Q3 2021 Nexstar Media Group Inc Earnings Call

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Okay.

Good day and welcome to the Nexstar Media Group third quarter 2021, Brazil Conference call. Today's call is being recorded I would now like to turn the conference over to Joe What you saw me Investor Relations. Please go ahead.

Thanks, Katie and good morning, everyone.

I'll first review the Safe Harbor language, and 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 notes looks like through the forward looking statements made during the call.

For additional details on Brexit uncertainties. Please see nexstar. Its annual report on Form 10-K for the year ended December 31, 2020, and Nexstar subsequent public filings with the Securities and Exchange Commission.

Next door 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 Joseph and good morning, everyone. Thank you all for joining us to review <unk> third quarter financial results, which highlight the competitive advantages of our scale and reach our continued success in achieving a faster and stronger than anticipated recovery in core advertising and another period of double digit distribution and digital revenue growth once again.

Our third quarter net revenue adjusted EBITDA and free cash flow. We're nicely ahead of consensus expectations, reflecting growing momentum across our broadcast digital and network divisions and their associated revenue streams, Tom Carter Nexstar as president and Chief operating officers on the call with me as always this morning, and we're delighted to be joined this morning by Lee hungry.

<unk>, who has taken the CFO reins from Tom back in early August as I mentioned at recent Investor events. Leann is an accomplished finance leader with more than 20 years of experience in TMT investment banking in operations and she was a sought after candidate at other scale TMT entities. So we're very fortunate to have her on our team to support.

Our next phase of growth.

Together, we will review the quarter our outlook our plans for continued growth investments leverage reduction and capital returns and our confidence in achieving our upsized pro forma average annual free cash flow guidance of approximately 1.33 billion for the 'twenty one 'twenty two cycle.

I'll start with a summary of the quarterly highlights and recent developments, including our continued focus on accretive M&A and driving value through high return growth opportunities. Tom will then provide an operations review and Lee and will finish up by covering the financial report.

With many pandemic related challenges behind US we are beginning to actualize the value of the scaled program and platform that we've created and have turned our focus from effectively managing through the pandemic to again aggressively pursuing growth.

During the third quarter, we were able to leverage our platform via the accretive acquisition of the hill, which has synergies across our businesses. We also benefited from increased gaming and sports betting advertising revenue from our extensive presence in approximately 80% of the states where the betting for sports betting is legal or expected soon to be legal and we launched our second.

Owned and operated multi cast network rewind TV to nearly 50 million homes. We also partnered with sports script to launch its multi cast network in nine of our markets and more soon to come also in the quarter. We added 26 hours of programming to news nation weekly schedule underpinning. These initiatives was our continued focus on execution.

All of our core businesses as we generated $254 million of free cash flow before transaction expenses in the third quarter, representing year over year growth of 14% year to date, we've generated free cash flow of $916 million.

Near term fourth quarter trends are pacing nicely ahead of expectations with 99% of our full year total advertising revenue budgets already on the books with the benefit of our recent growth initiatives and the return of political advertising Nextera is positioned for what is expected to be record levels of revenue and free cash flow in 2022.

We clearly remain on track to meet or exceed our increased pro forma average annual free cash flow guidance of approximately 1.33 billion. During the 'twenty, one 'twenty two cycle, which with 41 million shares now outstanding amounts to approximately $32.50 per share.

With assets that have a nationwide reach of over 210 million people or in excess of 68% of all U S. Television households, LTM revenue of $4 8 billion EBITDA of $2 1 billion and free cash flow up 1.4 billion. We have achieved the scale that puts nexstar in a category of our own.

We are 50% bigger than our next largest competitor in terms of broadcast revenue and we will generate in 2022 free cash flow on par with Viacom CBS. This scale affords us the resources and synergy potential to pursue organic and inorganic growth opportunities, which we may not have been able to consider before.

As always we view these opportunities through the lens of our long term criteria of being accretive and complementary to our business. We will continue to look for acquisitions of stations in markets where regulations permit.

Also for content, driven television and digital assets and other complimentary businesses, where our scale or other synergies can drive returns at the same time Nexstar has deep financial capacity allows for further leverage reduction and return of capital initiatives all of which were prominent in our Q3 'twenty one playbook.

In addition to the 138 million allocated toward accretive M&A in the third quarter, we allocated 80 million towards leverage reduction, while repurchasing $140 million worth of our class a common shares. We also returned $29 million to shareholders through our quarterly cash dividend through the nine months ended September 30, Nexstar allocated approximately 493 million.

Towards share repurchases and dividends, marking a 29% increase over $383 million in total capital return to shareholders for the full year of 2020.

All of this was done while we maintained a total net leverage ratio of three four times.

Looking ahead with respect to political we expect 2022 to generate revenue somewhere between our 2018 and our 2020 political revenue results given our scale. We have an excellent coverage of a substantial majority of the competitive races, where an approximately 80% of those markets. Let me give you the details in the house there are 88 competitive races.

Of which 75 are in states, where nexstar has a presence in the Senate.

<unk> 434 seats, 29 races, and Nexstar markets, including seven of the nine most competitive races. They were also 29 gubernatorial elections in our markets of which 12 are expected to be competitive all of which is to say, we're well positioned to do what we've done before historically, we've captured 12% to 15% of total.

