear forecasting visibility.
As a result, we continue to expect another year of healthy revenue growth and 2019 and are confident in our mid teens growth guidance for the year.
Now turning to advertising marketing services.
As expected advertising marketing services revenue increased 3% year over year, which marks a sequential improvement over first quarter 2019, as well as year over year.
This reflects strong underlying TV advertising trends accompanied by solid growth by premium.
To provide some further color on specific advertising category performance trends.
Which vary by sector as always the stronger categories. This quarter included professional services.
Banking media and telecom packaged goods utilities and education.
Other quarters, such as auto in restaurants were lower in the quarter, reflecting trends in those sectors.
Moving now to expenses as expected our operating expenses were 4% higher this quarter at the low end of our mid single digits guidance.
This increase was driven primarily by higher programming fees, partially offset by our ongoing streamlining of our business processes.
As a reminder, these programming fees include reverse compensation paid to networks.
When excluding programming costs expenses were down slightly also in line with our guidance.
During the second quarter corporate expense was $10 million down $1 million from last year, reflecting our successful efforts to reduce the cost of managing the business overall.
As a result, adjusted EBITDA, excluding corporate expenses was $179 million producing a solid 33% margin.
During the second quarter, we generated $52 million or free cash flow roughly 10% of revenue in line with projections previous incorporated in our two year guidance range of 18% to 19% of revenue.
Our debt increased during the quarter by approximately $60 million to $3 billion, primarily due to a draw on our revolver to fund the Justice network and quest acquisition, producing net leverage of four times.
As previously discussed we continue to use our free cash flow and a $1.5 billion revolving line of credit.
Invest in both new products and initiatives as well as to fund acquisitions.
Later this fall, we expect to refinance some of our existing debt maturities taking advantage of historically low interest rates. The proceeds will then be used to replenish some of the drawn revolver, which we also plan to extend one year to 2024 with no change to its size.
Now turning to M&A.
As Dave noted we have been very active on the M&A front. This year reflected the announced acquisition of two dominant TV stations and two radio stations from dispatch broadcast group for $535 million earlier this year.
Earlier this quarter.
In addition to 77 million dollar acquisition of Justice in question networks also close this quarter.
As a reminder, the dispatch transaction provides us with the number one rated TV stations in both Indianapolis and Columbus.
For 2018, 19, EBITDA multiple of 7.9 times, including run rate synergies.
We expect the transaction to close very shortly with the Nexstar divestitures station is expected to follow later this quarter.
We plan to fund all three transactions for the use of available cash and borrowing under our credit facility.
All of these transactions are immediately free cash flow accretive EPS accretive in less than 12 months.
Reflecting our strong financial discipline and the compelling value of strategic fit the cornerstone of our M&A strategy.
Now turning to third quarter and full year 2019 guidance.
In an effort to help forecast our future results were again provides several key quarter ahead financial guidance metrics.
Just as a reminder, again the third quarter of last year included $60 million of political advertising at approximately $6 million or premium revenue, which was subsequently adjusted out.
We expect third quarter total reported company revenue to be down low single digits, excluding the impacts of political AD revenue for last years third quarter and $5.8 million and premium adjustments, we expect revenue growth to be in the high single digits range.
I would add that this does not include the immaterial impact from Justice quest or the acquisitions that have not yet closed.
We will provide updated guidance on our third quarter.
Call in early November which reflects the impacts of all closed transactions and PREIT provide prior period pro formas as well.
[noise] from an expense perspective, we expect third quarter to increase in the mid single digits, driven by higher programming fees or flat to up slightly excluding programming expense.
Midway through the year, we are on track to meet all of our previously discussed guidance elements for the year.
Key organic guidance metrics for the full year in 2019, including include the following key elements and remain unchanged since our prior updates.
Well, we expect to see full year subscription revenue up mid teens percent based on sub trends and tracked timing of MPPD renewals only 15% of our subs renewed last year approximately 85% of our subs are up for renewal by the end of 2020.
Corporate expenses.
Are expected to total approximately $45 million.
Depreciation is projected to be in the range of $55 million to $60 million with amortization of approximately 35 million.
Interest expense for the year is expected to be in the range of $190 million to $195 million.
