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Nexstar Broadcasting Group Inc. (NASDAQ:NXST)

Q1 2008 Earnings Call

May 7, 2008 10:00 am ET

Executives

Perry Sook – Chairman, President and Chief Executive Officer

Matt Devine – Chief Financial Officer

Joseph Jaffoni – Investor Relations, Jaffoni & Collins Incorporated

Analysts

Bishop Sheen - Wachovia

Avi Steiner - KBC Financial

Steve Shapiro - GoldenTree Asset Management

Edward Atorino - Benchmark

John Kornreich - Sandler Capital

Victor Miller - Bear Stearns

Operator

Welcome to the Nexstar Broadcasting 2008 first quarter results conference call. (Operator Instructions)

I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations.

Joseph Jaffoni

Thank you, operator and good morning, everyone. I’m just going to take a moment to read the Safe Harbor language after which I’ll introduce management. All statements and comments made by management during today’s conference call other than statements of historical fact may be deemed forward-looking statements within the meaning of Section 21 of the Securities Act of 1933 and Section 21(a) of Securities 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 financial information during the call. In compliance with the Regulation G reconciliations of the non-GAAP information data 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 and circumstances.

At this time, I’d like to turn the call over to your host, Nexstar Founder, President and CEO, Perry Sook.

Perry Sook

Thank you, Joe and good morning, everyone. Thank you all for joining us today to discuss Nexstar’s Q1 2008 operating results. Matt Devine, our Chief Financial Officer is here, as always with me on the call this morning. And after our brief remarks, we’ll open the floor to Q&A.

Nexstar’s 2008 first quarter revenue, broadcast cash flow and EBITDA exceeded last year’s results and fell within the guidance we provided earlier this year. The $63.7 million of Q1 2008 reported net revenue includes approximately $1.8 million of net political revenue and compares with the $62.1 million of net revenue in to 2007 first quarter. In that quarter approximately, $340,000 of net political revenue was included.

Increases in local and political, new media and retransmission consent revenues absorbed the declines in national, network compensation and trade and barter revenues. In light of what we’ve seen reported to date, our first quarter financials indicate that Nexstar continues to outperform the industry and is on plan to generate annual record operating results this year.

Let me review some Q1 highlights. New local broadcast revenue, new local direct broadcast revenue totaled $2.9 million for the first quarter. If you look at our top 10 category billing that decreased 4.4% with auto and fast food down approximately 5% and 8% respectively. Two top 10 categories registered year-over-year increases; insurance and services rising 26% and legal was up about 2%.

Our quarterly retransmission consent revenues were up 18% to $4.6 million from $3.9 million in Q1 of 2007. New media revenue rose eight fold to $2 million in the quarter compared with the $0.25 million in Q1 of 2007. We’ve previously indicated that in 2008 we expect to at least double our 2007 new media revenue, which totaled $5.1 million and we stand by that projection.

We changed our national rep firm to CAS Media for 24 of our television stations in 14 of our markets. We’ve worked with CAS since the acquisition of our CBS affiliate in Johnston Altoona and based on their outstanding performance there for us in that market, we extended our relationship with them as a means of improving our national sales performance.

We also indicated that we believe within the next few years approximately 30% of the company’s EBITDA will be generated from non-traditional revenue initiatives such as online revenues, retransmission consent and other digital revenue sources.

In 2007, for the full year, approximately 22% of Nexstar’s EBITDA consisted of contributions from these high margin revenue streams and in Q1 2008, approximately 25% of Nexstar’s EBITDA was generated from those sources.

The company’s financial results throughout the year will benefit from several visible growth drivers. We expect to garner strong shares of political advertising; further grow our high margin retransmission revenue stream; and realize a full year benefit of the conversion of our TV station websites into community portals.

We’re also expanding our new media initiatives and product offerings as well as offering new incentive programs for our advertisers and our sales staffs.

Let me now turn the call over to Matt Devine to provide some additional detail on the financials and guidance. And then we’ll both come back with more color.

Matt Devine

Thank you, Perry. I’d like to review some of the key year-over-year Q1 line items on the company’s income statement and balance sheet. Net revenue of $63.7 million in Q1 of 2008 was up approximately 2.6% versus the prior year’s first quarter.

Cash operating expenses of $42.4 million compared to $41.3 million in Q1 of 2007. Broadcast cash flow of $21.3 million increased over $20.8 million in last year’s first quarter. EBITDA of $18.1 million compared favorably to $17.7 million in last year’s first quarter.

Total gross revenue was $71.2 million versus $69.3 in Q1 of last year; gross local was $41.9 million in Q1 of this year, up a little under 1% versus last year.

