Q2 2019 Earnings Call
Excuse me everyone. Thank you for your patience in holding please continue to hold the conference will begin and approximately two to three minutes.
Again, thank you for your patience in holding please continue to hold the conference will begin and approximately two to three minutes.
Good day and welcome to Nexstar Media Group 2019 second quarter earnings call.
Today's call is being recorded.
I would now like to turn the conference over to Jos you Funny Investor Relations. Please go ahead Sir.
Thank you Ryan and we'll get to management's presentation and comments momentarily as well as your questions and answers, but first I'll review the safe Harbor disclosure.
Statements and comments made by management. During this conference call May include forward looking statements.
Nexstar based these forward looking statements on its current expectations and projections about future events.
Forward looking statements include information preceded by followed by or that include the word guidance believes expects anticipates could or similar expressions.
For these statements Nexstar claims the protection of the Safe Harbor.
For forward looking statements contained in the private Securities Litigation Reform Act 90 95.
Forward looking statements contained in today's call concerning among other things the ultimate outcome and benefits of the announced transaction between Nexstar Tribune media and timing thereof.
Future financial performance, including changes in net revenue cash flow and operating expenses involve risk and uncertainties and are subject to change based on various important factors, including the timing of.
And any potential delay in consummating the proposed transaction the risk that a condition to closing of the proposed transaction may not be satisfied and the transaction may not close the risk and regulatory approval may be required for proposed transactions delayed is not obtained or is it obtained subject to conditions that are not anticipated the impact of changes in national and regional economies Nexstar is it going to service refinance outstanding gas debt [laughter] successful integration of tricky medium, including achievement of synergies and cost reductions.
Pricing fluctuations in local and national advertising future regulatory actions and conditions in the television stations operating areas competition from others in the broadcast television market served by Nexstar.
Volatility in programming cost the effective government regulation of broadcasting industry consolidation technological developments and major world news events unless required by law Nexstar undertakes no obligation to update or revise any forward looking statements.
Whether as a result of new information future events or otherwise in light of these restaurant services and assumptions. The forward looking events discussed in this communication may not occur.
You should not place undue reliance on these forward looking statements, which speak only as of the date of todays conference call for more information on factors that could affect these expectations.
Please see our filings with Securities and Exchange Commission.
With that and thank you for your patient. It's now my pleasure to turn the call over to your host Nexstar, Chairman President and CEO Perry Sook Kerry. Please go ahead.
Thank you Joseph and good morning, everyone. Thank you all for joining us today to review Nexstars 2019 second quarter operating results.
Today, we'll review the quarter and our outlook as well as other ongoing initiatives to drive free cash flow growth and shareholder returns most notably the progress we've made towards completing the tribune transaction, our ongoing leverage reduction as well as the upside presented by the financings and announced divestitures for the transaction as always our Chief Financial Officer, Tom Carter is here with me on the call. This morning.
Full year 2019 operating expectations before and onetime expenses remain on plan as we've shared before 2019 represents the start of the next significant growth cycle for Nexstar as we balance our focus on the upcoming completion of highly accretive Tribune media transact a transaction.
With our current operations, including our preparations for the 2020 election cycle and the significant number of 2019 retransmission consent agreement renewals in front of us.
With respect to current operations, the second quarter results reflect improving spot television advertising trends and further progress in bringing value parity to our leading viewership of our local stations on MVP D.N. V. M. B P D bundles, resulting in double digit distribution revenue growth.
These factors were offset by the absence of cyclical political advertising as well as approximately a $10 million payment in other revenue related to a onetime spectrum repack payments in our year ago period, All told Nexstar second quarter net revenue ex political was up 2.7% compared to the prior year period.
Overall second quarter broadcast cash flow and adjusted EBIT da before one time transaction expenses were in line with our expectations, while free cash flow was impacted by the transaction costs and the timing of 2019 operating cash tax payments as well as cabin capital expenditures.
Our 2019 full year budgets for cash taxes, and Capex remain unchanged. So this situation will self resolve over the balance of the year and as a result, our Standalone 2018, 2019 free cash flow guidance remained unchanged at 615 million for Nexstar as legacy operations or approximately $13.50 per share.
Last week, we received conditional approval from the D.O.J. fewer settlement they filed with the DC Circuit Court with the court's approval of video Jay settlement, which includes the Divestures, which we announced earlier this year. Once we have FCC approval, we will be in a position to close the Tribune transaction.
During the second quarter, we priced or 3.1 billion dollar term loan a and 675 million dollar term loan aid facilities and when combined with the 1.1 billion of senior notes issued earlier in July comprise all of the primary financing phone, it's necessary to complete the transaction.
In addition, during the quarter, we entered into an agreement to sell to Indianapolis stations swim in early day minority led broadcasters circle City broadcasting, thereby completing our divestiture plan and putting the pro forma entity in compliance with FCC local and national television ownership rules.
