Nexstar Broadcasting's (NXST) CEO Perry Sook on Q1 2014 Results - Earnings Call Transcript

May.11.14 | About: Nexstar Broadcasting (NXST)

Nexstar Broadcasting, Inc. (NASDAQ:NXST)

Q1 2014 Earnings Conference Call

May 8, 2014 10:00 ET

Executives

Perry Sook - President and Chief Executive Officer

Tom Carter - Chief Financial Officer

Analysts

James Dix - Wedbush Securities

Aaron Watts - Deutsche Bank

Marci Ryvicker - Wells Fargo

Tracy Young - Evercore

Davis Hebert - Wells Fargo Securities

Edward Atorino - Benchmark

Operator

Good day, and welcome to the Nexstar Broadcasting Group’s 2014 First Quarter Conference Call. Today’s call is being recorded.

All statements and comments made by management during this conference, other than statements of historical facts, maybe deemed forward-looking statements within the meaning of Sec 21 of the Securities Act of 1933 and Sec 21A of the Securities and Exchange Act of 1934. The company’s future financial conditions and results of operations, as well as forward-looking statements, are subject to change. The forward-looking statements and comments made during the conference call are made only as of the date of today’s conference call.

Management will also be discussing non-GAAP information during this call in compliance with Regulation G. Reconciliations of this non-GAAP information to GAAP measurements are included in today’s news announcement. The company does not undertake any obligation to update forward-looking statements reflective of changes in circumstances.

At this time, I would like to turn the conference over to your host, Nexstar President and CEO, Perry Sook. Please go ahead sir.

Perry Sook - President and Chief Executive Officer

Thank you, operator and good morning everyone. I’d like to thank you all for joining us this morning to review Nexstar’s record first quarter operating results and our ongoing initiatives to drive continued free cash flow growth in 2014 and beyond. As always, our Chief Financial Officer, Tom Carter is participating on the call with me this morning.

2014 is off to an excellent start for Nexstar with another record quarter led by robust growth in all financial metrics. Nexstar generated record first quarter net revenue and with the operating leverage and our model, the 19.3% revenue increase resulted in our highest ever first quarter broadcast cash flow, adjusted EBITDA and free cash flow, which grew 27.2%, 27.4%, and 148.5% respectively.

Our consistent free cash flow growth again highlights the value in our long-term strategy to complete accretive acquisitions while evolving the traditional television broadcasting operating model and our locally focused content into a diversified entity with high margin revenue streams. With core advertising trends remaining strong, the cyclical return of political spending, our expanded digital media operations, and our visible retransmission revenue stream, we believe that Nexstar is on track to generate record free cash flow growth and free cash flow in 2014.

Operationally, Nexstar had an outstanding first quarter with results highlighting our ongoing focus in building new local direct advertising as well as growth of distribution and digital media revenue at the station level and the successful integration of the accretive acquisitions we completed in 2012, early ‘13 and early ‘14.

Nexstar generated total first quarter revenue of $133.8 million, that’s 19.3% rise from the year ago period with increase driven by strong growth in local, national, political and retrans. Reflecting organic and acquisition related growth, first quarter revenue, our core ad revenue I should say rose 11.4%, that’s inclusive of 9.5% first quarter growth in local spot and 16.3% growth in national spot revenue.

Overall, core revenue growth highlighted gains in four of our top five and seven of our top 10 ad categories on a same station basis. In addition to the 4% year-over-year growth in auto, we saw strength in cable, furniture, legal, healthcare, insurance, and retail categories. Our core revenue growth continues to reflect healthy levels of new business with new to television ad revenue for Q1 of $6.3 million marking a 17% increase over the prior year.

Nexstar’s revenue growth in the first quarter excluding political was a robust 16.5%, while first quarter political advertising revenue rose over fivefold compared to the same period last year and by 43% over comparable first quarter 2012 levels as over the last two years we have strategically expanded our station base into markets with high levels of political advertising activities.

In addition to strength in core advertising, Nexstar’s record cash flows highlight the continued double-digit growth in first quarter retransmission fee revenue, which rose 31% on a quarterly sequential basis and 47.6% year-over-year to $35.1 million, which marks a record level of quarterly revenue from this source. With the renewal of retransmission consent agreements representing approximately 22% of our subscriber base completed in late 2013, we project highly visible and significant revenue growth from this source throughout the remainder of the year.