Gross national revenues totaled $16.2 million this year. Political revenues of $2.1 million compared with about $400,000 in last year’s first quarter. New media revenues totaled $2 million in Q1 of 2008 compared with $300,000 in Q1 of last year.

Cash retransmission revenues of $3.3 million, was up about 27% compared to $2.6 million in Q1 of last year. Total retransmission revenue, which includes the ad spend component came in $4.6 million this year, compared with $3.9 million last year. Trade and barter posted $4.4 million this year versus $5 million last year.

The company generated a 33.5% BCF margin in the first quarter of this year. As Perry noted the growth in local, political and our digital revenues overcame declines in national network comp and trade and barter.

Nexstar’s first quarter 2008 corporate overhead cost totaled $3.2 million and included approximately $600,000 of non-cash employee stock option expense this quarter. In Q1 of 2007, corporate overhead totaled $3 million and included $500,000 in employee stock option expense.

Free cash flow, as defined in this morning’s announcement, was $4.3 million for the first quarter of 2008, compared to $2 million in the year ago quarter.

The company incurred $4.2 million of CapEx in the first quarter of this year, of which $2.8 million related to our HD build-out, compared with $5.9 million of CapEx incurred in Q1 of last year.

We project CapEx spending of $33 million in the full year of 2008 of which approximately $30 million will relate to our HD conversion expenses.

As far as the balance sheet goes, cash on hand at March 31 of 2008 was $58.5 million, compared with $16.2 million at year end 2007. Our outstanding bank debt totaled $400.8 million at March 31 of this year, compared with $356.7 million at year end 2007.

Our 7% notes totaled $198.1 million, resulting in operating company net debt of $540.4 million at March 31, 2008 versus $538.5 million at year end 2007.

Total leverage at March 31, 2008, was 6.47 turns. The October 2005 amendment senior credit facility covenants provide for a total leverage covenant of 6.75 turns through year end 2008.

At the holding company level, our 11 3/8% notes fully accreted to $130 million at March 31 of 2008, compared to $126.5 million year end 2007. Thus, total net debt including the holding company, was $670.4 million, compared with $665 million at year end 2007. That would represent leverage of 7.4 turns at the holding company level.

On April 1, Nexstar redeemed approximately $47 million of the principle amount of our 11 3/8% notes, thus insuring that they would not be applicable high yield discount obligations pursuant to the IRS code.

The principle payment was funded with cash generated from operations and from borrowings under the company’s senior secured credit facility.

Also, on April 1 of 2008, these notes became cash interest paying and as such, will now be included in the company’s total leverage calculation in accordance with our senior bank credit facility. I’d like to reiterate that at year end 2008, we are projecting total leverage not to exceed 5.5 turns at the holding company level.

Our guidance for the second quarter is net revenue between $69.5 and $71.5 million, compared with last year’s second quarter with $68.7 million.

Station operating expenses are projected to come in between $42 and $43.5 million compared with, approximately, $42 million last year’s second quarter.

Our corporate overhead should come in somewhere between $3.2 and $3.4 million compared to $3.2 million in last year’s second quarter.

That concludes the brief financial review for the call. I’ll now turn the call back to Perry for some final remarks before Q&A.

Perry Sook

Thank you very much, Matt. Great job. Let me briefly talk about the 2008 outlook and why we’re on track to achieve record operating results this year.

Throughout the year, we’ll realize strong levels of political spending and significant continued growth from each of our new revenue sources.

First, total national political spending is on track to reach record levels; broadcast television predicted to take the lion’s share of the campaign advertising dollars. Our 680 hours a week of local news content, one of our strengths, continues to attract political dollars based on correlation between news viewers and those who vote.

In addition, stations our deploying proven strategies, internally developed, to drive political revenue and revenue share and garner industry-leading shares of that political spend in our markets.

Second, we’re very confident of further growing our retransmission revenue stream. During the first quarter, we announced a new 6 year retransmission consent agreement with Wide Open West, a leading regional provider of high speed Internet, cable and telephone services.

As we’ve said before, most of Nexstar’s initial retransmission agreements that were 3 years in length were completed in 2005. As such, 47% of the contract dollars we currently earn expire before year-end 2008 and approximately 80% cumulatively of the contract dollars we currently earn expire before the end of 2009.

We’re very encouraged by the rate secured in recent agreements as well as the tone of the other retransmission consent and negotiations that are currently under way.

In addition, the staggered nature of expirations and renewals has created a scenario where we will achieve high margin revenue growth from this channel in 2008 and 2009, and beyond.