So U S broadcast political AD spending on television and all signals indicate the 2022 will be a very strong political year for nexstar.

Our Q3 acquisition of the Hill presents Nexstar with a fast growing and profitable political digital news platform that has a nationally recognized brand known for delivering balanced political reporting as well as authentic opinions and perspectives strategically the hill is highly complementary to our broadcast stations, our leading digital platform and news nation.

Next Ars National Cable news networks in America source for unbiased news with synergistic opportunities across all three of our business lines next door is leveraging our leading salesforce, an omnichannel approach to content distribution to expand the hills reach and revenue channels, we intend to further penetrate the political news market to grow audience.

Sure by scaling the hills content on news nation and across our local stations.

We continue to make progress in scaling news nation's content offerings with the major programming expansion at the end of September including two new shows Dan Abrams why produced and hosted by veteran journalist and analysts Dan Abrams and morning in America alive three hour weekday morning News show hosted by award winning former ABC news correspondent and anchor.

Adrian banker in one year since our launch we transformed the former WGN America cable asset from our syndicated programming network into a growing and profitable National news presence, reaching 75 million U S. TV homes, and ARINC 13 hours of original news programming each weekday.

[noise] News nation is fully distributed on linear and OTT systems, and we've achieved CPM parity with the incumbent cable news networks and we are seeking we are seeing new rating highs every week in fact news nation as the fastest growing cable network on television. This reflects our pivot from a startup to a credible contender in just over a year.

We are now promoting our expanding news programming and seasoned respected journalists.

Which is double the consumer awareness of news nation since our launch while there is still much work to be done we have great confidence in our long term growth strategy for their networks and the complementary opportunities related to our acquisition of the Hill.

Our scale and reach of also enabled us to participate in the fast growing sports betting and I gaming industries are gaming sports Spaghetti bedding category has grown to be our third largest category in the quarter with revenue increasing 66% on a year over year basis. This category is also responsible for the largest absolute year over year dollar gain.

Among all of our categories.

In fact in states, where sports betting has established sports betting is typically are number one or number two add revenue category.

Yet with many more states ready to approve sports betting legislation over the next year and I gaming and mobile gaming also becoming legalized in more prevalent we see continued growth coming from this category.

Reflecting this opportunity this quarter. We also helped launched sports grid network, the nation's first ever digit net devoted to sports wagering and fantasy sports.

September one across digital sub channels in nine of our U S markets with more to come in the near future.

Our scale also helps us in our efforts to give back to our communities as I mentioned on the last quarterly call earlier. This year Nexstar established a partnership with feeding America to raise awareness regarding the issues of hunger and food and security in the United States.

This past September was designated as hunger action month, and Nexstar aired and published on our website more than a thousand stories, highlighting local issues regarding hunger food insecurity and community effort to help those in need.

We estimate that the Nexstar nation delivered more than $1.6 million in value to feeding America. During September a clear demonstration of the power of our platform.

This year marked the 25th anniversary of Nexstar as founding over this quarter of a century, the company's transformational growth and financial success highlights our enterprise wide culture that is committed to localism and operational excellence. We've built upon that foundation with our innovation monetization and revenue diversification strategies combined with a disciplined approach.

Towards M&A expense management and capital allocation since our IPO Nexstar stock has returned over 200% to investors and over 200% T. S. R over the last five years.

Looking ahead, we expect to generate continued year over year growth across all of our nonpolitical revenue sources for the remainder of 2021.

<unk> growing multi platform audience and industry, leading distribution combined with the valuable sports betting opportunity upcoming 2022 election cycle return of the auto category next year Retrans growth and the growth of news nation in ratings and revenue means we will continue to have excellent visibility to deliver on or exceed our free cash flow targets.

And the 2021 2022 cycle overall, we're confident that with all the actions that we've taken over the past year that they positioned nexstar to continue providing outstanding content and service to our local communities, while extending our record of delivering exceptional financial results and industry, leading risk adjusted returns to our shareholders.

With all that said, let me now turn the call over to Tom Carter for the operations review Tom Thanks.

Thanks, Perry and good morning, everyone, our solid third quarter and year to date 21 results reflect the resiliency and adaptability of our businesses and our long term strategy is to leverage our scale to drive topline growth. We're extremely proud of the consistent strength of our operating results and a more than 12000 members of the Nexstar nation across the country.

While serving their local commit communities have consistently demonstrated their ability to offset the pandemic challenges, putting next door and a path to continued success and growth as Perry said, our Q4 operating results are pacing strongly and we expect to end 2021 on a solid notes before entering 2022, which will.

A year of growth given our internal opportunities, including the return of political the political ad cycle.

As we further look into 2020 three there will be an upside benefit that year from the large percentage of retrans distribution agreements that we will complete during 2022.

Operationally Nexstar a strong rebound in 2021 continued in the third quarter with net revenue rising three 5% over the prior year to 116 billion.

As we more than offset approximately $120 million in year over year decline in political advertising.

<unk> third quarter net revenue, excluding political increased approximately 16%, reflecting our success in leveraging the unreal unrivaled multi platform consumer reach and engagement of our content to deliver continued strong growth across all of our nonpolitical revenue sources.

Our topline growth combined with expense management drove third quarter, adjusted EBITDA and free cash flow before one time expenses of 413 in $254 million, respectively, Nexstar brought over 35% of our Q3.