In aggregate and concurrent with the closing of the Tribune transaction. We were divested total 21 stations in 16 markets for gross proceeds of 1.36 billion.
The total gross proceeds from the proposed station divestitures exceed our initial estimate approximately 36% while the divested cash flow inclusive of the elimination of certain synergies is less than in our prior projections.
All of the financings were completed at attractive terms and blended rates below our internal forecasts.
I will now run through some of the quarterly highlights after which Tom will go through the numbers, including an update on our cap structure or 2019 expectations and other items of interest to those of you on this call.
Excluding political total second quarter spot television AD revenue decreased by 2.6 million or 1%, reflecting 4.6% year over year declines in national partially offset by a 0.4% increase in local revenues overall second quarter spot television advertising trends improved meaningfully over the first quarter 2019 levels with quarterly sequential growth in both local and national spot revenue of 6% and 7% respectively.
For the 2019 full year, we continue to expect low single digit growth in non political television advertising revenue versus the comparable 2018 period.
In Q2 19, five of our top 10 television advertising categories were flat to up and overall, our local sales initiatives continued to generate healthy levels of core new business revenue with Q2, new to television AD revenue of $17.3 million, which was a 14% rise over the prior year.
Combined second quarter digital media and retransmission fee revenue of $370.5 million rose, 8.9% over the prior year period, and collectively accounted for 57.1% of net revenue compared to 51.5% of net revenue into 2018 second quarter.
Reflects both the lower levels of political advertising in the current period and the ongoing evolution and shift of our revenue mix.
Our way of comparison in Q2, 17 blast off cycle year, or combined second quarter digital media and retransmission fee revenue was $317.1 million and accounted for 50.6% of net revenue.
So weve grown these revenue streams on a combined basis by 17% over the last two years.
Second quarter retransmission fee revenue increased approximately 38 million or 13.8% over the prior year period, reflecting recent renewals of distribution agreements with them Bbds growing contributions from MTT distribution agreements and overall subscriber levels, which remains largely concepts.
Total second quarter digital revenue declined approximately $7.8 million or 12.1% as we continue to experience the marketplace changes that impacted select demand side platform customer buying in the first half of 2019.
We expect these trends to continue to improve as we cycle through these market changes.
Importantly, nexstar second quarter local digital advertising revenue grew at a mid teens percentage and our digital agency services business also achieved the mid single digit growth over 2018 second quarter.
Our local digital businesses in Q2 benefited from custom package as you did for the Masters the NFL draft in the Indy 500, demonstrating again that we have more upside here as we better execute on our strategies to leverage our premium local content across our local digital operations.
Moving on now with a few additional updates on the Tribune transaction, which remains on track for a timeline to close this quarter as I mentioned earlier, the 1.36 billion of gross proceeds from the announced station divestitures is in excess of our initial estimate of 1 billion.
In addition, the blended multiple for all the stations to be divested amounts to approximately a 10.6 times. The average two year average broadcast cash flow. These stations as a result, our borrowings and leverage will both be lower than anticipated at closing.
Our last public guidance was that net leverage at the closing of the traction that transaction will be approximately 5.1 times and given that we now completed the financing we're looking at opening leverage below five times.
Nexstar and Tribune have completed all of the steps and satisfied all of the merger agreement conditions necessary to finalize the plan transaction, including entering into the agreement to divest the stations, we mentioned before to achieve ownership and other regulatory compliance approvals securing approval from Tribune shareholders and putting in place all the necessary financing.
With video Jase conditional approval last week, we are now waiting for FCC approval and court approval of the D.O.J. settlement and certain other customary closing conditions and once again, we continue to expect that the transaction will close in this current quarter.
We have my expectations for the value that the Tribune transaction brings nexstar shareholders over the past 23 years, Weve completed successfully integrated and generator growing value for shareholders from three dozen transactions living which have increased our scale diversified our portfolio and enabled us to remain highly competitive in today's media and technology ecosystem.
From the standpoint of accretion to shareholders. The Tribune transaction will be not only our biggest but our best transaction attribute transaction reflects ongoing consistency with all of our M&A criteria as it marks further progress towards our goal of improving our competitive position by strategically expanding our operating base to realize the benefits of scale, increasing our strategic and financial flexibility and ultimately driving shareholder value.
With the industry's most proven management team our long term record of maintaining operating disciplines and a focused approach to managing our capital structure and cost of capital. The acquisition of Tribune media represents a tremendous near and long term opportunity for Nexstar the markets, we serve and our shareholders.
With our active management of our capital structure and our strong free cash flow, we acted on several opportunities to enhance shareholder value in the second quarter, two our return of capital and leverage reduction initiatives, which included reducing debt by approximately $112 million and returning approximately $21 million to shareholders through our quarterly cash dividend.