Third, our new media initiatives and the response from both advertisers and web users is proving to be unequivocal success. We’re now launching our user contributed video capability, auto classifieds and a new local search feature.

We’ll follow this later in 2008 with custom micro sites and a significant expansion of our classifieds, including job boards, real estate and personals. As such in 2008, we will have a full year benefit of the conversion of our TV station websites and the community portals and a partial year contribution from the rollout of these new features.

New media revenue will grow substantially over 2007 levels as we said earlier. Reflecting these facts we remain confident in achieving goal of increasing new media revenue in 2008 by approximately 100% from the initial $5.1 million recorded in 2007.

In the core business, and consistent with our long-term approach to strategically and selectively building our platform, in Q1 we entered into a local service agreement with Mission Broadcasting for KTVE, the NBC affiliate serving the Monroe, Louisiana-El Dorado, Arkansas market.

Mission purchased KTVE for approximately $7.8 million and Nexstar owns KARD, the FOX affiliate in that market. The purchase price represented an attractive multiple of the station’s cash flow, and given the transaction was completed in 2008, we will have new revenue from this source throughout 2008.

In addition the Nexstar organization continues to adapt, innovate and anticipate the needs of consumers and advertisers. Earlier this year we launched the nexstarGREEN and our DTV Answers initiative.

Both of these campaigns have a primary focus on localism and serving our viewers, but they are also being embraced by advertisers and sponsors resulting in new revenue streams for Nexstar with over $3 million in sponsorship commitments for nexstarGREEN and DTV Answers on the books for 2008 to-date.

Nexstar is consistently achieving record operating results and outperforming the industry by adhering to our core strategies for growth, which include building our midsized market platform; producing leading local newscast; and developing new revenue streams.

We expect that our ongoing approach to actively managing our station portfolio, developing new revenue streams and focusing on our balance sheet and capital structure will serve investors well.

With a solid portfolio of television assets, a growing new media platform, growing retrans revenue, the benefit of political advertising and the Summer Olympics in 2008 all in all, the year is shaping up to be a great year for Nexstar Broadcasting.

In closing, thanks to everyone to join us and now let’s get to your Q&A to address specific areas of interest.

Question-and-Answer Session

Operator

Our first question comes from the line of Victor Miller - Bear Stearns.

Victor Miller - Bear Stearns

Thanks for taking the call. Political up $1.5 million and retrans $700,000; new media, $1.75 million; it’s about $4 million in new revenue streams coming in. You had mentioned, Matt, I think a specific number for national, $16.2 million. It seems like out of all of the places that was the most challenging part of the business. Maybe you can talk about what’s driving that?

Secondly, Perry, can you give us a sense of how the political, given the fact Obama and Clinton are still in a protracted battle for the win there, is that been a net-positive or net-negative to your company in your mind?

And lastly, with stock here at $5.70, obviously you’ve been putting above average growth rates for sometime and cleaning up the balance sheet in a significant way. With the stock here much closer to its 52-week low than its 52-week high, but given the reality that your float is very small, is there anything you can really do in terms of repurchasing shares or is that just kind of not a discussion given the float and the size of the overall share base? Thanks.

Perry Sook

Let me start and answer those in reverse order and then Matt can certainly jump in. We discuss the possibility and potential of repurchasing shares all of the time. What is the best use of free cash flow available to us in 2008? The bulk of the free cash flow obviously was going to retire the Applicable High Yield Discount Obligation that we did on April 1, as well as finishing our CapEx build-out for DTV.

I think going forward, certainly in 2009, if we enter the year levered less than 5.5 times our CapEx will go from somewhere in the mid 30s to somewhere less than 10. If we do our job on our distribution revenue stream in new media that will backfill potentially two-thirds of the political number we expect to get this year. I think we’ve got lots of opportunities to examine what to do with our free cash flow in 2009.

As it relates to political, obviously, we operate in 3 markets in Indiana and the political spend was very, very good to us in the months of April and May.

In fact we had more political on the books in the month of April than we’ve reported that we ended the first quarter. Where it goes from here, we have marginal exposure to West Virginia and Kentucky, with our Hagerstown and Evansville stations and obviously we have a small operation in Montana.

But I think that what really needs to happen here is, from an economic perspective as it relates to generating revenues, this is not a political commentary, is that once frontrunners have been firmly established, then the money flows from their supporters, they no longer have to hedge bets within their party.

But then also the issue money can begin to form both to support those candidates and for those that take the other side of that view.