Q3, net revenue 10 to the unadjusted EBITDA line before the one time transaction before onetime transaction expenses and we brought approximately 61% of every adjusted EBITA dollar to the free cash flow line.

Core TV advertising, reflecting accelerating rebound demand from our premium local and national marketing solutions led to a 13, 3% year over year increase in revenue for this segment.

As we've done consistently for many many quarters nexstar as local sales initiatives continue to deliver healthy levels of new business with.

With our sales teams generating a record $34 8 million of new third quarter third.

Third quarter, new to television revenue, marking a 37% increase over the prior year and a 6% rise over Q1 of 2021 Q2 of 'twenty one excuse me.

Excluding auto 2021 third quarter advertising revenue.

Advertising revenue exceeded pro forma 2019 levels and with the significant ongoing growth of gaming and sports betting category. We expect Nexstar is positive AD trends to continue in the fourth quarter and next year.

In the third quarter total revenue of Nexstar as top 10 AD categories paced, 12% ahead of the prior year, we recorded gains in nine of our top 10 categories with the biggest dollar gains coming in gaming sports betting services and the retail category as consumers return to in person shopping.

We are seeing the broad based rebounds continue in Q4 with Nexstar as core advertising accelerating year over year, beginning in the second quarter. Our local sales teams are working hard to drive further revenue share gains capitalize on fast growing categories. Nexstar is positioned to be a primary beneficiary of the return of auto adverse.

<unk> supply chain and labor issues ease and manufacturers begin to move move again to promote new models in electric vehicles.

Third quarter 'twenty, one distribution fee revenue rose, 15% year over year to approximately $619 million. This growth reflects distribution agreements renewals in 2020, representing approximately 18% of our subscriber base and other increases and stabilized subscriber trends across our platform that remained.

Consistent with our expectations and support the ongoing distribution fee and net Retrans margin trends, we continue to have good visibility into our contractual distribution economics with over 85% of our big four affiliations contracted through December 31 of 22, we expect continued retransmission revenue.

Growth, reflecting contract renewals, representing a mid to high single digit percentage of our subscribers in 'twenty, one approximately 60% of our subscribers in 'twenty. Two those will result in a higher growth rate of this revenue source in 'twenty three.

Third quarter 'twenty, one total digital revenue increased 46, 8% to approximately $81 million with digital profitability up substantially over the prior year's period.

Our positive results reflect our actions over the year to discontinue or deemphasize certain less profitable digital operations as well as the strategic operational realignment affected last fall. Our top line increase was driven by strong year over year growth in our local digital advertising revenue and agency services business and.

<unk> from last year's acquisition of best reviews, and a small period of contributions from the hill in the third quarter Nexstar has integrated content and audience development strategies continued to deliver impressive audience audience engagement statistics with our media content and significant consumer digital app usage across our network.

Work of 120, local websites and 284 local news and mobile weather apps.

<unk> digital and other revenue growth continued to contribute to our ongoing revenue diversification push in.

In the third quarter distribution digital and other revenue accounted for 62% of net revenue. The success of our revenue diversification efforts is evidenced by the fact in the third quarter of 2019 distribution digital and other revenue accounted for approximately 55% of net revenue looking forward. We expect continued growth from all of our nonpolitical.

<unk> and the remainder of 'twenty, one with similar high levels of overall revenue diversification.

We continue to build on Nexstar digital Twenty-twenty strength, when our properties delivered record growth in audience engagement ranking number one in local news for every month of the year and reaching all time highs across key performance indicators, including including average monthly users of $91 million total page views of $7 8 billion totally.

Total multiplatform minutes of $10 4 billion and total digital video views of $1 6 billion all of this according to Comscore.

With the momentum of our content and audience development strategy, we expect growth in digital revenue going forward and combined with our realization of this this year of the mid seven figure expense savings, resulting from the strategic operational and alignment of our broadcasting and digital operating subsidiaries, we should see continued cash flow growth from digital.

Overall, we're excited not only by the strength in results of our existing platform, but by the many organic and M&A growth opportunities in front of us, which will enable nexstar chicken to continued our record of delivering growth and free cash flow maintaining modest leverage and delivering.

Attractive capital returns to our shareholders. Looking ahead, we have excellent visibility to achieving our free cash flow targets in the current cycle and a clear path to continued near and long term enhancement of shareholder value as we followed the successful strategies. We've established in terms of building the top line, meaning close maintaining close control of our <unk>.

Fixed and variable expenses, optimizing the balance sheet and selective value enhancing M&A our disciplines. In these areas have added consistency and visibility to our results, while creating new value for our shareholders with that it's my pleasure to turn the call over to Leann for the financial review and update Leann.

Thanks, Tom and good morning, everyone I'm thrilled to join the Nexstar team as a banker I have covered the broadcasting and broader TMT sector for a couple of decades, and I've known Tom for more than one.

I'm a huge fan of what they've built and the returns they've generated for shareholders I look forward to helping facilitate the growth for the next 10 years like Nexstar had overlap and I've listened to hundreds of these earnings calls from the other side. The interesting thing on this side. This time. So this is my first one is that everybody go easy on me.

Since Tom has provided most of the color on the revenue line items.

Blank and then start at the CMO, Sean I'm, providing you some color on our expenses in the quarter.