We expect capital expenditures between 70, and $75 million, which includes recurring capex of approximately 30 to 40 $35 million to $40 million and about 35 million a nonrecurring projects, including mandatory channel Repacking, our headquarters relocation, which was completed in the first quarter and a new facility in Houston, which was completed in February .
We expect the effective tax rate to be at the low end of the 23% to 25% range.
And beyond this as we previously disclosed we plan no additional share repurchases until we de lever funding our new acquisitions.
For 2018, 19, we project free cash flow of 17% to 18% of revenue on a two year basis, and 18% to 19% of revenue for 2019 and 20.
In terms of capital allocation building now on Dave's comments regarding the current M&A environment.
As we previously discussed segment, followed a disciplined capital allocation framework that balances our desire to enhance our growth profile for strategic accretive acquisitions with our commitment to a strong balance sheet organic growth and return of capital to shareholders through dividends and de levering.
Capital allocation decisions are always tightly aligned with maximizing shareholder value and we consistently allocate capital to the options that offer the highest medium to long term financial results.
As Dave noted earlier, we continue to participate actively in M&A processes for assets that are fit for us within current industry regulation and frameworks and we have ample capacity under the cap, even after including our recent acquisitions to execute on our strategy further.
Our recent acquisition demonstrates the efficiency ever buying power.
For about 1.1 point $4 billion, we acquired approximately an annualized 500 million in revenue and 200 million EBITDA on a two year average basis with about a $100 million on free cash flow well only retiring three points of cap headroom.
We clearly remain laser focused on creating incremental shareholder value with every opportunity we create.
Beyond this our second quarter results as well as our outlook for 2019 demonstrate that we are making strong progress in diversifying our organic revenue and cash flow streams.
Reaffirming our confidence in our long term strategy.
As a result, the continued growth of less cyclical profitable business is only serves to enhance our ability to create shareholder value with even greater transparency with M&A, providing an important opportunity to leverage our operating scale through enhanced content and efficiencies.
We could not be more confident in the runway this provides into 2020.
With that I'd like to open it up to questions operator.
Thank you and ladies and gentlemen to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Once again Costar one at this time.
And we will take our first question from Marci Ryvicker with Wilson. Please go ahead.
The markets been pretty nervous about net retrans trends given reported pay TV sub declines coupled with some high profile carriage dispute. So Dave can you update us on subscriber trends, maybe touch on large versus small markets and then as you mentioned you have a lot of retrans contracts coming up so how should we think about pricing power.
Follow up thanks.
Okay. Good morning, why she thanks, so our paid subs are right in line with where we thought they would be as we said last year. After we'd had a pod straight positive months. We're now just slightly into the negative category and this is both traditional and virtual combined.
And so we are we are right in line with where we thought we would be.
And we are frankly because of our nature of our portfolio to your second question I think performing better than the industry overall, yes that that gap between large and small markets continues to exist, it's narrowed a little bit because as the virtual mvps have gotten into these smaller markets.
But I think it's got a lot to do.
I wouldn't also characterize adjust between large and small I continue I would categorize it was between sort of the household income of those markets and the economic strength of the markets versus non for instance.
Ill just pick one market.
In the second quarter Houston was often total subs as an example, so theres kind of a tale of a few different economic cities in there.
As it relates to she asked about pricing and about the Retrans disputes as summer, let me talk about the Retrans dispute to summer obviously, we're not involved in those but theres a couple of dynamics. There. One is in August is not typically a good month to resolve a retrans dispute per se. So I think just I'd I'd make that comment generally writ large just because of sort of a it's not a month of a lot of active programming deep on vacations et cetera, et cetera, and I do think there was actually a little bit of a political dynamic to some of the retrans dispute right now because.
The satellite home Reauthorization Act I think I, just screwed that up or known as Stella. It's up every five years and that's up in next year and typically the.
MPPD industry tries to use that piece of legislation to get its nose under the tent on on messing around with retransmission consent, which were confident they will but I think they believe those disputes create some of the noise that actually help them on that cause legally as it relates to our subs marci so of that 85%.
50% of them will be by the end of the fourth quarter. This year and in every case and 35% next year and in every case will have significant step ups. Because we did those deals a few years ago, they're already by definition, a quite a ways under market. So.