So I think for the political money to really flow across the country and across our platform, to achieve the numbers we’ve talked about, that will have to happen. I think will happen fairly quickly.

But as you know, in a Presidential election year, 75% to 80% of the political ad spend comes after the 4th of July in any event. But suffice it to say that second quarter we will ahead of our internal expectations and ahead of Q1 in terms of reported political revenue.

But the last item as it relates to national, obviously automotive was a drag on the category overall in the first quarter and I think if we look at the internal performance of our stations by affiliation, our FOX affiliates hit it out of the park.

We saw substantial share gains in our FOX affiliates. I think because of the BCS, the Super Bowl and Idol being original programming in 2008 Q1, where I think the writers’ strike had more of an effect than we realize on the mentality of national buyers in the marketplace in terms of not buying into non-original programming or limited first-runs on networks other than FOX.

So I think that we saw that. Obviously FOX represents about 20% of our portfolio and we saw across the board substantial share increases in our FOX’s stations performance in Q1.

I will say that we did make a proactive move at the end of first quarter to move approximately half of our television stations, but approximately 70% of our national revenue under the Katz’s Media and Millennium umbrella. Millennium and Continental are the two sales brands that we are now under over at Katz’s.

And we do expect, given the performance for us in Johnstown/Altoona, and the tremendous job they’ve done there, we do expect that that will be net positive to our national sales performance on a going-forward basis.

I hope that’s been response to your question. Let me know if I left anything out, Victor?

Victor Miller - Bear Stearns

No. Always very precise. Always good, thank you.

Operator

Our next question from the line of Bishop Sheen - Wachovia.

Bishop Sheen - Wachovia

Matt, I got to put you on the hot seat because you have so many moving parts I just want to make sure I understand your balance sheet, which yes, you have done a great job of arbitraging and taking down. Let’s do this snapshot of April 1, after the Synco payment, because I know you used some bank debt, some of the revolving capacity to do that. Can you walk me through the balance sheet as of April 1?

Matt Devine

The balance sheet would consist of bank debt of about – I’ll be a little off on this, because it’s an April 1 date as opposed to a 3/31 date, Bishop – but bank debt of about $350 million; 7% notes of $198 million; 11 3/8% debt of about $83 million; and cash on hand of somewhere around $15 million to net against all of that.

Bishop Sheen - Wachovia

Got it. All right. That all now makes sense.

Matt Devine

By the way, Bishop, just for your model, that weighted average cost of debt to the company is a little over 6%.

Bishop Sheen - Wachovia

Right. Okay. So you have accomplished what you wanted. But as we look at the leverage going forward, while you structurally still have a Hold Co., and you have about $83 million in the Hold Co., for the purposes of leverage, the $83 million was totally parry with the 7s now, right?

Matt Devine

It will be included in the bank’s definition of total leverage, yes.

Bishop Sheen - Wachovia

Right. So as we get out to your 5 1/2 net by the bank facility, that includes that $83 million residual of the 11 3/8%, correct?

Matt Devine

That’s correct, Bishop.

Bishop Sheen - Wachovia

Okay.

Matt Devine

And that 5 1/2 is a year-end number, as you realize.

Bishop Sheen - Wachovia

Right. So plenty of cushion against the covenant and to go into the political off year hoping that your new media is growing like topsy. I have two other questions and then I promise to let you go.

Matt Devine

Bishop, I should just add to your last thought by responding and letting you know that again, we will shed about $30 million of one-time CapEx expense as we go into 2009 and that translates to in excess of $1.00 a share in a free cash flow.

Bishop Sheen - Wachovia

If you’re going to do $33 million in 2008 of total CapEx.

Matt Devine

Right.

Bishop Sheen - Wachovia

Are you saying that you’re going to be like single-digit in 2009 in CapEx?

Matt Devine

We’ll be a number less than $10 million in 2009. That’s correct.

Bishop Sheen - Wachovia

Okay. That’s a great point. That gives you a lot of cushion as well.

Two things you said and I just want to make sure I have it right, the cash-cash part of retrans was $3.3 million part in Q1 2008 and that was against the cash-cash part of retrans in Q1 2007 of what?

Matt Devine

Let me hunt down that number for you in a second. But it was up about $1 million.

Bishop Sheen - Wachovia

Okay.

Perry Sook

It’s $3.3 million in cash in 2008 and $2.6 million in cash in 2007.

Bishop Sheen - Wachovia

That’s helpful. All right and the last thing is your direct local. You may call it something else, but it’s probably your most profitable revenue; the one that costs you the least. Can you give us a feel for where that is as a percentage of your non-political local or percentage of your total non-political broadcast revenue?