During the quarter, we announced and completed the accretive acquisition of Internet Broadcasting Systems or IBS, a digital publishing platform and digital agency services provider. This acquisition marks Nexstar’s entry into the profitable and fast growing digital agency business, while broadening Nexstar’s digital media portfolio with technologies that are complementary to the company’s existing digital businesses and multi-screen strategies. Overall, IB strengthens our position as a leading local technology and services provider for businesses and we see these capabilities offering the best opportunities for growth. And as such, they are the focus of our digital media initiatives.

Also, with first quarter revenue of $6.3 million, that reflects the addition, I should say, and reflecting the addition of IB and excluding the one-time items in 2013, we expect to generate record digital media revenue in 2014. We will continue to leverage our digital local content online via mobile devices to bring advertisers new marketing solutions that yield high interactivity and ROI while offering a suite of fully scalable digital solutions, including award winning websites, our innovative SaaS-based digital publishing platform and syndicated content technology and services.

In total, our higher margin retransmission fee and digital media revenue taken together grew 36.7% year-over-year to $41.4 million and accounted for 30.9% of 2014 first quarter net revenue. By comparison, total first quarter 2013 fee and digital media revenue comprised 27% of net revenue and 22.3% of net revenue in the first quarter of 2012.

The operating efficiencies that we are deriving from our expanded scale and the integration of recently completed acquisitions as well as continued focus on expense management resulted in record 2014 first quarter operating income of $27.7 million and an increase of 55.5%. Broadcast cash flow was $50.6 million, a rise of 27.2% and adjusted EBITDA of $42.1 million with growth of 27.4%. Free cash flow was $25.3 million, which represents 148.5% increase year-over-year, that’s also an approximate 100% rise over the first quarter of 2012, the previous political period.

Now, let’s look into our M&A activity and our recently closed and pending transactions. In less than three years, Nexstar has doubled the number of television stations to which we own or provide services as we and Mission have acquired or agreed to acquire 53 television stations for a total value of approximately $863 million in accretive transactions. Of that amount, $410 million representing four transactions in 29 stations are pending before the FCC and we expect all of those to close in 2014.

Later in the first quarter, Nexstar completed our acquisition of three stations in Des Moines, Quad Cities and Sioux City, Iowa from entities related to Citadel Communications for $88 million. The acquisition of these Iowa stations marks Nexstar’s entry into an important political state for advertising political advertising activity. And Nexstar has operated these stations since last September pursuant to a time brokerage agreement and integration has already been completed, the financial and operating results are already meeting our expectations. Last month, the FCC approved Nexstar’s purchase of five stations in Colorado and Florida, which we are acquiring for $33.5 million. These stations are being acquired from an intermediate seller as part of a separate transaction. And we expect to close the transaction properly once all of the sellers, the original sellers’ conditions have been met.

As we have reviewed on prior calls, pro forma for the completion of all pending transactions, we believe that Nexstar would generate free cash flow in excess of $350 million during the ‘14/15 cycle or average pro forma cash flow – free cash flow of approximately $5.85 per share per year during this two-year period. Notwithstanding our confidence in completing the remaining transactions, our existing operations alone are expected to generate approximately $4.40 per share per year in this current 2014/2015 period. In addition, excluding the financings for the pending transactions are free cash flow generation from existing operations would result in Nexstar’s net leverage declining to less than 4% or four times I should say at the end of 2014.

Overall, our strong free cash flow generation combined with our strength and balance sheet provides us with the flexibility to acquire additional stations in accretive transactions to de-lever throughout the year and for ongoing return of capital to shareholders with our sixth dividend and second 15% quarterly dividend to be paid later this month. As shareholders, free cash flow growth is our priority and as we continue to generate excellent core political distribution and digital media revenue growth, our free cash flow visibility is solid.

Tom will now provide further details on the financials and will review the expected financing of our recently announced transactions and highlight our revised capital structure. Tom?

Tom Carter - Chief Financial Officer

Thanks, Perry and good morning everyone. I will start with a review of Nexstar’s Q1 income statement and balance sheet data. After which, I will provide an update on our capital structure and details related to the pending transactions. As Perry mentioned, our net revenue grew 19.3% to $133.8 million driven by 11.4% growth in core revenue to $92.8 million. The components of which were local revenue of $65.6 million, up 9.5% and national revenue of $27.2 million, up 16.3%.