I think the noise out there is a little bit of huffing and puffing bottom line is the strength of our portfolio will have very nice step ups in year, one of those increases and good escalators going forward.
And you had another question.
Yes, just you mentioned, you're taking your national sales and house graded this a while back it was a little bit choppy from them at the start. So I just wanted to know how we should think about the potential impact and national spot and then what percent is national spot as a percent of total spot maybe of total revenue just to figure out.
It's in the Thirtys.
It's in the Thirtys that which we call national Marci because that's in the past that definition has been whoever whatever business was handled through a third party rep, but we're on a great great really had a different portfolio. So they had a different strategy our strategy as it looks like rates. We have a lot of large agency business. This is actually not going to be negative to EBITDA in any way on our business is actually should be positive immediately and and going forward both on the expense, but especially on the revenue side. What we're what we're really aiming to do is take the friction out of the system for the agencies to actually give them less points of contact.
And then also to expedite the the automation of the commodity business as I said.
Faster and that is going to happen and the response from the agencies to what we have announced to them has been tremendous.
Thank you.
We'll take our next question from Alexia Quadrani with JP Morgan. Please go ahead.
Hi, This is David on for Alexia, Dave can you just provide some additional commentary on auto in the quarter. We did see recovering far for April just wondering if you see this reflected in the advertising demand at all.
Yeah. The auto auto was about where it was in first quarter I mean for us I mean, it's not violently down.
So call it call it mid single digits.
But.
Then we'll come back to it but the most I guess the biggest story about auto is how little story, it's become relative to our overall advertising and marketing services and we've seen our best quarter in quite some time and as a.
As we indicated in our guidance, we're projecting more sequential improvement. So I can talk more about that later I think in the end the car space I think it continues to be an issue from what we can tell that there is a little bit of a mess around Saar was a lot of his fleet sales right. So fleet sales don't bring with it that.
You know that extra dollar of advertising for the tier two and others. So I just don't I think it's a little misleading. So I think well on a relative basis. When you take out fleet sales sales remained sluggish.
Okay, and then just on the expense got X programming costs, you've got to be flat to up low single digits relative to down one in Q2, just provide some color on how to think about the sequential increase in the quarter and then you know for corporate expense. The full year guide does seem to apply.
Slight pick up in the back half just looking for some insight into what's driving that as well. Thanks.
Well just have re baseline so for the second quarter ex programming we were down.
Slightly and then also ex acquisition ex the new acquisitions, a small ones that we had as wells program when you're down about 3.3%. So that just gives you sort of a perspective for second quarter. We just gave you a third quarter guide, which is not ex those elements, obviously and we've got a little bit of linkage relative to ingest Justin's question a couple of other costs.
Beyond that in terms of the expense base line, we continue to drive into the back half some of the corporate expense reductions as well as the new system that we're implementing to them when we bring on the new acquisitions, we've got reductions that will hit in the first quarter of 2020.
Okay very helpful. Thank you.
Well take our next question from Doug Arthur with Huber Research Partners. Please go ahead.
Yes, just one question, Dave it's been kind of quiet on the deregulation front recently as you look out to 2020 and beyond.
Anything to sort of.
Materially update us on in terms of what the FCC, maybe working on at this point.
Yes, I think the I think the cap is.
Kind of in a sluggish spot right now I think you know with the Stella build coming up.
I think there's some dynamics in that relative to the industry itself and not.
About the good times, so I'm not I'm not terribly competence something happening before the end of this year still still believe.
That.
Very good chance next year, there will be a change in the cap obviously the current structure the discount.
Embedded with Aercap has to be dealt with at some point, but I think that it's unclear right now what that timing will be.
But I think that.
The better chance in the first half of next year than the second half of next year.
Okay. Thank you very much.
Our next question will come from David Joyce with Evercore ISI. Please go ahead.
Thank you I was wondering if you could provide some more color on premium in terms of how that contributed to the mis growth in the quarter and then just a housekeeping item on when you think the.
Pending Nexstar and Tribune.
Closings might fees. It still is that still possibly as August event, given the DJ approvals. Thank you.
You bet, so premium was a contributor.
Two two RMS growth, absolutely, we've gotten nice strong double digit growth.