Perry Sook

It was as I reported for new local direct broadcast revenue, not new media portion, but the new local direct broadcast revenue was approximately $2.9 million in the first quarter and that was approximately 7% of our total local revenue for the first quarter.

Bishop Sheen - Wachovia

Okay. And you called that new, but I’m not sure what the definition so much of new is. But I meant just the percentage of local business you’re selling direct and you don’t have to pay a higher cost to sales via agencies, et cetera?

Perry Sook

Sure. New local direct broadcast revenue are advertisers that have never advertised on our television stations before and who also do not use an agency. It’s not like a new store comes to town or a big box opens up and that’s new revenue to a particular market but that’s not what we’d consider new local direct revenue.

But in terms of our total direct revenue as a percentage of our total local, that number runs, any given quarter all in, somewhere between 15% and 20%.

Bishop Sheen - Wachovia

Okay.

Perry Sook

It’s generally a high teens number of our revenue is total local revenue is direct revenue, non-commissionable to an agency.

Bishop Sheen - Wachovia

And how much upside do you think as a percentage of your local that has? Do you think you can improve upon that noticeably?

Perry Sook

Obviously our drive is to build. The way we’ll do it is to continue to generate new local broadcast direct revenue. And again that was $3 million a quarter and that’s certainly where we emphasize for the on-air side of our business development. The sales people can earn approximately three to a four times commission rate on new revenue they generate as opposed to just handling existing business.

Now, if you look at the other side of that, our new media revenue, in the first quarter again that’s another $2 million and the majority of that, approximately 70% of that, is non-commissionable.

So managers in our company have begun to look at local-plus new media as a true local-local revenue number in the marketplace and when you do that the increases obviously are a bigger number. But that’s another couple of million dollars that’s approximately 70% direct business at this time.

Bishop Sheen - Wachovia

Makes sense. Thank you, Perry. Thank you, Matt.

Operator

Our next question comes from line of John Kornreich - Sandler Capital.

John Kornreich - Sandler Capital

Yes, good morning, just a couple of quickies. Is your guidance for total retransmission this year still like in the $22-$23 million area?

Matt Devine

Yes. That’s a reasonable number, John.

John Kornreich - Sandler Capital

That’s total?

Matt Devine

Right.

John Kornreich - Sandler Capital

Okay and then some three quarters of it might be cash?

Matt Devine

That’s correct.

John Kornreich - Sandler Capital

And you said $30 million of new revenue, so you’re suggesting that the online revenue will be in the 7-area, $7.5 million?

Matt Devine

I think the online revenue will exceed that. Last year, John, it was $5 million and we’re saying we’re going to more than double that this year.

John Kornreich - Sandler Capital

So $10 million-ish?

Matt Devine

Yes, I think a little north of that.

John Kornreich - Sandler Capital

So actually the digital revenues will exceed $30 million? You said approximately $30 million in the release?

Matt Devine

Yes. That’s correct, John.

John Kornreich - Sandler Capital

Okay. But just refresh my memory, that 11 3/8% bond is now cash pay?

Matt Devine

That’s correct.

John Kornreich - Sandler Capital

And when is it? April 1?

Matt Devine

That’s correct.

John Kornreich - Sandler Capital

Okay. So if I’m doing my numbers right, at the end of the year, this is roughly correct I’m sure; the total debt outstanding using some free cash flow will be around $640 million area and 5 divided by 5.5.

You’re saying that EBITDA should be pressing on $120 million and SOI, therefore, adding back the corporate overhead, will be over $130 million?

Matt Devine

Yes. You’re not very far off, I think. So, we basically agree with those numbers.

John Kornreich - Sandler Capital

Okay.

Perry Sook

I think there’ll be some debt reduction along the way that will probably bring that debt number down from...

John Kornreich - Sandler Capital

Yes. I took off $30 million from the $670 million.

Perry Sook

Okay.

John Kornreich - Sandler Capital

Assuming that you’re annualizing over $10 million in online by the end of the year, which you will be, in other words the fourth quarter is nicely ahead of $2.5 million, I assume if you allocate costs that you’re plus on the margin there?

Matt Devine

Last year the margin on online was about 40% and you’re correct to say that we’re expanding that margin, John. I should tell you, as we sit here today, we have in excess of $6 million on the books already for this year and so we feel very comfortable blowing through the 100% growth number that we’re talking about on online.

John Kornreich - Sandler Capital

I’m just trying to get at the tone of business, kind of an amorphous guidance. If I look at your first quarter revenue and take out incremental political, incremental retrans, your revenues are down. So the underlying is down, flat to down. Is that the tone of “underlying business?”