Through the six month period ended June 30, we've allocated approximately $204 million of cash from operations, reducing our outstanding debt.
Notably after giving effect to the Tribune transaction, the incurrence of debt transaction expenses and the expected first year synergies. The divestiture proceeds we see a total clear pass through rapid de leveraging with the free cash flow generated from our soon to be expanded base of operations and we continue to expect that nexstars net leverage will decline to something less than four times by the end of 2020.
With that all said, let me turn the call over now to Tom Carter for a review of our financials. Tom. Thanks, Perry Good morning, everybody I'll start with a review of Nexstars Q2 income statement and balance sheet data after which I'll provide an update on our current capital structure and some points of guidance.
As Perry mentioned overall net revenue was down 1.7% really driven by the lack of returning political revenue during the year and just as a note same station results will approximate actual prior year results this quarter as acquisition activity in prior years does not materially affect the results there.
Total spot revenue was down 1% to 267.6 million as Perry mentioned with local revenue being up and national revenue being down the political revenue as I mentioned before decreased from approximately 32 million to 3 million for the quarter.
And overall net revenue was up 2.7%, which was driven really by the 13.8% retransmission fee increase during the year, which was as expected.
Overall second quarter spot revenue advertising trends continued to show improvement over the first quarter.
20, 2019 levels with local and national spot revenue growth on a quarterly sequential basis of six and 7% respectively second quarter non television advertising growth of 8.9% to 370.5 million reflects.
The 13.8% rise in retransmission fee revenue to 314 million, which was partially offset by 7.8 million dollar reduction in digital revenue.
As we stated on last quarter's call call, we anticipate topline growth in digital would be impacted in the near term due to our de emphasis of nonprofitable and marginally profitable lines of business at the end of 2018 and in early 2019. In addition to certain marketplace changes that impacted select demand side platform customer buying in the first half of 2019.
Next door Nexstars second quarter core digital advertising revenue as Perry mentioned, meaning our hyper local web sites increased 16% year over year and our digital agency services business, which is also a local business achieved a 3% growth over second quarter 2018 levels.
We believe the early success of our strength in digital sales and marketing initiatives. We expect this to to see continued improvement in the digital revenue trend in the second half of 2019.
Second quarter station direct operating expenses net of the trade expense increased approximately 8%, primarily reflecting budgeted increases in network affiliation expense.
Same station fixed expenses, excluding programming expenses were up a modest three tenths of 1%.
Second quarter SGN a expense at the station level was relatively flat compared to the prior year period, while corporate expense was in line with our expectations of 31.8 million, which included $9.7 million of stock based compensation and $5.1 million of onetime transaction costs relating to it for me.
Excluding onetime transaction expenses and stock comp recurring corporate expenses declined slightly which was consistent with our guidance for the second quarter.
Looking ahead to third quarter 2019 on a nexstar standalone basis, we project recurring cash corporate overhead to be similar to Q2 levels of approximately 17 million exclusive again of the stock comp and that Tribune related transaction costs.
Noncash compensation is projected to be approximately $10 million similar to the prior quarter and $37 million for the year, reflecting the issuance of new equity incentive awards late last year.
Cash transaction expenses, primarily priced professional services fees and severance that cannot be capitalized our variable for the quarter based on the likelihood and the timing of a potential closing for Tribune.
Turning to the balance sheet overview of key couple of key items as it relates to June 32019, total leverage was 3.39 times, which compares with 3.57 at the end of Q1 and 4.23 at the end of 2018 Covenant first lien leverage was 1.96 versus a covenant of four in a quarter and again. This compares to 2.09 at the end of Q1 and 211 2.11 at the end of Q4 18. So you can see our de leveraging initiatives had paid handsome dividends from an overall leverage perspective.
Net debt at June 30 amounted to approximately $3.7 billion compared to 3.76 billion at 331, 2019, and 4.7 billion in January of 2017, when they close the next transaction.
In the second quarter, we reduced funded debt by $112 million, we remain committed to applying our growing free cash flow to take further action to enhance shareholder value.
Well, our return of capital and leverage reduction initiatives, which in total amounted to approximately $133 million during the quarter, including $21 million in dividend payments and the aforementioned hundred $12 million in funded debt reduction.
Subsequent to quarter end, we repaid an additional $12 million on our term loan balance in early July bringing funded total funded debt reduction for the first seven months to approximately $215 million.
Second quarter total interest expense amounted to $51 million compared to 56 million in the prior year's period with cash interest expense of 49 compared to 54 in Twoq. You have 18, obviously this is reflective of that aforementioned debt reduction as well as a favorable interest rate environment.
We expect Nexstars cash interest expense exclusive of interest paid on escrowed funds and any acquisition commitment fees to be approximately $48 million in Q3 of 2019.