Year to date and in the quarter and premium, it's performing very very well, but still as a percentage of our overall business. It's it's just we've got a lot of advertising dollars. Obviously, so we really we had a really good quarter on both counts what we what the you would traditionally call core that we don't call out anymore, but.
Core trends as you as you refer to them are also very strong for us as well, but premiums doing very very well.
Second question on Nexstar honestly, we don't know, we don't know until we know.
The.
A lot of lot of those.
Issues are really nexstar is resolved those whatever issues that remain to be done and I don't know if I don't know that there are any with the FCC. Our indications are it's pretty clean.
And we've got the DJ approval. So we don't know what will close this month or not this August tends to be a quiet month and.
A lot of people in DC not working.
But we shall see.
Thanks, and then finally, if you could just comment on.
Things have been trending with the TSC three though.
Trailing with your partners.
Yeah, I think there's a lot of progress being made on that front. So we're now in the transition phase where we are today, we're working with.
Through Pearl and other large broadcasters to try to really focus on transitioning the top 30 markets a lot of that has to do with when some of those markets are being re Pat as part of the spectrum auction.
So, but you did it I would say.
It's actually ahead of where if you'd asked me three years ago, where I thought it would be but are still going to take some time, obviously, given the repacking and and the transition plan, which involves a lighthouse more stick in each market to get done, but some markets will get done but.
A lot faster than others.
Great. Thank you.
Thank you.
Moving next to Kyle Evans with Stephens. Please go ahead.
Okay. Thanks.
Dave There was a time when we were.
As a group kind of excited about end market M&A.
Any any new views on on deregulation in that area.
Yes, no as I've said before Kyle I think the last couple of earnings calls obviously thats the.
The position the sort of the.
[noise] positioned the D.O.J. started taking on the industry.
Following the sale transaction of last year has put a crimp on that for the time being I think over time, it's absolutely going to happen it will be very poised to participate but the yard we're not we're not building or are all of our growth right. Now is not built around that but we are when it does happen we're poised.
To take advantage of it but I think I think in the current regulatory environment at the moment it sort of temporarily parked.
Got it.
We went through a period of sub growth on Retrans slightly red today, and we're looking at kind of a sequential down.
Subscriber revenue in the quarter, what does your if you kind of squint look out at the back half of this year and next what do you what do you expect to do.
Actually let me make sure I think if you, referring I fear refrigerant cloud to our.
Having a lower growth number and second quarter is a little noise in that number. So I think we were plus 18 is that right in the first quarter.
But 3% three of those points, where we had KFN be in San Diego for you know.
The full quarter, and we did and we only had it for six months last year. So on a if you were to.
On a pro forma that Thats, a plus 15 and you know so plus 13 and second quarter is worth about exactly what we would have expected because that's normally the sequential trends. We have we have seasonality in our sub count so there.
Plus 15, plus 13, as writing right, where we thought we would be so and so really no theres no.
New driven I think the point about the sub trends issues for US is as we've talked about it on the revenue side. The escalators that we are getting we'll get both on step ups and an annual increases will far offset.
Subjects sub trends declined because as a reminder, and as an industry, but especially for groups with strong stations like ours, you still have this issue where you know.
Call it 15% to 20% of subscriber revenues go to the big four broadcasters, while we still have 35% or so of the viewing that delta is that work in the marketplace today and is working like it should be.
Got it do you have do you want to share any outlook on that or is that.
I'm going to leave it there is no. We're not we're not we're not we're not give any outlook, but I think I used the worst enthusiastic in my and my statement. So we have we're we're nicely positioned Carl.
Really nicely positioned given the amount of subs, we have up for repricing and the fact that we have.
Absolute firewalls on what our reverse comp will be.
Clear clear knowledge of what that is uncertainty for some time.
Great where were you able to take cost out of the business ex programming and how much of that is left that's my last question. Thank you.
No. There's no end to innovation technology continues to do wonderful things you know so we continue to innovate we're doing right now relative to rolling up on the finance side I'm doing some things we are overtime as the price of technology comes down, we'll probably be able to.
Cost a lot of money to move a TV station, but we've got some real estate, we could get out of.
As costs finally come down on broadcasting infrastructure and there are still some system from frankly, the national sales thing I just discussed the amount of kind of just.