Perry Sook

I think that’s probably a fair way to look at it; if you just look at traditional ad spend just local and national, ex everything else − political and…

John Kornreich - Sandler Capital

I’m including online. There’s no reason to exclude that. But I’m taking out the incremental, whatever it is, $800,000 of retrans and incremental political of $1.4 million that accounts for the increase in revenue. So therefore the underlying is about flat, which doesn’t surprise me. I mean, business is tough.

Perry Sook

Yes, flat to slightly up. If you just are adding local, national and online and comparing those numbers, yes. It’s a slightly up number; it’s a single-digit.

John Kornreich - Sandler Capital

Okay. And lastly, staying on the vein of underlying tone of business and you’re saying it’s kind of flattish, maybe up slightly. Is that the way it is right now? It’s not falling off a cliff right now?

Perry Sook

That is correct. We had a nice April. Obviously it was a high single-digit revenue month, up versus the prior year. If you strip out political and online, the base revenue was consistent with the tone for first quarter. So no, it is not falling off the cliff, John.

John Kornreich - Sandler Capital

Can we expect any asset sales by the end of the year?

Matt Devine

We hope so.

John Kornreich - Sandler Capital

Okay.

Matt Devine

As you know, we continue to have ongoing dialogue with three parties on three specific markets, but we want to be prudent divestors as we are prudent acquirers. We want to make sure that any non-strategic assets that we divest are accretive to the shareholders and we are going to stay by that tenet as we work our way through the year.

John Kornreich - Sandler Capital

I agree. If you sold a station right now for eight times on an after tax basis, because you have a low basis perhaps, you are not doing anything to de-leverage.

Matt Devine

That’s exactly right.

John Kornreich - Sandler Capital

You are helping the liquidity, but you don’t need help there right now.

Matt Devine

That’s exactly correct. And by the way, as you know, the company has in excess of $400 million of NOLs to help shelter any proceeds that may materialize related to a sale.

John Kornreich - Sandler Capital

Good. Okay. Perry, in these times when the underlying trends are pretty tough and keeping costs under control are very, very important, you’re lucky to have a CFO like you have.

Perry Sook

I don’t disagree. I couldn’t agree more. I read a great quote from Jeff Bezos from Amazon just in the last couple of days and he said frugality drives innovation and I think that’s us. If you look at our margins; if you look at our top line growth versus the prior year all-in and we grew each quarter of 2006, each quarter of 2007 versus the prior year. And we’re committed to delivering that in each quarter of 2008 and did in Q1.

There are not a ton of other companies out there, I think, that have delivered top line growth now for three straight years or will for three straight years and these three years, in particular, very few I submit. But I will tell you that we are very focused on costs; our general managers will attest to that fact, and I couldn’t agree more.

I will also tell you on the divestiture front that Matt is being very rigorous with these prospective buy-side candidates to make sure the money is good and that any deal we would reach would stick. So that’s what’s taking the time to make sure that they’ve got the color of money in front of us.

John Kornreich - Sandler Capital

You must be scratching your head after you released your earnings this morning stock went down 6% immediately.

Perry Sook

Yes. We actually haven’t been to a terminal to look at it. But that surprises me.

John Kornreich - Sandler Capital

Okay, thanks a lot for your help.

Perry Sook

Sounds like a buying opportunity. Thank you.

Operator

Our next question from the line of Edward Atorino - Benchmark.

Edward Atorino - Benchmark

Could you talk about the ad categories? Business is mixed. So where are the pluses and minuses? Auto, obviously, has been struggling.

And secondly, could you talk a little bit more about the green initiative? Those revenues I presume are in the normal TV ad categories. What is the growth of that area and what is the outlook for the green category?

Perry Sook

First the categories: if I look at our Q1 numbers, I think we reported automotive was down although if you look among the nameplates predictably the foreign nameplates were up − Lexus and Mazda and Acura, folks like those − but the automotive category was down as we reported.

Fast food down; we saw attorneys, insurance up;, department and retail stores basically flat; that’s a relatively good sign. Telecom, basically flat, given the tremendous spending that we saw a year ago we think that’s a pretty good sign as well. Furniture, medical, again are all in the plus or minus 1% or 2%, nothing of any great moment there.

As it relates to the green initiative, this is a program that we put together to generate not only awareness in our communities, but generate a unique sponsorship opportunity for all of our television stations and our online platforms.

Anecdotally we are attempting to pursue non-traditional revenue and you are right, if the revenue shows up online it will go into the online number, if it shows up on-air, goes into the on-air number.