Second quarter operating cash taxes were 50 million, while operating station and digital Capex totaled 18 million spectrum or repacked capex totaled $23 million, which we believe is fully reimbursable from government funds in the due course.
Overall second quarter broadcast cash flow and adjusted EBITDA before onetime transaction expenses were in line with our expectations, while our Q2 free cash flow was impacted by the timing of 2019 operating cash tax payments, which were slightly higher than forecasted for the three month period.
It's important to note that year to date cash taxes of 52.4 million are on track with our expectations of approximately $115 million for the year.
First half capex, excluding the aforementioned read Reimbursable repacked costs was 36.4 million consistent with our expectations for the year of approximately 7 million.
As a result, our steady state 2018, 2019 free cash flow guidance also remains unchanged at $615 million for Nexstar as legacy operations or roughly $13.50 a share.
Q3 cash taxes are estimated to be approximately $26 million, while third quarter Capex again absent repass Capex is approximately 19 million.
As it relates to our funding of our pending acquisition of Tribune media, we're fortunate and opportunistic in tapping the leverage finance and secured loan markets in June and July and completed the offering of 1.12 billion.
Five and five 8% senior notes and priced our 3.1 billion dollar term loan b and $675 million term loan aid facilities together, we have fully address the plans financing for the transaction.
This structure allows nexstar to take advantage of favorable rate environment and the secured loan market has historically been less volatile than the high yield market and brings lower interest rates than a high yield bond financing. In addition to having no prepayment penalties our capital structure weighs the proper balance of fixed and floating rate and attractive weighted average cost of capital and prepayment and refinancing flexibility. In addition, we have a well staggered maturity profile with no significant maturities until 2022 at which point, we expect will have made significant headway towards substantial debt reduction.
Reflecting the above capital structure, our soon to be updated.
$60 million in year, one synergies and our expectations for continued significant political AD spend in 2020.
Our last guidance for the deal assumed total leverage of approximately 5.1 times at transaction close with a covenant leverage decreasing to four times by year end 2020.
Well give more color on this once the transaction closes, but our expectation is that these metrics will include improved given updated information.
As it relates to management's focus on free cash flow generation, we remain confident in our ability to de lever pro forma for the annual free cash flow of approximately 900 million for the combined operations, which is 46% higher than nexstars record standalone free cash flow projections.
As Perry mentioned, we expect there to be substantial upside to our free cash flow given the identified synergies recent operating results. The good results from the divestiture proceeds and lower than anticipated leverage at closing.
Our intent is to increase our guidance at the time of closing, which we continue to expect to be sometime in the third quarter. In summary is nexstar is executing well all functions, including operations integration synergy realization capital structure and service to our local communities. Our disciplines. In these areas have driven significant growth as well as consistency and visibility to our results with our financial results and the value we expect to derive from our pending accretive acquisition of Tribune. We continue to believe we have forged a clear path for continued near and long term enhancement of shareholder value.
That concludes the financial review for the call and I'll turn it back over to Perry for some closing remarks before culinary.
Thanks, Tom with significant and growing free cash flow and attractive weighted average cost of borrowings and a long term record of success and fully integrating acquired stations extracting synergies and enhancing operating results, while improving our service to viewers and advertisers nexstars prepared to complete the highly accretive acquisition of Tribune media as with our past transactions. We've developed a comprehensive integration plan and we remain confident in our ability to deliver on the value of this compelling combination given our current operating management disciplines and our history of success in outperforming our synergy targets in terms of capital allocation, our substantial annual free cash flow combined with our strong balance sheet and attractive weighted average cost of capital will provide us with the financial flexibility to continue investing in our business and our employees, while meaningfully reducing leverage and returning capital to shareholders.
Nexstars organized organization wide commitment to excellence and local content for viewers and users as well as unparalleled marketing results for our advertising partners has been fundamental to our success in our growth with the pending increase in our geographic diversity and audience reach a large number of distribution contracts up for renewal between now and year end 2019, and the return of the political cycle with the upcoming 2020 presidential election, Nexstar has excellent visibility to delivering on our free cash flow and leverage reduction targets and the current cycle and the continued near and long term enhancement of shareholder value.
With that I'd like to thank you all for joining US today. So now let's open the call for Q1 day to address your specific areas of interest operator.
Thank you.
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[noise].
And well take our first question from Dan turns with benchmark company. Please go ahead.
Yeah. Good morning, Hey, Parion, Tom look I, obviously with all the good free cash flow upside news the only thing. Unfortunately on People's minds is kind of the 18 Ti blackouts of Perry if maybe you want to address that whether low cash this plane.
Pardon any of this how you think that kind of resolve itself over time and you know the potential.
The financial impact if you think there will be one short term.
Well with respect to 18 C and a direct TV, we continue to trade proposals and to negotiate.