Net revenue for the quarter was up three 5% on a same station basis net revenue was effectively flat and up 11, 5% excluding political core revenues on a same station basis were up 10% distribution revenue was up 13% and digital revenue was up 10%.

Third quarter direct operating expenses SG&A and trade expenses, all increased primarily as a result of higher revenues related to the recovery in core and digital advertising as well as expenses from station and digital acquisition, including a partial quarter of expenses from the Hill.

Total corporate expense was approximately 47 million, including noncash compensation expense of approximately $12 million and additional legal expenses during the quarter. We recorded one time transaction costs of $2 7 million related primarily to the acquisition of the health.

Capex was approximately $36 3 million and was slightly above our third quarter guidance is our guidance, reflecting a capex figure net of insurance proceeds and other allowances and timing adjusted adjustments some of which are reflected in other line items on the cash flow statement.

Spectrum Repack Capex totaled approximately $1.6 million and we received approximately $5 $6 million of reimbursements from the FCC during the quarter. As a reminder, we anticipate being fully reimbursed for all capex related to spectrum repack as those activities wind down later this year.

Third quarter total interest expense declined 9% approximately $70 million cash interest expense was approximately $67 million compared to $73 million last year, due primarily to lower first lien borrowings and a lower interest rate.

Third quarter operating cash taxes were $74 6 million and came in slightly higher than our guidance of $70 million largely due to a higher forecasted EBITDA and updating tax estimates.

With recorded $15 million in distributions from equity investments related to our 31% ownership in TV food network in the third quarter and that entity continues to produce strong results year to date. These distributions have amounted to $222 million.

Looking ahead, we project corporate overhead exclusive of stock comp and transaction cost to be approximately $32 million in the fourth quarter and we expect corporate overhead in line with the $125 million area for the year slightly above our prior guidance due to the inclusion of some ongoing legal expenses, which are no longer accounted for as onetime in nature.

Noncash comp is expected to be approximately $13 million for the quarter and less than $50 million for the full year transaction and other one time expenses are currently expected to be nominal in the fourth quarter operating cash taxes are expected to be approximately $76 million in the fourth quarter, and we project operating cash taxes of less than $325 million for the full year unimproved.

<unk> ability and revised estimates.

Cash capex should come in around $45 million in the fourth quarter and $142 million for the full year, but when taking into consideration net reimbursement is not included in the Capex line item I think it will be close to a $135 million previously indicated for the year we.

We expect Nexstar as cash interest expense to approximate $65 million for the fourth quarter and $267 million for the full year, reflecting interest expense savings related to lower outstanding borrowings on the decline in LIBOR rates.

For the fourth quarter of 2021 we anticipate recording approximately $18 million in TV food network distributions and approximately $240 million for the full year.

Turning to the balance sheet Nexstar as outstanding debt at September 30 of 2021 were $7. Five 5 billion total net debt amounted to approximately $7 4 billion down from $7 5 billion at December 30, or 31 2020.

Net debt for first lien covenant purposes is $4 6 billion subsequent to quarter end, we repaid another $30 million of our term loan b.

On our first or our net first lien covenant excuse me our net first lien covenant ratio at September 30 of 2021 with 2.14 times compared to 2.28 times at year end 2020, which is well below our first lien and only come in at a four point to five times, our total net leverage for covenant purposes at quarter end was $3 four two times compared to three six in Europe.

At year end 2020.

For all the factors and Numerate it earlier by Perry and Tom We are excited about the prospects for 2022 and remain confident in our ability to enhance shareholder value and deliver on our upsized pro forma average annual free cash flow guidance of approximately 1.33 billion over the 2021 2022 cycle or approximately $32 53 per share which based on yesterdays.

This price represents a free cash flow yield of 21%.

In the third quarter, we effectively returned effectively $4 25 per share, which on an annualized basis reflect the yield of 11%.

Year to date for the third quarter, we returned $493 million to shareholders last week, we announced the 70 cent per share fourth quarter dividend and disclose that subsequent to the end of the quarter, we repurchased another $50 million of shares with $721 million left under our share repurchase authorization, bringing the total thus far in the year to 500.

$72 million of capital return to shareholders. The remainder of our free cash flow when you make acquisitions fund capex and repay debt as we move forward. We will continue to evaluate the right capital allocation in order to create the highest shareholder value as we have always done.

With that I'm going to turn it over to the operator for questions operator.

If you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Ken Please press star one to ask a question.

Paul's or just a moment to allow everyone an opportunity to signal for questions.

Thank you our first question will come from John <unk> with Wolfe Research.

Thanks, Good morning.

Terry going back a few months ago. There was a lot of concern that having the NFL on streaming services would impact your business. So can you give us an update on what you're seeing now that we're deep into the season and then on the core advertising front as you know there's been a lot in the press about supply chain issues impacting advertising have you seen anything or are your people on the ground hearing them in upcoming on.

And is there anything to call back a call out on in terms of large markets versus smaller national versus local.

Hum.

Let me start first with the NFL I mean, obviously all of the NFL games with the exception of Fox or on streaming platforms now and.

I think the overriding positive of NFL viewership. This fall has been a more competitive games and secondly, our fans in the stands I think it enhances the viewing experience and I think that's what's driven the overall ratings increase you know the the ratings for NFL telecast continue to be measured in the millions and you know the the <unk>.