Just kind of the old model, which orders were handled has a lot of just a lot of people touching it and.
On that area writ large while our in house sales strategy is not cost driven.
Actually will be inefficiency as well going forward.
Hi. This is they try just to expand on that a little bit we have beyond the ERP implementation that we've got going on for next year, which contributes to the cost saving synergies that in the new acquisitions as well we continue to invest in things that like healthy living for employees, which are due or reduce our medical costs. We've got a plug and play a set of centralized systems and platforms now relative to cash management. So a lot of the things that you would think of as sort of support or infrastructure for us at TEGNA that we're now importing for the stations that will be acquiring or beneficial both and employees as well as reducing our cost base and importantly spring up free cash flow. So I think that there it becomes that much more modular plug and play with the new acquisitions that way.
Great. Thanks, so much.
Our next question will come from Jim Goss with Barrington Research. Please go ahead.
Thanks.
Dave you outlined a number of the key content and programming initiatives and.
There are different attitudes and strategies toward content within the broadcasters I'm wondering if you might.
Talk a little more broadly about what your strategy and philosophy is.
Regarding programming whats the nature size breadth and the economic value could ultimately be is it just the service side show and supportive or is that a separate business that'll take on a greater presence over time.
Thanks for the question Jim insensitive to your last question, it's both right. So let's just take the.
The true crime initiative right, it's not really just a podcast initiative thats, our first foray, but the fact of the matter is.
What we're planning to take advantage of is the fact that youre going to how what I would call a nuclear war in scripted programming between the Netflix is in Disney's New service and 18 cheese, new direct to consumer service, we're not going to play in that game right, but in that they will they will need other programming like reality programming like say, making a murderer as a Ted Bundy special on Netflix we have.
Archive content exclusive archive content on.
Four out of 10 unsolved through crimes in America. So we sitting on that library of IP content and that will really turn into a video production.
Business that will not require some big studio in investment there's reality producers all over the country.
That are available we've got the gist former head of the independent producers Association, leading the effort for us.
So that will be us aside business, where are we selling programming too.
Two.
The big players in the ecosystem within our own stations.
The primary focus initially around content innovation was.
There was just I think too many people in the industry. We just said well. This is all secular and declines in linear viewing certainly a piece of it is but a lot of it weeks considered self inflicted local TV news cast did not innovate a lot in the last 25 years. So we have.
We have had a lot of benefit as I've talked to you about before about innovation process that allows local markets to really do some smart things and how they go to market and we've got examples of newscast at where we literally taken the number one news cast of the market.
The station went to market a whole different way last three quarters of its original audience and gained back 150% of its audience and got eight years younger on average that's real money even in an EBITDA, even if the core market were declining that gives us a share increase and thats, 95% margin money and then on like daily Glass life is a show that each with each acquisition, we are now adding adding programming.
To those new acquisitions at zero marginal cost and being able to.
Yes reduces syndication expense that might exist on those stations so its goodness all around and.
The the side benefit, which does mean money over time and it's starting to now is that giving ours.
Having a very focused company wide innovation ideation process, whereas rich driven by the staff level they get to participate they get to own pilots they get to feel like they're part of change results in a more innovative culture, both on digital platforms and all platforms at our stations as a result, so I appreciate the question because I think.
From a strategic standpoint, as fragmentation increases and distribution advantages start to decay over time and it would be very very more and more important for local media outlets to differentiate themselves on content.
Okay. Thank you for that and just one other area.
Regarding the M&A that you were talking about do you feel any added pressure for M&A as a result of a the twenties funny political coming so you can take greater advantage of it and also will that M&A focus and that certain traditional a range of market sizes or.
Does geography, and political weighed heavily on such decisions.
To your first question no. We don't feel any pressure do anymore M&A, our political footprint is fantastic actually and so we've got now.
States, we had before that are going to be massively competitors take Arizona, which really would never used to see a ton of money in and now we're going to have that's going to be a presidential battleground state and it will be one of the top three spending state.
States in the Senate.
And there is only two markets and we're in both so our current footprint. We know so no no pressure to do M&A to get a higher share of political as it as it relates to going forward will always stay inside our knitting, we don't.