However, we're not going to do that publicly so I'll just leave it at that.
Low caste, there's really not playing a any any factor in these negotiations with the networks suit last week I think your you will see the beginning of the end of low gas and it will end up in the same dustbinmen Aereo and film on and others that have tried the same trick before so.
I think at that point, you know, we continue to make progress in our ATM the negotiations and obviously when we have something to announce we'll be sure to tell you.
And then just in terms of subs power you did say constant I'm, assuming that means flattish just in terms of visibility or any outlook two net retrans going forward would be helpful.
Dan just your specific question with regard to subscribers.
You know we've looked at this and on a toad payables total total paid subscriber base.
Year to date were down less than 110th of 1%.
And since one one of 18 were actually up about 110th of 1% in terms of number of paid subscribers. Obviously, that's driven by continued growth in the MTT product and some reduction in traditional MPPD, but overall paid subscribers are basically flat.
Got it and Tom just any change on the net retrans outlook I'm, assuming not with that backdrop.
No obviously, we've got some pending deals outstanding that you know the puts and takes will.
Will affect it but we don't believe it to be material and obviously we.
Earlier this week, we announced a renewal for all of the legacy Nexstar stations near term renewals for next Nexstar stations with CBS and we're pleased to get that announced and I think you know it came in as expected.
Perfect. Thanks, guys.
Thank you we will take our next question from David Joyce with Evercore ISI. Please go ahead.
Thank you for sure you give us some color on the advertising, but was there anything that you had the decelerated during the second quarter or was there some cross currents of different sectors and the.
Good.
Build into that some more and really what's what's your upside on the digital advertising. This year given of course that you did shut down some of the digital businesses earlier in terms of is how much more is digital playing playing a role in your.
Rome negotiations with your advertisers thanks.
Well I would say that in second quarter, you know automotive actually was a category that strengthen versus first quarter and Weve reported you know kinda locally, 6% national 7% sequential improvement quarter over quarter. The the strength in automotive is really coming from the.
Development work of our local teams with the tier three advertisers, which where our local dealers. We can see that continuing into the third quarter July revenue is in the books and core revenue and digital revenue both performed better than our second quarter numbers that we just posted this morning in our digital revenue was got two components to it obviously are roughly equal one is the local digital revenue that is generated by our sites by our sales forces in our local marketplaces, we reported as you've heard Tom say earlier up double digit percentages. There. Obviously the decline has been in our national digital revenue due to some market changes for you know supply side dynamics as well as exiting some businesses that were that were unprofitable and good we're cycling through that here in the back half of the year, but again, our our local digital revenue what performed better in July then Ben the results, we posted for second quarter.
We see that continuing through the balance of the year.
And how much of a role is the tip initiative on standardizing programmatic playing a role.
It is yes.
The progress on that please.
Well the interesting thing is that advertisers now are beginning to demand that people design and implement through the tip interface or.
Standards and that's that's that's actually a watershed event for US. This is primarily in the area of log reconciliation and kind of the back office piece of that but it is it is being adopted and I would say, we probably had more forward momentum in the second quarter than we have had for a while and and you know we expect for that to continue as we implement more lines of code. If you will for other elements of the buy sell process, but right now our efforts are focused primarily on trying to streamline and automate log reconciliation make goods and billing practices, which obviously would save the agency's money, which make us more attractive counterparties to do business with.
Great. Thank you very much.
Thank you we will take our next question from Zack Silver with B. Riley FBR. Please go ahead.
Okay, great. Thanks for taking the question I suppose CBS renewal do you guys still expect net retrans margins remaining at levels over around 50% and then could you give us some updated thoughts on how you see the economic share of Retrans overtime evolving between the networks and the affiliates.
Sure I'll take the first half of that question and yes, our our indication and the math that were running continues to have a net retrans margins in excess of 50% for for the balance of this year and for next year and I think you know once we get a hold of the Tribune properties will be able to reevaluate that longer term than that but or for the immediate future, yes in excess of 50%.
And I'll, let Barry talk about you know kind of longer term trends, yeah, I mean as long term listen the network, Sir you know negotiating and asking for more from us and we in turn are asking for more from the from the NBP D and the revenue line is greater than the expense line. So if they move in tandem we actually increase our margins so.
We see no change in outlook in that dynamic for the foreseeable future and as Tom says you know our foreseeable future as you know probably three years out post the Tribune transaction, but just looking at the normal cadence of deals with networks and with MVP disease, or we see no change to the outlook or the ecosystem.
Okay, Great and then I guess this is.
The second quarter in a row, where the core is come in a little bit light of informal guidance that you guys provide.
On our call is then just wondering what you can say about that and what dynamics are maybe causing less visibility inter quarter.
Well I think you know we view it as a you know kind of a low single digit you know world and I would say that you know national revenue for us coming in you know at 4.5% behind the prior year was a less robust than we had expected but other than that.