Dreaming component of that is is a it's a fraction and John I didn't quite get the the last two pieces of your question could you could you run those behind me again please.

On the advertising side with a lot in the press around supply chain issues. It sounds like you're not seeing anything just based on the comments coming out of three went to <unk> and so are you hearing anything for four Q. What are your people on the ground talking about as they talked to that's a local local customers and if there's anything to call out, meaning a large versus small markets for Nash.

No versus local advertising.

Yeah, we're not seeing that much of a difference now between large versus small I think you know everything is fairly homogenize theres no material differences in market size or region Ality at this point.

You know I do think that the results that we've turned in had been despite despite the supply chain issues that have been prevalent that affect furniture category appliance category electronics as well as certainly automotive, but good news on the automotive front.

The GM plant here not too far from our offices in Arlington, where all of the Escalades in Yukon and Suburbans are made or most of them in America. It's just added overtime shifts to kind of catch up with the demand. So we anticipate that the automotive category will remain a headwind in the fourth quarter and perhaps the first quarter of next year, but should probably turn.

Two a net positive tailwind by the second quarter and certainly the second half of next year do you think that John just looking at comparison of 21% to 19.

In.

Q3, and in Q4 14 of the top 25 categories are up.

Perry mentioned some of the other ones furniture, autos electronics et cetera that are being affected but the rest of them are more than making up for that from.

From a from a growth perspective, so we're seeing you know growth over 19.

Auto and growth over 20 ex auto.

Alright. Thanks.

Yeah.

Thank you. Our next question comes from Dan Carnose with the benchmark company.

Great. Thanks, good morning.

Welcome Lee and didn't Miss a beat there.

I guess, if I could just follow up on John's question on Tom. Thanks for the additional color. There just as we think going into Q4, obviously you called out a sports gambling is a huge category now.

We're not quite you said I thought it went back to 2019 levels in Q4.

Do we get.

Does that number improve in Q4 accelerating trends do we get back to 2019 levels, even with auto maybe not quite there would be kind of my first question and then secondarily. You know you guys now have a 400 plus million dollars digital business.

Ballpark your website, maybe a quarter of that it's still 300 standalone.

So I guess, maybe can you give us sort of your long tailed thoughts on how big that how you think about monetizing obviously right now everything has synergies but.

Do you consider having kind of a much larger digital standalone operations.

<unk>.

Thanks.

Well sure I mean as it relates you know if I look at our top 10 product categories for third quarter everything was up anywhere between 104% to 166% of 141% over the prior year. So major increases with automotive down about 10%. So you know I don't know if you'll see much of a change thematic Lee.

Into the fourth quarter.

Other than if you remember fourth quarter last year, obviously, a huge political quarter. So there was some displacement we have that inventory back political was active but obviously won't be anywhere near that order of magnitude and and so you know we're we're positive that you know as I said earlier, we've got 99% of our budgeted AD revenue on the books for the year.

Year as of this morning in literally two months to make the last point. So I think we feel very good about fourth quarter, we feel very good about the the transition into 2020.

2022.

And with regard to digital digital will continue to grow we see more opportunities there with our content acquisitions like the hill that can be.

B you utilized across our spectrum of you know the multiplatform.

Carriage that we have I think you'll see us do more content acquisitions and less technical acquisitions or.

Actual plumbing I think we feel good about our distribution from a distribution from a digital from a linear cable and from a broadcast perspective, and we'll be able to monetize that and I think you'll see a nine digit.

Digital revenue for Q4 and that will I think you know serve as well beginning into 2022.

Look our digital advertising surpassed all of TV advertising now in terms of total dollars. So we told our management team. There's no reason that that is not permitted to happen. In this company are here. So I think youll continue to see as Tom said, we will build on our content first strategy kind of build the broadest base of Khan.

Tent and distribution to allow us to compete for the largest amount of a dollar. So I think you'll see continued investment continued growth from digital and.

We we look to build that to a point over time, where the revenue potentially could rival that of the AD support for for the broadcast stations. So that's obviously, where the growth isn't as my dad used to say it helps to hunt where the ducks are.

Thanks, guys I appreciate it.

Thank you. Our next question comes from Steven Chahal with Wells Fargo.

Thanks, maybe first just to follow up on advertising you made the comment that Q4 is pacing strongly just wanted to clarify is that a comment specifically related to advertising or is that about the business more broadly and maybe you could give us a sense of how much the hill contributed in AR in the quarter.

Or will contribute in the fourth quarter and then I have a quick follow up thanks.

I would say.

The advertising market continues to improve total.

Advertising total broadcast advertising will be up Q3 over Q4 on a core basis.

It won't be back to 2019 levels, just yet, but we continue to make progress in that regard.

So from that perspective, I would say you know what it is improving but we're still being weighed down by a by auto from that perspective, and do you have any specific comments on the hill.

In terms of the contribution it was you know only a very small percentage of the quarter that it was in there. So that was it was like a little over $5 million of revenue from the Hill.

Great and then Leann I think was an easy enough went on you, but you know you're you're new to next door, but certainly not to the industry. I think you'd said you know you see your role as more than just paying down debt and paying the dividend. So when you think about some strategic growth areas for the business either organically or.