Political revenue in the even numbered years stood at $4 million and retransmission fees were $35.1 million, which as he mentioned, was up sequentially 31% over fourth quarter. And it’s important to note, there weren’t any acquisitions that closed in either Q4 or Q1, so that is really a same station comparison for the purposes of retrans.

Our digital media revenues were affected by non-recurring revenues from previous year and stood at $6.3 million. And as Perry mentioned, we had record broadcast cash flow, adjusted EBITDA, and most importantly to us free cash flow of $25.3 million, which was up almost 150% over the same period in 2013. On a same-station basis and by same-station, I mean, for stations owned more than one year, our net revenue increased 11%. Core revenue increased 5.4% driven by 11% increase in national revenue. And as Perry mentioned, our retransmission fees were up 30% plus.

With the focus on generating free cash flow, we remain disciplined in managing costs and in addressing our capital structure, leverage and cost of capital. First quarter station direct operating expenses net of the trade expense and station SG&A expenses rose 23.9% and 13.1% respectively. These increases primarily reflect higher variable costs related to the significant increase in national and local revenues and continuing operating expenses of the acquired stations.

On a sequential basis, station direct OpEx and station SG&A increased a modest 1.9% Q4 ‘13 to Q1 ‘14. And on a same station basis, fixed costs, which exclude the affiliation expenses and sales expenses, were actually down 1.9% versus Q1 of 2013 again for those stations owned more than one year. And that shows I think and demonstrates our ability to aggressively manage our business and control costs.

Nexstar’s first quarter corporate expenses were $8.5 million, of which $6.8 million was cash corporate expense. This is in line with the $8.5 million that we guided to at the Q4 2013 conference call. This compares to corporate expenses of $6.7 million a year ago, which included $0.5 million of non-cash stock option expense. The increase reflects the increased staffing and infrastructure to support our expanded platform as well as an approximate $1.1 million increase in non-cash stock comp as a result of the options, which were granted in the January 2014 board meeting to 53 executives, directors, and managers in the first broadly distributed incentive option grants since 2009.

For the remaining quarters of 2014, we project non-cash stock option expense to approximately $1.6 million per quarter. As such, total corporate overhead will approximately aid between $8 million and $8.5 million per quarter, but the cash corporate component of that will be between $6.5 million and $7 million per quarter. During Q1 of 2014, Nexstar incurred approximately $900,000 in one-time transaction expenses during the quarter, which included $300,000 at the station level and $600,000 at corporate.

Turning to the balance sheet, I will review key items as of 03/31/14. Total net leverage at 03/31/14 was 5.52 times versus the total permitted leverage covenant of 7.25 times. First lien leverage at 03/31/14 was 2.67 versus a covenant of 4. Nexstar’s outstanding debt consisted of first lien debt of approximately $542 million outstanding under the term loans and $526 million of 6 7/8% senior unsecured debt. We had $105 million unfunded revolver at quarter end and approximately $50 million of cash at the quarter end on the balance sheet. There were no changes in the capital structure in Q1. And overall, the net debt declined $1.17 billion at 03/31/14 from $1.31 million at 12/31/13 reflecting the pay downs of additional term loans and increase of cash of approximately $10 million.

At 03/31/14, the company had deposits of approximately $35.6 million against pending acquisitions. The acquisitions have a total value of $410.3 million as Perry noted before. And during the first quarter Nexstar completed the acquisition of the three stations in Iowa from Citadel for approximately $88 million. And additionally we funded the purchase of internet broadcasting systems for $20 million. Both of these acquisitions were fully funded from cash flow generated by Nexstar’s existing operations. The refinancing of the previously outstanding approximately $310 million of 8 7/8% notes in Q4 was accomplished at a blended rate of approximately 5.75% comprised of $275 million at the 6 7/8% bond rate and $150 million of borrowings under new credit facility of 3.75%.

Looking forward the committed cost of financing for the remaining transactions is below 4%, which will reduce Nexstar’s weighted average cost of borrowings to approximately 5% from the current approximate levels of 5.25%. However, we continue to incur commitment fees based on the outstanding commitments we have in place to fund these pending acquisitions. And in Q1 that amounted to approximately $0.25 million in ticking fees in the company’s operating segment.