We're not we're not looking for stations in markets 100, plus.
We like Big fours and you probably noticed we've really focused on three of the Big Force.
For the most part and we'll continue to do that.
But.
We'll we'll just continue to be opportunistic.
But no pressure to do anything and I, just want to add to Victoria's point.
About the cap Reits, so where it specifically with the discount were at 31.8% so using cap apology as we affectionately refer to it around here and it is sort of like a sports teams salary cap.
Would you HF stations that 14% of the country that we're under the cap. So we do look at acquisitions relative as Victoria said to how much cash flow.
How much EBITDA do we get with each point under the cap and that's a big criteria, we use for M&A.
Just one other thing Jim in terms of our leverage our ability to use our firepower. In addition to the cap itself, even when we close all of our our transactions that we previously announced will be under five times and as you can tell from what we said previously given the cash flow inherent in our 2020 results political and otherwise we very quickly de lever to about 444.1 times. So the capacity to do more M&A is it strategically arises is obviously they are both with leverage as well as the cap.
Okay. Thanks very much.
We'll take our next question from Craig Huber with Huber Research partners. Please go ahead.
Yes, I got a few questions if I could.
The advertising number.
Dave in the quarter that we just finished excluding small acquisition what was that percent change year over year. Please.
Sorry, advertising and marketing services, asking one yes, yeah, excluding the small acquisition you guys said earlier in the year, what was that percent change year over year.
Like it was up low single digits.
Yes, low single digit Jeff.
And then what's the TV advertising PC or just the total advertising Pcs for the third quarter and year over year basis, excluding the acquisitions that have closed.
Good so they're they're good.
Obviously, we've closed July and.
It was very very good so they are they are positive.
And even though the quarter was late as it always is but they are good and they are better than the second quarter.
So set up like.
Three four or 5%, you're suggesting or.
Given the number of forward looking on advertising marketing services, but there are positive and they are good and they are better than second quarter.
Okay and what is your updated take gave on auto TV advertising. It seems like you're trying to suggest negative trends here might alleviate a little bit here in the second half of the year, but what is holding it back here just.
Just kind of go through the various issues with the auto dealer level. The return on the national level. Please.
Yes, I think this is the only it was first of all it's not yet not terrible right.
It's just not positive right, but the only answer I've Craig is the one I gave earlier.
Is that which of which we seem to see is that the Saar numbers are artificially inflated by fleet sales. So.
Real sales at the dealership level are not up right and as we all know it's kind of a one for one correlation with sales.
So you've seen it not just in TV, you've seen it and other.
Forms of media that get auto advertising as well. So we're not we're not unique in fact theres, even there's digital platforms that are bumper.
[noise] down.
Significantly more than we are.
And then also Victoria, if I can ask you a housekeeping question.
Once these two large acquisitions closed what do you think you annualize amortization expense on your appeals going to be.
We're going to update all of that so you'll see a pre and post amortization EPS number, but we'll do it all together once we get to close Weve got where right now going through the process.
Okay. My final question Dave is.
What is the average per cent change right now of the ratings at your local.
I don't have I don't have a number for that correctly given the size of our company. We actually have three different forms of Nielsen methodology out there. So we don't even we don't even.
When we're not even able to sort of do that any kind of meaningful way. So it you know it varies but we I would just say overall, we have good trends in the markets that matter.
Two or three years ago, we had some big markets and through some acquisitions, we've had in the wrong direction. So.
We have good trends, especially as you look at the share of our viewing right you might have a market where hot levels may be down.
4% year over year in terms of overall view in the market, but we could be up and but we've seen some nice increases in the big markets that matter.
Okay, great. Thank you.
Thank you.
We'll take our next question from Michael Kupinski with noble capital markets.
[noise]. Thank you and thanks for taking the question you know I remember a time in the past where broadcasters would actually be a little bit more vocal to the networks regarding ratings performance and how some of the money. It was actually being in reverse comp being spread in terms of programming initiatives and I was just wondering.
In terms of the network.
Reverse comp that you are currently paying how are you holding the networks feet to the fire in terms of the ratings performance from the network side and then.
The prospect of where those dollars are allocated towards programming initiatives that might be interesting to.
Hi Tech now.