Inorganically, where you'd like to look at allocating capital could you give us any more color on that yeah.

Yeah.

Thank you.

You know.

Obviously, there's a lot of I think that we could be doing with this platform and I think it's really continuing.

To pursue what we've been doing in the past, which is you know it's continuing to make station acquisitions, where we're able to do that from a regulatory perspective at continuing to invest in content.

Both from a TV perspective, and then also from a digital perspective, and then I think it's just then the other sort of question Mark a area of you know are there other businesses out there that could be complementary to the assets that we have to kind of continue to grow it and what can we do with our spectrum. So I don't think it's going to be too.

Our field from what you've seen and what we said.

But we know we need to continue to grow this business because they wanted to have the same sort of returns. The next 10 years that we did for the last time.

Yeah.

Thank you.

Thank you. Our next question comes from Aaron Watts with Deutsche Bank.

Good morning, everyone and welcome to the mix two questions from me. The first one question on your network partnerships and I. Appreciate that you don't have to focus on this for another 12 plus months, given where you are in cycle.

I'm curious at some of the actions being taken by your partners to bolster their streaming services.

You see an opportunity during the next round of network renewals to push back on increases in reverse comp and Relatedly. How we should think about where the margin is today on retransmission fees and where it might be heading over the next few years, especially in light of the new long term NFL broadcast deal and perhaps the desire from those networks to have you help.

Pay for that.

Well I would say first of all we've always helped the networks pay for the NFL and the Olympics and see double a and pretty much you know.

All the other all our card sports offerings out there so no change in that or desire to to decrease fees and or certainly decrease the rate of increase of the fees that are that negotiating effort has not changed and will not change in upcoming negotiations. We obviously do take note of.

The fact that the networks are oftentimes competing with themselves with their streaming offerings and therefore, competing with us and that you know therefore that means less less exclusivity to what we're buying from the networks that comes at a cost or should come at an impact of the cost we believe but I would say you know are you you have to look at our mix of station.

Because we have some very large markets CW my network stations.

That pay very little if any reverse compensation.

And therefore, when you look at the numerator and denominator denominator of Retrans revenue and network payments, we are at and I think for for the foreseeable future as far out as I can see a continued to be above a 50% margin and I think that you know would bring us in at an approximate 50% <unk>.

And our big four stations and obviously higher than that on a non big four and I think we're relatively unique in that regard. So I don't think you can mark us to the market or mark to market to us in terms of Retrans margins because of the uniqueness of our station portfolio.

Okay. That's helpful. Thanks, and if I could sneak one more in in maybe this is for Tom or Leann.

You mentioned, where your free cash flow production is headed and Yagi rated company, you'll be keeping with that right. You certainly will have the capacity to drive your leverage down further to achieve investment grade ratings. If you wanted to is there a desire to go in that direction to capture the benefits of cheaper cost of capital of longer duration financing not that.

Obviously ever want to lose you guys do I G land.

This is Lee and I don't I don't think we're intending to try to drive towards investment grade rating I think are as he said before you know our target is three five times or around there and in the past what we've done is if theres been a nice deal.

We levered up a little bit, but then repay the debt really quickly to get back down to that leverage level. So I think we'll probably see more of the same.

No I think we benefited.

You know from from our business model that obviously I think the high yield market embraces from a free cash flow perspective.

So you know.

Yes, we would receive some benefit from being investment grade, but I'm not sure. It's really commensurate with the amount of capital that would have to be allocated to debt reduction to get to an investment grade rating, which would be substantial. So I think we're in a happy kind of place.

Place now from being able to to price our debt at attractive levels at this leverage.

Juncture.

Alright, great. Thank you very much.

Thank you. Our next question comes from Craig Huber with Hubbard Research partners.

Yeah.

Great. Thank you my first question on auto of course.

I think you said auto was down 10% year over year in the third quarter.

What's the pacing out for the fourth quarter and are you seen a major difference with on the national side of auto versus the local dealer side.

No actually our tier three revenue because some people are advertising service. Some people at our advertising you know collision repair and body shops and things like that are tier three revenue is pacing on par maybe slightly better than tiers, one and two.

I think you know what we saw you know throughout this year is automotive revenue on the books that perhaps for supply chain issues.

Was <unk>.

Somewhat cancelled off as the quarter went on we're going into the quarter with less revenue on the books, so less to cancel and we think we'll probably end up in and about the same area that we did for third quarter.

As a category.

Okay, and then would you also appreciate that which also care to just let US know what you think the P. C. Number is that for overall core AD revenue on a year over year basis in the fourth quarter.

Yeah, It's a positive number and again, it's a different number for broadcast digital and networks, but I mean, all three taken together each individually are positive and all all in it's a positive.

Single digit number.

So the.

Just core TV AD revenue year over year is up some number less than 10%.

So what you're saying a single digit not much trust. Okay. Okay, sorry go digit percentage, yes, and obviously you have to X political out of that right right. Okay.

And then your.

Your Retrans subs please.

That number for the quarter was that down say roughly 5% year over year.

Alright and stuff.

It was down less than 5% right.

And then how would you say to that is versus the prior one or two quarters. That's a trend line, it's slightly better than deposit.

Positive trend has continued yes.

Okay. My last nitpick question.