I don't think we see any any changes you know.
We've got to obviously way you know the puts and takes of a trade war and tariffs and you know what that does to our various lines of business, but things that we can control you know, it's kind of a goldilocks worldwide, it's not too hard to talk too cold. Its just kind of a just kind of plugging along and again.
Total spot revenue down 1%.
You know, it's within our forecast range of you know the the the bandwidth and I'd just add to that I think from our perspective, we view the national dollar as being a lot more.
A lot faster money and quick to change the local dollars. Obviously are stickier from our perspective, so I would say the national AD end buyer.
[noise] I think we saw that towards the end of the second quarter.
Okay, great. Thank you paring down.
Thank you we will take our next question from Marci Ryvicker with Wolfe Research. Please go ahead.
Thanks, I appreciate you not wanting to negotiate with 18 came public but I think one of the reasons why your stock is down and the fact that you have reaffirmed your free cash flow guide in the market didn't seem to believe since your dark on 18 key for a while so are you assuming a retroactive payments like you've gotten historically or did you reverse go down enough.
You can hit the free cash flow guide anything you can talk to for the guide and then.
Typically for Q3 retransmission consent revenue I assume we should expect a sequential step down from Q2 at this point.
Well Marci as I said in my comments our guidance is based on a steady state. We don't know what the outcome of any negotiation with a TNT is at this point, whether it be retroactive or otherwise and so I think we're sticking with what we have and the knowledge that we have until we have more concrete because we're not going to.
Play a game of.
Updating guidance based on you know any particular.
You know when that may be Boeing one way or the other one we have concrete information, we will update our guidance accordingly.
And then just to comment on Indianapolis really attribute in their press reports you might require a waiver from the FCC.
Another station divestiture, if you can comment on that.
Well there is a top four waiver in place.
In Indianapolis, allowing tribune to own the two stations that they own their there would need to be a reauthorization of that waiver.
Which we fully expect in due course, so I don't think there's anything to see there.
And I would just add and you know Marci you know should know this that you know we have internal targets that are in excess of our guidance to get to our free cash flow numbers that we give you. So.
We're not going to comment on whether the 18, TD will be retroactive or or not but you know I mean, we're confident that we will deliver our free cash flow guide and we'll just put a period at the end of that sentence and and that's what we'll say.
Okay. Thank you.
Thank you we will take our next question from Kyle Evans with Stephens incorporated. Please go ahead.
Hi, Thanks, I just wanted to follow on on the digital questions.
Specific.
Which quarter do you expect.
National issues and does that mean, maybe growing that piece of the business or just clients and then I've got some.
Well I would say that the situation is somewhat self revolving is resolving as we move through the year, but in terms of lapping those you know unprofitable businesses. It will be through the balance of this year, but but I think we've seen the bottom of what the marketplace changes would would produce in terms of results for us and we're doing better than that now so I would expect incremental improvement through the balance of the year.
[noise] My memory is correct. When you guys were blacked out with Cox they pulled ads from the system.
[noise] the short answer is no, but I'm not going to comment beyond that.
Fair enough and then maybe.
Longer term.
For the auto industry I know, it's been kind of.
Moving target for the last two years.
You know I'm sure that's not our primary business I guess, we can you know we can all speculate but listen I think that you know there's cost pressure in the automotive business, there's probably less profitability in the local dealerships and there was 10 years ago or so I think that is a pressure I think there are a lot of folks competing for auto dealers attentions. Our job is you know just as as an example, as to go to our local dealers and say listen there's no reason for you to be paying for six auto and tender web sites, because there was virtual duplication pay for one and put the rest of that money back into television and we can not only help with your brand with your image, but we can drive people to the one auto in tenders sites that you do stick with and that's having some residents with our with our local dealers. We have also internally and our sales staff soon designated an auto specialist in every market.
That is his or her job to know as much about the card business as the people were calling on and so I think that our job is to do a better job of being a partner rather than a purveyor two to the auto dealers and I think we're seeing the results of that in our internal numbers and I think it will manifest itself over time, but you know.
I I can't imagine that you're going to see fewer drivers and fewer cars on the road five years from now than you do today. Despite the everybody's everybody's prognostications. So I think it's a steady state business is it a double digit growing business you know it.
The recent time when it has been it's been after a recession when it gets dropped down and we were up against easy comps. So you know, but our automotive businesses improving on on a sequential basis and again through the end of the year and absent a credit direct sale extraneous shocks or tariffs that would affect the price of some vehicles, we don't see that changing in a material way.
Thank you so much.
[noise]. Thank you as a reminder that is star one for questions well take our next question from Jim Goss with Barrington Research. Please go ahead.
Thanks, I was wondering if there isn't applicable network mix for your portfolio from your standpoint, and since Tribune would have a different.