Reflecting the refinancings over the last year and the previously mentioned ticking fees on the CCA financing commitment, total interest expense in the first quarter declined to $15.2 million from $16.5 million in the same period in 2013. Cash interest expense also fell and was $14.5 million for the quarter compared to $15.7 million for the same period in 2013. Nexstar’s Q1 CapEx of $4 million compared to $6.8 million in Q1 of ’13. The CapEx incurred in ’14 was for newly acquired stations, the relocation of our corporate offices and the new Marquette news facility related to the launch of local news in that market. The year-over-year CapEx reduction reflects the fact that much of the 2013 CapEx was front end loaded towards the beginning of the New Year – beginning of the year for stations additions, constructions and equipment costs for the new broadcasting and news operations and acceleration of local HD origination.

For 2014 we are budgeting CapEx of approximately $22 million with approximately $2 million of that budgeted CapEx being earmarked for the pending acquisitions – for the stations to be acquired in the pending acquisitions. We believe our results again demonstrate we are successfully managing our M&A initiatives and disciplined acquisition criteria, our top line fixed and variable costs and the balance sheet for cash and remained focused on further actions that can enhance value. Also as Perry noted, the second increased dividend in our sixth dividend overall will be paid later this month.

In summary we are very pleased with the free cash flow we are generating from our expanded platform and our balance sheet capital structure and cost of capital are in great shape. And we are prepared to both complete the pending acquisitions, while simultaneously reducing leverage throughout the remainder of this year.

That concludes the financial review for the call. And I will turn it over to Perry for some closing remarks before Q&A.

Perry Sook - President and Chief Executive Officer

Thanks Tom. In summary we are laser focused on closing, effectively integrating and extracting synergies from the remaining 29 stations we have agreed to acquire and we believe that our long-term acquisition strategies and operating plan combined with Tom and his team’s management of our capital structure is a proven formula for sustained long-term growth and shareholder appreciation. As we complete the four pending transactions, Nexstar will again generate meaningfully higher free cash flow allowing us to quickly reduce borrowings and our leverage ratios.

Our leading local news and content franchises as well as broadcast televisions world is the most influential medium among consumers, remains the foundation of Nexstar’s continuous long-term expansion and growth. On completing all the announced transactions our platform will expand to 108 television stations making Nexstar the second largest operator of television stations in the United States. Our combined audience reach will be approximately 16% of all U.S. television households allowing for further significant expansion of our platform, while remaining under the current 39% regulatory cap.

With significant free cash flow and growing free cash flow, with positive industry trends and our strength in balance sheet, we are very confident that Nexstar’s path to enhancing long-term shareholder value is clear. The first quarter results and Q2 trends to-date reinforce our view that 2014 will be another period of record financial results for the company as Nexstar benefits from it’s expanded scale, new operating efficiencies and synergies related to recent and pending acquisitions, the renewals throughout 2014 have retransmission consent agreements covering over 40% of Nexstar’s subscriber base as well as the ongoing financial growth and accretive acquisitions related to expansion of our digital media initiatives and the return of the political cycle this year.

With the results we announced this morning, Nexstar’s record of exceptional compound annual growth on free cash flow continues with $25.3 million in the first three months of 2014. From the 2003/2004 cycle when we first went public and from the 2003/2004 cycle through ‘12 and ‘13, we grew free cash flow at a compound annual growth rate of 61.4%. While that’s impressive, our forward outlook is even brighter as pro forma for the completion of pending transactions, the compound annual growth rate from 2003/04 cycle to ‘14/15 will increase to approximately 69%. And Nexstar’s pro forma free cash flow in 2014/15 is expected to rise more than 110% over the recently concluded 2012/13 cycle.

On behalf of Nexstar’s more than 3,000 dedicated employees, I’d like to thank you for joining us and for your interest in the company. Now, let’s open the call to Q&A to address your specific areas of interest. Operator?

Question-and-Answer Session

Operator

Yes, sir. Thank you. (Operator Instructions) We will move first to James Dix with Wedbush Securities.