On the digital side, excluding the two acquisitions, how much was digital revenues up year over year, you guys mentioned in the press release, the local side did pretty pretty well. Thank you.

So the question is on a pro forma basis same station basis.

Yeah.

Digital revenue was up about 13%.

Very good that's all I had thank you.

Thank you. Our next question comes from Jim Goss with Barrington Research.

Thank you one question about the news nation, congratulations on achieving C. P M parity with the others and given the combination of that and neutrals, you're neutral stance do you have an opportunity to get a competing political ads from both sides you know more than some of the other.

Networks night.

And what is the mix of national versus regional ads, but then that service at all.

National or do you have return opportunities.

It's all national except as you know most cable networks give back two minutes an hour to the local cable interconnect to sell.

So, but with all of our revenue is.

As national delivered by they brought him in his national sales force.

And as it relates to political we did about $1 million in political last year on news nation and that was just with our three hours of primetime obviously with our acquisition of the Hill and the fact that we're doing 13 hours a day of live programming Monday through Friday, We would expect we'll do certainly.

Certainly as well in political next year, although again politics in the midterm elections are all local theres no real national referendum.

Issue ads at state and local races Senate House Governor so that inherently would be much more a a linear broadcast rather than a linear national cable play in terms of political AD revenue, but we'll get some.

Okay. No that's why I asked about the regional potential. The other question I had is about rely on T V.

Is there any can you frame the potential significance. It is very minor is relatively.

Or is there some importance and look at the economics of it between program availability and cost versus for audience access and distribution potential.

We basically bifurcated the syndicated programming that we own for our Digi nets and made and tenet T V, which is now Nielsen rated and doing very well. It is something like if it were a cable network. It would be in the top 65 cable networks in terms of total audience delivery.

And we just raised it by Nielsen earlier this this year, but.

Antenna TV is now focused on fifties and sixties sitcoms and.

Rewind TV, we just kind of bifurcated the programming and made that more of a seventy's and eighty's sitcom network and right now it's virtually distributed and in adjusted in the Nexstar platform, but reaching approximately 50 million homes and we'll grow that distribution overtime, primarily now the advertising as direct.

Lance, but it has the easily has the potential to be a double digit million revenue contributor on top of what we do with antenna TV in 2022.

Okay. Thank you very much.

Thank you. Our next question comes from Alan Gould with.

Loop capital.

Thanks for taking the question I've got two questions first for Perry political anything you can read into how political is doing this year versus 2018 and read into what that might imply for versus 2019, and what that might imply for next year. I know you said between 20.

18 in 2020, but.

<unk> 22 could be 2020, and then I have a question your time after that.

Well I don't want to I don't want to be irrationally exuberant here as it relates to political but as you look at our footprint and the races. I mean, we're going to have we're going to participate in 30 to 34 Senate races, and the ones. We think will be particularly competitive next year will be Florida, Ohio, Pennsylvania.

North Carolina, Georgia, and Nevada, Wisconsin, Governor 31 of 36 races, and again, Florida, Pennsylvania, Kansas, Maryland, Michigan, Georgia, Wisconsin and in the House, we will literally participate in 355 of the 435 races. So.

We think we'll do very well we are not guiding to a number that would equal or exceed 2020 in terms of total AD revenue, where we generate over $600 million in revenue, but I think that as the year goes on and of course you know it's.

Political is kind of a wildcard in terms of who is in who drops out what races change where the money flows but.

But I think that.

We'll be a lot closer to 2020 than maybe most folks are thinking, but we're not guiding to a number equal to that or greater than that for next year.

Thanks, Perry and then for Tom Tom There's a word in the press release I Havent seen since pre pandemic that the visibility I mean, you're talking about visibility talking about a big political year, 20% plus free cash flow yield.

You're going to have a lot of incremental revenue and cash flow coming out of political you've been consistently buying back about $150 million worth each quarter. This year.

Would it make sense to increase it now in anticipation of what you should be generating next year.

Well I think that would be probably a little bit out over our skis. You know typically we have not borrowed to buy back stock or two.

Pay dividends, which what it would take us doing that to increase the basically worth were.

We're spending what we what we bring in.

From a debt and from a.

Return of capital to shareholders perspective, so I would not anticipate that being the case, but I would tell you that you know our cash flow is a little bit counter cyclical relative to other broadcasters largely due to the fact that we get the large food network distribution in March of every year.

So our free cash flow in Q1 will be significant.

And kind of counter cyclical to what you would think of a broadcast or having a modest first quarter.

EBITDA and free cash flow it'll be or may not be our largest for the year because of political in Q4, but it'll be.

Larger than a typical broadcast free cash flow so you'll see more.

Our availability and our resources will increase in Q1 and will allocate that.

When we get to that point.

Okay. Thanks, I think the X factor all of that is going to be what what M&A opportunities that are currently percolating.

Bubble up to the surface.

That will determine capital allocation, which is something that.

The three of US talk about literally almost every day.

Okay. Thank you.

Thank you again as a reminder, if you'd like to ask a question. Please press star one now our next question comes from Conor Murphy with Deutsche Bank.

Hey, guys how are you.

Can you just talk a little bit about how your conversations with national advertisers on the ball.

News nation on the Hill I was sort of a suite of digital and National news products.

Secondly, as we think about.

22 political cycle.