Our most recent sale was in Northwest Arkansas with our NBC and FOX combo, who basically sold a campaign to General Electric in conjunction with Wal-Mart to talk about compact fluorescent light bulbs and other green initiatives, recycling and low-power mode in the home.

But basically we produced proprietary local content on each of television stations each week. And then we also have proprietary content online and those stories accumulate as they air so we’re building a repository.

In our local markets in Springfield, Missouri we collected a mountain of old computers to recycle and many of the stations have initiated local outreach opportunities. Again, it’s about using the television stations and the online platform to raise awareness.

But also what you can do and it’s obviously been very timely with $3.95 a gallon gasoline and all of that. But the advertisers that we have targeted have been non-traditional and they have been energy companies and they have been natural foods companies.

Again, I mentioned GE and Wal-Mart, vendor dollars in North-West Arkansas that normally would not be coming through our tradition ad channel. We’re modeling companies and energy companies, as I said they’re pretty much across the board the kinds of folks that have been attracted to this initiative.

Edward Atorino - Benchmark

What’s the dollars from that again?

Perry Sook

On the books for 2008 if you look at the green, it’s approximately $3 million. And we have our DTV initiative, which again is trying to educate viewers on the DTV transition and we have turned out those into responsible elements both on-air and online and that’s about $1 million of revenues as well.

Both of these campaigns were just launched in the first quarter of 2008. We think the advertiser reception has been very strong.

Edward Atorino - Benchmark

Yes. On the political front, I know it’s a guess word, but any target number do you want to throw out? In terms of political? It could be in the 30s, 20s?

Matt Devine

We’re going to stand by our previous prediction that the gross political number for this year will come in somewhere in the mid-30s.

Edward Atorino - Benchmark

Yes. It should be fun. And now all we need is a base of business a little better.

Matt Devine

Yes.

Edward Atorino - Benchmark

Thanks so much.

Operator

Our next question comes from the line of Steve Shapiro - GoldenTree Asset Management.

Steve Shapiro - GoldenTree Asset Management

Perry, if you look at the totality of the business, local seems to be doing okay, national’s obviously down. We don’t know where that’s going to bottom. You have new revenue streams, obviously, retrans is very solid and demonstrable. Digital and new media look promising, but offer a small base right now.

As you look at everything in total, Perry, how does the quality of the business compare to 3 years ago, in your mind? Is it as good a business as it was 3 years ago?

Perry Sook

In 2005, we were in a unique position of having very noisy, public disputes with cable companies and we took several of our stations off the air. So compared to what we went through in 2005, so far 2008 has been a breeze.

Again I think we began to look at this business and say, okay if the traditional ad channel is mature and/or not growing at rates that investors would consider to be attractive, what else can we do to leverage our bricks and mortar presence in these marketplaces; our local content and all of our feet on the street? And that’s where new media and distribution were born. We’re now in the first quarter. 25% of our EBITDA came from things other than selling commercials on our TV stations.

I set a goal with our managers at the beginning of 2006 and said our goal was within 5 years it’s 30%. I think it will be 30% within 3 years and I think it will be 40% plus within 5 years.

I think if I can develop this concept into reality where we have 3 distinct contributing revenue streams all with different growth characteristics. It’s multi-platform for a reason that we don’t want to be wholly dependent on any one platform on going-forward basis.

I think we are in a recession. I think that the business is cyclical and we do sell advertising through a recession, recessions end, and I would expect that it will end probably toward the end, if not at the end of this year and I do expect that national advertising will improve from the current state of where it is.

None of the trends that we look at have lines that are going straight down. They go up and they go down. That’s taking a very long view going back to the start of company in 1996 or the start of my ownership career in 1991.

I think the business is cyclical and I think we’re in a tough part of the cycle. But again that’s why we were focused on balance sheet improvement and strength there to make sure that we are in a good position to ride through this.

And again, I look at 2009 and I say look at the free cash flow that this company is going to generate. For those of us that obviously read financial statements from the bottom up, that’s a very good thing. I’m very enthusiastic about the opportunities that that will create for us.

Steve Shapiro - GoldenTree Asset Management

Okay. Thanks.

Operator

Our next question comes from the line of Avi Steiner - KBC Financial.

Avi Steiner - KBC Financial

Thanks, gentlemen. A couple things: one, based on, at least how I interpret your guidance, it looks like you going to be bumping up against the 6 3/4% covenant for the second quarter. And I was wondering if I’m right if you could help me bridge how you get there?