James Dix - Wedbush Securities

Hey, good morning guys. A couple of things. I guess, just first on the M&A outlook, I mean, given that you have been going through this process with these pending deals for some of them quite a while now, just if you could just go through what are the things which are giving you some confidence that the pending deals will close this year? And then I had a follow-up on fundamentals?

Perry Sook

Sure, James. Well, let me just say it this way, we do have a plan, an updated plan and we are working through that plan to close the remaining pending transactions. And we are confident that we will be able to move this plan forward in compliance with the new rules that are currently out from the FCC. Notwithstanding, we do believe that those FCC rules will ultimately likely come under congressional review and probable judicial review, but we have a plan, we just don’t want to put the playbook out for public consumption.

James Dix - Wedbush Securities

Okay, great. And then you mentioned kind of my second topic in your first response. Any more color now that you have seen the final rules that the FCC adopted as of mid April, they were published? Any more color that you can give as to what you think either you or the industry is likely to do over the next two years, just to kind of adapt to those rules specifically on the joint sales agreements?

Perry Sook

Sure. I believe that we will take the full two years to review our options with the relationship to our existing JSA agreements. Obviously, our focus is on pending transactions and that’s where we are modifying agreements to pass muster with the current regulatory regime.

James Dix - Wedbush Securities

Great. And then one just on fundamentals, just what type of pacings are you saying in the second quarter in terms of the ad business? I mean, I have heard from some people, some mixed pacings on national, in particular, and maybe some headwind for Fox affiliates. So, any color you could give on kind of how the second quarter is looking from the core ad side versus what you saw in the first?

Perry Sook

Yes. I think that if you – as far as our Q2 outlook, I think you will see a low single-digit growth in core. You will see high-teens for digital and then add in results from IV, which will begin to be reflected in our financial statements as of April 1. And in a healthy dollop of political and then you have retrans and I think now given our first quarter reporting that you have pretty good window into what that will look like for Q2. So, I think those are the basic building blocks and that is in line with our plan.

James Dix - Wedbush Securities

Great, thanks very much, Perry.

Operator

And we will now move on to Aaron Watts with Deutsche Bank.

Aaron Watts - Deutsche Bank

Hey, guys.

Perry Sook

Good morning.

Aaron Watts - Deutsche Bank

A lot of information appreciate all the detail. I was trying to write as quick as I could, but wanted to just clarify on the same station kind of core performance in the first quarter I think you said it was up 5.4% with national up 11%, what was local?

Tom Carter

3.2%. And again, that’s for 3.2%, those are, all those numbers are for stations owned more than one year. Actually, if you include the stations that we have acquired it’s slightly higher than that, simply because those were not as well run we would like think under previous ownership. So we are kind of bringing them under the fold here, but on stations owned more than one year it’s 5.4% for core, 3.2% for local and 11% for national.

Aaron Watts - Deutsche Bank

That’s interesting, I think you are the first one I have heard say that national felt better than local in the quarter, anything you attribute the variance there to or just why national outperformed for you for than – over local?

Perry Sook

Well, obviously, I would like to take the opportunity to complement our superior sales force to just for their results. But it has to do primarily with categories and where the advertising is placed. And there is account shifts from local to national and national to local that happen all the time. A driver there was the – was an increase in spending from cable and other media and that is primarily placed nationally which would drive that results – drive those results. But we refused to allow weather as an excuse in the company, but you heard that from me on our first conference call of the year that we need to be selling smarter and further ahead and not let weather affect our ability to make the month. And I can tell you that we for the first quarter on an all-in basis we exceeded our internal budget and forecast, so we are very pleased with the results.

Aaron Watts - Deutsche Bank

Okay. And on auto I think a lot of people had mentioned that the weather did have a dampening affect there on auto sales, I think you said your auto was up 4.4% in the first quarter, should we expect that kind of growth rate to feel better and the second quarter just given the weather has calmed down a little bit?

Perry Sook

Well and again maybe we are the exception, but our local dealers spending in the first quarter was up double digits, it was up 11% and that’s where the transactions take place in the individual showrooms. And I think that’s an exception to what others have reported as well. I think as we look forward, I think that the kind of single digits increases you saw in auto in the first quarter that’s probably a pretty good proxy for second quarter. I am not sure there was anything driving acceleration beyond that. So I mean I don’t think we are counting on more growth than we saw in the first quarter on a percentage basis.