Yes, that's a great question. So that conversation does take place believe me. It just doesnt buy this behind closed doors, it's not it's not something we do publicly as a company. We've had we've had between relationships in our size. We have had access to all the networks relative to programming and believe me, we do have those conversations but for the most part.
I'm not going to call out any individual network I actually believe we're pretty aligned I think that.
The networks have found that.
NBC is.
When they first bought it.
The NBC portfolio I think they were focused on the cable assets and broadcast it turned out to be that the pleasant surprise, so I think that as cable.
Michael as cable loses total subs right.
The broadcast networks are becoming a larger and bigger distribution source for them. So it's very important for them to have programming that's going to work and I think a lot of that investment also comes down to sports right and I think they are going to be as invested in sports as they ever have been and there we are very much aligned.
Got you and at this point, though you don't have you are you are you, giving specific ratings performance guidance is two networks I mean things that you know I mean art.
Because in the past they know that we so you would say that we're looking for particular share any anything specific like that or is it just more okay. We want to invest in sports because we know we'll get programming there aren't good viewers. There I mean is there any other initiatives that that you're looking for outside of sports that you would like the networks to to move toward we sell so look lead to our network. It's not just about sports and look just take their news programming right. It's a lot of our day parts. So when we are sitting down with our network partners. We are very focused on their performance in particular, dayparts, especially say the morning newscast.
And things like that so it's not just around prime.
And I mean for instance, our NBC portfolio. The today show is very important to us and.
We help them make money and they help us make money right I think our.
Our stations perform at the very high end relative to that for that show So where it's it's a good question, we're very much and you're right as reverse comp has increased its only given us more.
Leverage an entre to have a say on that stuff, but I think the good news is for the most part with most of the networks. We are now well aligned more aligned frankly than we might have been nine or 10 years ago, when youve and BC was that are running to cable prior to the Comcast days.
Gotcha. Thanks for thanks for answering the question I appreciate it.
Thanks, Michael.
We'll take our next question from Davis Hebert with Wells Fargo. Please go ahead.
Good morning, everyone. Thanks for taking the question.
Just a couple on the balance sheet.
Do you need to come to the debt markets for funding of your acquisitions. I think you said you would use existing liquidity and then secondly, the near term maturities you mentioned, how much runway would you would you like to create and.
I think this also gives you an opportunity to reassess your capital structure. So would you anticipate doing anything meaningfully different perhaps looking at the secured debt market. Thank you.
Hi started now and we've got plenty of room under our existing revolver relative to the sat transactions that we've already announced or using a combination of draws on our revolver as well as cash on hand.
Given where interest rates are though it does prevent provide us with an opportunity to go out to market and do some refinancing and extend some of our maturities at lower cost and we'll be looking to do that as I mentioned earlier, we don't have anything substantially different in mind in terms of our structure. We are looking at the revolver right as I mentioned earlier, we extended here now that we've gone through 2024 now that Weve got additional EBITDA revenue and EBITDA from acquisitions, but keeping at the $1.5 billion sort of.
Hi, guys.
And until we go to market those kinds of things really can't comment on covenants and structure, but at this point no significant.
Material changes to our plans.
Okay. Thank you and I just had one big picture question now that Youve been building some scale with the virtual mvps.
Are you getting any sort of real time data on viewership and.
Anything more particular around the reach of younger demographics on those platforms and thanks again for the questions.
Yes that varies by our various by the provider end buyer network affiliation. So in some cases, yes and in some cases not as much as we'd like.
Okay. Thank you.
Thank you.
And this does conclude todays question and answer session I'd like to turn the call back over to John Janedis for any additional or closing remarks.
[noise] I'll take it offline. Thank you again folks for taking the time to listen to our call today to conclude we are pleased with and encouraged by the strength of Texas business, which is supported by our strong subscription revenue as we just discussed and are valuable affiliation agreements as we look forward. This paired with our discipline and active capital allocation and M&A strategy will continue to position us for success through the end of the year and well beyond if you have any additional questions weren't able to cover today. Please reach out to John Janedis at 700, 3873622 to seven or 37362 to thank you again, everyone and thank you operator.
You're welcome so and this does conclude today's conference. Thank you for your participation you may now disconnect.