We expect a big marketing push over the next couple of quarters to build even more awareness for new motion to drive incremental ad spend.

Those platforms next year.

On top of that better position news nation I had obviously you have a bunch of distribution deals you have coming up at the end of 'twenty two.

We will start we will start and work our way backwards through all of that news nation is.

It is already distributed on the the Mvpds that are up for renewal in 2022. It will just be a question of what enhancements, we can make to that from a rate or distribution perspective.

Most of the virtual Mvpds deals expire at some point next year or in 2023.

Dissipate in all of those are most all of those now so again, it's what we can do to upgrade it you will see a continued promotional push our awareness number is up to 21% of the of the country, but as I like to say that means 79% is still a greenfield opportunity for us in terms of of news nation.

Anecdotally.

The sales force for the Hills secured a 2 million dollar order from Google in the fourth quarter that would not have happened likely without our ownership in the <unk>.

The ability to advertise our portfolio as a portfolio to to Google, but did result in an incremental $2 million revenue that was not in there and their plan. So I think thats a preview of upcoming attraction of what we can do we're still in the early phases of the integration with the Hill, we realized most all of our synergy targets.

You know people are still not yet on our payroll and benefit plans and that all happens at the first of the year So and.

And we are about to name a new general manager for the Hill kind of a individual with Washington Insider experience, which we think will be hugely beneficial in elevating our visibility in the AD community there so.

We're excited about our prospects for the Hill and continued improvement at best reviews, as well as news nation. So I.

I think all taken together youll see more of the proof of concept of an integrated cell.

As time goes on in 2022.

Great. Thank you.

Thank you. Our next question comes from Monica <unk> with Onyx credit.

Yeah.

Thank you congrats on the quarter and Nick Congrats to the new ROE just wanted to follow up on your comment.

The operating expense increase.

Like that increased about 300 to get that percentage of revenue.

I understand you talked about some of the drivers there.

I'm wondering if do you mind repeating that.

And you know we're seeing some of the increasing reverse retransmission also contributing to the increase of Opex as a percentage of revenue. Thank you.

Yeah. So I think a couple of things there. So just what I said before was that it was primarily a result of higher revenues related to the recovery.

And digital advertising.

Commissions and everything is kind of in that in that number as well as less in expenses from the new expenses from the acquisition like the hill and the like I think as a percentage of revenue. If you look at it quarter over quarter, Tom and I were talking about this last night.

You got to remember is <unk> got a lot of political revenue and the margin looks.

Look better in that corner, because there's just more revenue in that quarter.

Okay. Thank you.

Thank you. Our next question comes from Craig Huber with Hubbard Research partners.

Yes, I have a follow up if I could ask on the new standard a T. S C three point O.

Maybe can you just update us on where next door is with that what's the longer term business plan, there and how significant could be to you guys on the revenue side.

Sure well, we are we will have markets by the end of this year, reaching approximately 30% of the U S. Approximately 30 markets.

We anticipate having 50 markets on the year with an atoc threet auto signal, reaching half of the country by the by the end of next year, that's just the nexstar platform and portfolio.

And this is literally you know you have to build the toll road before you can charge people to drive on it. So this.

This is done primarily to coke light the light and in <unk>, which are on sale in your local best buy or appointments from appliance store now and there'll be more sets and cheaper sets coming on line in 2022.

But we've got to build the build out the infrastructure before we can build any kind of a use case, but we're involved in both the Pearl consortium as well as <unk>.

And in terms of developing in the uses of the spectrum.

And I think we're very excited we.

Spectrum is typically valued on a per pop basis, and Retrans is valued on a household per household basis, and so theyre kind of valued and measured the same way and I've said before I think that 10 years from now we'll be generating as much revenue from ancillary uses of our spectrum as we do from distribution revenue today, I think it'll take almost.

10 years to get there, but I think this is like the mineral rights of TV broadcasters. It's in the ground, we just have to build out.

To be able to monetize it but we think it's significant we think theres autonomous cars, there's internet backhaul theres all sorts of each of our broadcast hours could become a Wi Fi hotspot.

Helping the rural broadband problem, particularly in some of our our markets.

And on the smaller side of the scale so.

I could probably list two doesn't use cases here, but we've got to build build out the infrastructure pass through a signal and then ultimately we can use the.

The ancillary spectrum for other uses between our spectrum rental and our digital.

That is 80 plus million dollars business. So it's not like we're not making money from our spectrum now, but this is just the middle innings of the ballgame I think the big money comes when we've got a <unk> signal.

We're rather than four digit net center and an SD or an HD signal, we could put 10 digit thats, you know or the equivalent and a couple of HD signals out and add in <unk> I think that.

It's an enhanced viewer experience once we transition to existing customers viewers and advertisers.

But it gives us so much more real estate that we can develop for other uses that are where we're obviously bullish and that we're trying to be the company, leading the charge to transition and build out to <unk>. So that we can we can begin to test. Some of these use cases that are that we're in discussion with today.

That's great. Thanks Perry.

Thank you I'm showing no further questions at this time I will now turn the call back over for closing remarks.

Well. Thank you very much everyone for joining us today, we look forward to joining you in the new year to update you on our fourth quarter results, but most importantly to update our free cash flow guidance for the 22 and 23 two year cycle. So thanks for joining us and we'll look forward to talking to you soon in the new year.

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

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