Aaron Watts - Deutsche Bank

Okay. And last for me, Tom as you think about all this free cash flow you are generating, obviously you have been opportunistic with some acquisitions, you are paying a dividend on your stock, as you think about your debt balance are you okay with kind of the principal amount outstanding where deleveraging from this point on comes from growth of the business or would we see some debt pay down with free cash flow as well?

Tom Carter

Well, I think it all just depends, right now pro forma for closing all of the acquisitions we have got about a $50 million to $70 million funding need. Now, so depending on when these acquisitions close, there is a scenario that we have that we generate enough free cash flow in the next four to six months that we don’t have to do an additional financing. And we have $172 million of unfunded Term Loan A. We have $105 million of unfunded revolver and post the IB acquisition in April we have $30 million odd of cash. So we have either a combination of adequate funding and adequate access to capital or adequate free cash flow over the course of the near-term to fund all of these acquisitions which is my first priority because as Perry mentioned we believe these are going to close in 2014.

Aaron Watts - Deutsche Bank

Alright, great. Thanks for the color.

Operator

And we will now move to Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo

Thanks. Can you clarify that $4.40 free cash flow guide, does that include the Citadel deal that just recently closed or not?

Tom Carter

Yes, it does.

Marci Ryvicker - Wells Fargo

Okay. And then is there any financial metrics you can give us around IBS revenue and EBITDA contribution either for this year or over time?

Tom Carter

Sure, I think normally our transactions are anywhere from three to six months in terms of closing from a regulatory perspective. On IB, it because it didn’t require any sort of regulatory approval closed immediately after it was signed. So, our synergies aren’t really going to take effect in IB for probably three to four months. Normally, we have three to four months to plan and get ready and so they take effect immediately. Having said that, for modeling purposes, it was approximately a one-times revenue acquisition and we believe that six months into it, it will be at a run-rate pro forma multiple of approximately five times. We are just not going to get there for two quarters or so, because of the lack of regulatory delays to close. Is that helpful?

Marci Ryvicker - Wells Fargo

Yes. And then just going back to my first question, what’s the $33.5 million deal that got FCC approval, but wasn’t closed?

Tom Carter

It is the Nexstar portion of Hoak.

Marci Ryvicker - Wells Fargo

Is that included also in the $4.40?

Tom Carter

No.

Marci Ryvicker - Wells Fargo

Okay.

Perry Sook

And Marci, we expect that will likely close by the end of this month.

Marci Ryvicker - Wells Fargo

Okay.

Perry Sook

And those are stations in Grand Conjunction, Colorado and Panama City, Florida.

Marci Ryvicker - Wells Fargo

Great, that’s all I have. Thank you.

Operator

And we will now move to Tracy Young with Evercore.

Tracy Young - Evercore

You answered my question on the Hoak transaction. Just a question for you sort of a broader question, your retrans numbers were good this quarter as well as the e-media yet you are keeping the $5.85 free cash flow 2014/2015, are you just being conservative at this point or should we just be assuming that you will – is there anything that we can take away from that? Thanks.

Tom Carter

I would say the only thing you could take away from that is just being conservative. And right now, I think all broadcasters are a little bit from Missouri. Show me when it’s going to happen and how it’s going to happen and then we can refresh that. I think we will give additional guidance once these individuals, transactions start closing, but obviously the largest one of which is CCA, and that’s probably the most complex one. So, more to come, I think it’s important that we are not – we are reiterating guidance if we felt there was downward pressure, we wouldn’t be doing that.

Tracy Young - Evercore

Okay, I understood. Thank you.

Operator

We will now move to Davis Hebert with Wells Fargo Securities.

Davis Hebert - Wells Fargo Securities

Good morning guys. Thanks for taking the questions. A couple for me, the FCC’s ruling on joint retrans negotiations for two of the top four stations, can you outline how many markets this would affect you and how you might manage through that going forward?

Tom Carter

I don’t have an exact number, but I would say there are 18 Mission markets. And if either six or seven markets that is not applicable, because one of us or both of us don’t own the top four stations. So, it comes down to basically rough numbers, two-thirds of the overlap markets would be prevented. Now, I will tell you that the order is not yet effective, because it hasn’t been published in the federal register. So, we are currently not subject to it. And we would like to see that get delayed as long as possible, but there are plans afoot to have Mission assume that responsibility or to have them outsource those stations to someone other than Nexstar.