Sort of mix of those networks.
I wonder if that shift.
You know sits well with you or have you adjusted for some of that with the Divestures you've made.
Sure I would say you know the local news presence local brand is every bit as important if not more important to the success of the station than its network affiliation, but having said that pro forma for the Tribune transaction. We will continue to be the largest distribution partner for CBS in terms of national reach we will become the largest partner or just respond to for Fox in terms of national reach as well as the CW will be number two with NBC and number three with a B.C. So I think you know it's it's important to be important in your network relationships and I think we have we will have that standing with every one of the networks.
Okay and since.
My history with you suggested you never really sit still wants another deal is done.
What would a trade up of your station portfolio be within the the sit with keeping within the existing 39% cap assuming no changes.
That particular area.
I'm sorry, Jim I don't know when you said trade up I'm not sure what you mean yeah.
I mean to the extent that you would have to probably divest something to make room for something else. It would be more attractive is there something either related to this network mix or to get say, a bigger MBC position or something else that you would be looking for.
Like if you are trying to adjust your station portfolio.
Oh without without a and ability to change the the 39% range.
Sure you know, obviously, there's always opportunities to optimize things there our stations that underperform that we think we can make material improvements and you know there were there was more interest in the divestiture process than we had stations to sell so I think there may be some of those available as well, but yeah. There there are.
No chips to be played here. It's just that obviously, that's you know tab three four or five we've got to get the fish in the boat and.
Got it.
For being closed and then integrate it and then I think you'll see us.
I'll try and look at continued value enhancements posts post closing.
Okay, Jim I would just add to that I think that you know our goal would be to derive an economic benefit from more than one television station in any market that we're in and spread our fixed cost base across multiple revenue streams. So anytime we have the opportunity to do that whether its pairing a you know a CW affiliate with a big four affiliate or whether its swapping to get to and markets and exit other markets. You know when we close on the transaction, we will be fairly close very close to the national ownership cap would view, where Jeff discounts. So there's not a lot of cap room per se, but you can create cap room by exiting markets double up and others and and again, we'll be opportunistic with that just like we are with the with the the acquisition piece of the M&A.
Okay and lastly.
Is there any shift in the Keller capital allocation priorities as your leverage goals are met and sort of in a related area.
Are you thinking there would be some <unk> debt rating improvement that you should expect as you get down to.
Four times or or lower.
Obviously, there is a shift in.
Capital allocation to debt repayment, but we've been pretty heavy on that over the course of the last.
Eight months since we entered into the Tribune transaction, we're not exclusively and were not bound to only reducing debt. We can be opportunistic from a return of capital shareholder base.
Perspective, but clearly our goal is to de leverage and the best way to effect that is to pay down debt and that's the allocation of free cash flow. So I think that's where you should expect the majority of that coming absence, you know some dislocations in markets, where we could have an opportunity to buy back stock, but we're not there right now.
Okay. Thank you very much.
Thank you.
Take our next question from Clay Griffin.
With Deutsche Bank. Please go ahead.
Hi, good morning.
Love to get your initial thoughts on that.
Central House legislation.
Legislative efforts coming.
At least an issue.
Maybe we could start there.
Oh this police Ashu Ah I think notably there were no weather co signers on that legislation. So I think the prospect of it making out of committee are it's a it's a very long pot so that that would be our quick take on that.
Okay, Great and then just.
Looking at the just the growing volume of disputes across industry. Both in terms of.
Frequency and.
Duration, I guess does that really have an impact on how you or maybe your network partners are approaching affiliation agreements from the perspective of fixed versus variable.
The short answer to your question is that you know at least in the short term probably not I would encourage you to look at you know there is connected tissue. Among all of the just these disputes are most of these disputes and it comes down to a couple of common denominators and so I don't think Theres an industry issue list. We're you know we're being aggressive the networks are being aggressive everybody's being aggressive. So you know Theres also you know I think the the head of our Trade Association Gordon Smith called this kind of a political maneuver to create noise in front of B cell. Our reauthorization discussions that will be had when Congress is back in session. Later. This year you know there could be an element of that.
No that theater in this current environment, but time will tell and again, we're not negotiating in public we're giving details of our negotiation in public and you know, we'll we'll continue to work constructively to work to make a deal that is good for the company and its shareholders and ER and we'll just leave it at that.
Okay, and just one quick one for me to just.
Can you tell us about nbcs upcoming streaming product in terms of integration of your content.
Don't know have we don't know enough about it yet and and so.
We were.
Told at the affiliation meeting that you know in terms of our involvement it would probably look a lot like CBS all access where there was a local streaming component, but the details of that have not been a shared.
In detail with the affiliate body. So you know I guess, we'll all have to stay tuned.
Okay. Thanks.
Thank you.
Take our next question from Craig Huber with Huber Research partners. Please go ahead.