Davis Hebert - Wells Fargo Securities

Okay, got it. Yes.

Tom Carter

I am not going to give more details than that, but it’s an A or B and both options are on the table.

Davis Hebert - Wells Fargo Securities

Okay, got it.

Perry Sook

To Tom’s point, we did complete negotiations in April on a 2014 retrans agreement renewal and Nexstar was able to negotiate on behalf of both the Nexstar stations and the Mission stations in those affected markets.

Davis Hebert - Wells Fargo Securities

Okay, perfect. Thanks for that color. And then on the balance sheet, the target leverage you took up a little bit to 3.8 times just given what the timing of these acquisitions closing, but Tom, you have been good about giving us some idea about balance sheet capacity for M&A. Does that change with this target leverage or not target leverage, but leverage outcome?

Tom Carter

No really the leverage outcome is more – the creeping up of the leverage at year end ’14 is more a function of the fact that we are not going to have access to the free cash flow. If you go back to the April 2012 announcement of CCA, we thought we were going to have that beginning in the fourth quarter of 2012. Well, now it looks like we are going to miss at least nine months of that free cash flow and similar kinds of timelines affect Hoak as well as Grant. So really the creep up in leverage is $30 million to $40 million of lack of free cash flow from some of those properties. What I will say Dave is with the passing of time and the fact that we do have not insubstantial free cash flow as evidenced by the fact that we paid for the $22 million second payment on Citadel and $20 million for internet broadcasting out of free cash flow. And we haven’t even seen the beginning of the strongest free cash flow months and quarters for 2014 yet. So with the passage of time what historically has been kind of roughly characterized as $200 million to $300 million of acquisition capacity is going to increase just naturally through organic free cash flow.

Davis Hebert - Wells Fargo Securities

Okay. Last question for me on political one of your peers took up their full year guidance saying that political season could actually be a little bit more robust than they have thought, just curious if you are seeing that in any of your markets? And thanks for taking the question.

Perry Sook

Well, I think we had guided to a continuation of about a 20% CAGR over our reported 2012 results, which would give you a number in the mid-50s. I think we are very confident with that number and we are probably betting people we probably bet the over. But given that 60% of the political comes in six weeks in – of a 52 week year, it’s pretty hard to be much more finite than that. I can tell you that we booked $1 million in political this week and that’s just for primary season in some states. So yes I think that it would be a very active political year for the company given its footprint.

Davis Hebert - Wells Fargo Securities

Okay thanks a lot.

Operator

We will now move to Edward Atorino with Benchmark.

Edward Atorino - Benchmark

Hi. Are you seeing – you mentioned mobile, mobile is one of the great promises of broadcasting that sort of hasn’t happened and in fact the NAB that ’14 is going to be the year of mobile, could you discuss whether you are seeing mobile build, is this a strategic move, is the if NAB talking through its hat?

Perry Sook

Well, the mobile that we are experiencing now is basically our mobile video basically through our websites and it’s not true broadcasting to handsets. I probably think that’s a a laser way and we will most likely require a change in transmission standard to get there fully. But the thing that’s intriguing to me is when you hear Comcast talk about building 8 million hotspots for Wi-Fi and then we then can communicate with mobile devices without really blowing up data plans as well as our video is available real time right now. So it is arguable as to what the transmissions schema is going to be, but we still see a huge gap in just our digital revenues mobile views, page views approximately 40% of all of our page views and mobile revenue as a percent of our digital revenue was about 10%. So we are like just about everybody else running down the street trying to catch up with viewer adoption trends and planning ways to monetize them.

Edward Atorino - Benchmark

Is the problem technology, not enough whatever they are out there to receive the signal or is the problem with TV having the – I am not engineer having the ability to send the signals to a mobile device?

Perry Sook

Yes, I mean.

Edward Atorino - Benchmark

Or both?

Perry Sook

Well, their handsets are not currently equipped and by and large to receive television transmission that would require a chip.

Edward Atorino - Benchmark

Or both?

Perry Sook

And so I think that’s the first step. But again there is a potential opportunity to change the transmission standard that would make all of that easier and I think that’s where a lot of us are focused on the future of being able to monetize ancillary spectrum as well as monetize mobile.

Edward Atorino - Benchmark

Yes. It sounds like the NAB is ahead of the curve or behind the curve I mean. Thank you.

Perry Sook

Thank you.

Operator

(Operator Instructions) We will now move to (indiscernible).

Unidentified Analyst

Good morning. So, in light of the recent FCC rulings on JSAs, I am trying to get a sense for the exposure in your existing stations. So, the question is if you have had to exit your JSA agreements effective say January 1, 2014, what percent of first quarter EBITDA would have gone away?

Tom Carter

Well, let me just be clear that at no point would we have to exit those JSA agreements. We would have to modify them to comply with the current rules that rather than selling approximately 70% of the airtime of the stations, we can now only sell up to 15% of those – of the airtime of the Mission stations. So, we will modify agreements to come in compliance, but at no point do those agreements go away.

Unidentified Analyst

And with regards to contribution….

Tom Carter

Go ahead.

Unidentified Analyst

No, you were saying with regards to contribution from those – the EBITDA impact if it you modify those stations?

Tom Carter

Well, again, every quarter we publish consolidating financial statements in our public filings. And you can go back and see under the Mission category, the revenue between consolidated entities in Q1 of 2014 was $6.9 million in revenue of $133.8 million of revenue. That’s the amount of revenue that was associated with the JSAs. Mission’s total revenue was $18.5 million. So you can – you would have to make assumptions with regard to expenses, because Nexstar incurs expenses to provide these services to Mission. So, it is not a – it’s not a material profit center for Nexstar.

Unidentified Analyst

Got it. And in any case as far as revenue goes, only that $6.9 million would be subject to the modification?

Tom Carter

Right. And it’s $9.6 million to be clear.

Unidentified Analyst

$9.6 million, okay, great. Also on spectrum, do you intend to try to monetize any of your spectrum in the incentive options coming up next year?

Perry Sook

We will keep an open mind as to the process, but I find it hard to believe that anyone who has a going concern television station is going to find the spectrum auction more lucrative, but again, we will keep an open mind and review the process, once the guidelines are established and determine if that is still valid, but that’s our initial impression is that we probably will not participate, but you never want to say never.

Unidentified Analyst

Got it. Great, thank you.

Operator

(Operator Instructions) We will now move back to Edward Atorino [Benchmark].

Edward Atorino - Benchmark

Yes, I am probably just far from an engineer as anybody on the phone. Could you use that excess spectrum to do something else instead of selling it, I mean it’s unused? Can you add – I mean, can you add stations? I am sorry it’s probably a stupid question, but…

Perry Sook

No, not at all, Ed.

Edward Atorino - Benchmark

Would you mind tolerating me?

Perry Sook

No, no, I am happy to do so. I mean, right now, people are multiplexing and putting digital multicasts on the air. We have done that in certain circumstances and we have inherited a bunch in acquisitions, but by and large we have kept our powder dry if you believe that the demand curve for core television advertising which is how these things would be funded is a low single-digit grower, then our view is that you don’t want to introduce more supply. Now, we have put – we just recently this year put a Telemundo D2 on the air in Abilene, Texas, where there was no other Telemundo affiliate over the air. And that makes perfect sense. We have put Bounce multicast which is a network geared at African-American audiences on air in markets where we had a high African-American viewing population. So we have done some of that.

I will just remind you back during the analog to digital transition when the Qualcomm was generating and starting their media flow project, we leased spectrum to them in a couple of markets on Channel 55 where they were building their nationwide media flow footprint and that was very lucrative to the company, it was several million dollars over a several year period of time., But didn’t require the government to have a thumb on the scale or a part in negotiations. And I think you will see more of those kinds of discussions and opportunities once we get on the other side of an auction process. And then I think just naturally the market will bring parties together.

Edward Atorino - Benchmark

Thank you very much. Really I appreciate the time. Thank you.

Perry Sook

You bet Ed.

Operator

And it appears there are no further questions.

Perry Sook - President and Chief Executive Officer

Thanks everyone for joining us. And until next time take care. Bye now.

Operator

And that does conclude today’s conference. We thank you all for your participation.

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