Great. Thank you few questions I mean, clearly if we could start with sort of a macro.
Commentary, if I could hear from you on what's your sense given trade war the tariffs. What's your sense. Given you guys are 100 markets are so around the U.S. you talk to your various large advertisers out there what's your sense of the U.S. economy.
What are you hearing from the grout. Please.
Well I you know I think that people are generally optimistic I don't think you know people are wringing their hands just waiting for the recession to start I don't get that sense from our advertisers at all I will tell you that when you go into the mid west and the upper Midwest and you know where farmers have been told for a couple of years now that you know just to kind of eat it's because the tariffs are a necessary element of the trade negotiation.
You know they are they buying one fewer tractor or one less truck or whatever you know we don't you know I can't I can't tell you, but I would tell you that you know mid Westerners and farmers are generally pretty stoic people and they're not going to where they're hard on their sleeve either but.
You know I think that as I said earlier, it's goldilocks right. It's the longest expansion we've had post recession, but it's also probably the most muted so perhaps there's a math equation. There were you know lower growth is sustainable for a longer period of time until we reach the end of the business cycle I would find it a absent I find it hard absent and extraneous shocks to the system that there'd be a recession in an election year I just think that forces combined to almost ensure that that doesn't happen, particularly incumbent forces, but so we we are not anticipating you know any any real change to the economic outlook, you're probably at least through the end of next year I think you know.
Let's get past the election and see what all that means then then we can have a better better lens into 2021, 2022 and 2023, but at this point, we don't see anything you know.
Hugely positive or negative you know affecting the economy here in the <unk> in the next 12 to 18 months.
Thank you for that I also wanted to ask you Perry or Tom.
Your ad revenue.
For July I think you said, obviously said July was closed.
But it was better than the I guess down 1% number you had for the whole second quarter Shine for that's maybe flat to up 1% year over year.
First question My other question is for that.
For the second quarter.
Obviously, the P. since you were talking about three months ago on that on the somewhere call you thought youd core would be up 1% to 3% showing for the month of June came in worse than expected.
I I think you could assume all all of that what you said you know so if core revenue was down in the second quarter, 1%.
We are better than that so you know if you want to do assume a flattish to slightly up ish, but you know I wouldn't I wouldn't get too enthusiastic there and then yeah I think June , particularly in national we saw a drop off in declining demand and in the month and and so it performed worse than expected, but then you know we came back in.
In Q3, you know at this point with you know pacing that I think will will stabilize.
And if I could ask a regular <unk> regulation question, if I could the 39% ownership cap obvious for years people than expecting that to get changed here what is sort of your sensor with an election year coming up here do you think is going to get changed at all here in the next year and a half and in the corollary question is who actually has the trust actually ended the day do you think its congress of the FCC.
Change through an EPS ownership cap.
Thank you.
Well that the you know your the second part of your question is the question because Oh. It is an open debate in Washington as to whether the FCC has delegated authority or whether its statutory authority with the with Congress. There are many people claiming to have been in the room. When it happened that that have different views on what exactly did happen. There were of a camp that the FCC has the statutory authority to work to change the cap others, including our friends at Fox or I've taken a different positions in that but I would tell you that I think political realities are setting in I would I would Ah Ah I would not expect to change this year or in the national ownership cap for always be surprised but you know we're not anticipating it even though we're lobbying for but I would also tell you that I think it gets even harder in an election year to to make those kinds of changes, but but again, that's just one man's opinion, so I'm, we're not Uh huh.
Contemplating are counting on any change in the ownership cap to work to run our business for the next to 18 months.
Great. Thank you very much.
Again as a reminder that is star one for question.
We'll take our next question from David.
Hebert with Wells Fargo. Please go ahead.
Hi, everyone. Thanks for squeezing me in here.
Just one question for me on on the closing of the Tribune transaction.
Essentially all are waiting for I think you said as the FCC approval.
Do you anticipate that in short order here and if if we do get that approval you should be able to close pretty quickly thereafter, correct just wanted to confirm that thanks.
Yes, we are waiting for the judge to sign the settlement with.
The O.J. the D.R.J. settlement of it the suit that they brought with the settlement and that's the way things get approved at the Deo Jay So the judge has to sign off on that order and the FCC has to grant the transaction and we still believe that that will be a Q3 event, we're very confident in that.
Okay, great. Thank you.
Thank you. It appears at this time there are no questions. So I'll turn the conference back over to our speakers.
Alright, well. Thank you very much for joining us today, we look forward to our next communication with all of you, which we expect will be two announced the closing of the Tribune acquisition and to give you all an update on our pro forma 2019, 2020 free cash flow guidance. Thanks, again and have a good day.
Ladies and gentlemen, thank you for joining today's conference call. The call is now concluded. Please disconnect your lines and have a great day.