Is it asset sales; vendor term change? Some sort of equity fusion? And then if you could, tell me if you’re talking with the banks on an amendment?

Matt Devine

We said all along that we’ll be in compliance with that covenant at the end of Q2 by utilizing what we were calling prudent cash management techniques. Things that allow the company to backload, if you will, vendor payment whether it is related to CapEx, or other items.

We continue to believe that we will be in compliance with that covenant at June 30, as well as 9/30 and 12/31. And we have not baked in any asset sales to give us additional cushion if you will, related to that compliance.

I think any asset sales that may materialize obviously the proceeds would go against outstanding debt. But again we’ve said consistently that we feel that we can cash-manage our way to covenant compliance.

Avi Steiner - KBC Financial

Okay. And you’re not talking with the banks now? Is that a fair statement?

Matt Devine

No. I don’t see any reason to talk to the banks now, Avi. We all know that it would be a very, very expensive discussion to have with the banks. I just don’t see any reason to do it.

Avi Steiner - KBC Financial

Okay. I may follow-up with my guidance later or at least my model. Couple of other things: along the lines of plans for 2009 and then hopefully the better free cash flow on the CapEx decline, would you look to address the balance of the Hold Co. notes at that point?

Matt Devine

I think as we continue to de-leverage the company, we will get to a point obviously where if our leverage is below five to one we have a restricted payment basket that calculates to several hundred million dollars.

We will look probably at that time at our balance sheet and determine what the best use of our free cash flow will be and we are always looking to bring down our cost of capital.

But we’re really fast-forwarding the year or so out there, Avi and I really couldn’t give you any commitments or promises, other than the fact that we are keenly aware of trying to keep our cost of capital down.

Avi Steiner - KBC Financial

That is perfect. And I’m sorry, perhaps these are all debt-related. Did I hear you say earlier, and this my the last, that April 1 pro forma for the AHYDO payment, that bank debt was $350 million, did I hear that correctly?

Matt Devine

Yes, you heard it correctly. I misspoke. We made that approximately 50 AHYDO payment on April 1 out of the cash that we had on hand. That’s my fault; I apologize to everyone.

Again I don’t have an April 1 financial in front of me. But I know we made about a $5 million bank repayment on April 1, I believe it was. And so, I expect the number I just shared with you would be a number that we would get to in Q2.

Avi Steiner - KBC Financial

I appreciate that again. Thanks a lot.

Operator

Our next question is a follow-up question from the line of Bishop Sheen - Wachovia.

Bishop Sheen - Wachovia

Poor Matt, we just keep pinning you down. Avi really covered what I was going to zone in on but just once again, that $350 million bank that you said pro forma April 1. That’s really not pro forma, the take down of the sinker. That’s where you think you are going to get to by June 30?

Matt Devine

Yes. That’s more accurate, Bishop.

Bishop Sheen - Wachovia

Where you think you’re going to get to?

Matt Devine

Yes.

Bishop Sheen - Wachovia

You are going to get there by paying it down with free cash flow?

Matt Devine

It’s going to be a combination of items obviously; it’s going to be significant debt reduction this quarter, again due to some prudent cash management techniques.

Bishop Sheen - Wachovia

Right.

Matt Devine

In addition to growing EBITDA in the quarter.

Bishop Sheen - Wachovia

Okay. So again not to hold your feet to the fire, but just playing bigger than a bread box, where should I think of the actual bank debt at April 1 after you make the sinker? If you use the cash and bank debt to pay the sinker?

Matt Devine

Yes, a number closer to $390 million.

Bishop Sheen - Wachovia

That’s what I’m looking for.

Matt Devine

Yes. Again, I misspoke. I apologize for that.

Bishop Sheen - Wachovia

Okay. And, then again, you think you can hit that, if I remember, through June 30, it is a 6.75 covy?

Matt Devine

Right.

Bishop Sheen - Wachovia

It can go to 6.5 until September 30, I think?

Matt Devine

That actually doesn’t go to 6.5 until December 31 of this year. It’s 6.75.

Bishop Sheen - Wachovia

6.75 through the whole back half of the year?

Matt Devine

Right.

Bishop Sheen - Wachovia

And that you’re going to hit because of all of the carve outs, et cetera, with threading the needle very prudent cash management?

Matt Devine

Yes. That timing, if you will, will help us as we go forward through the course of the second quarter.

Bishop Sheen - Wachovia

Right. It would seem intuitively that June 30 is the challenge. September 30 should be a lot easier because of the political surge? Probably correct?

Matt Devine

That’s accurate.

Bishop Sheen - Wachovia

Okay. So that’s the Matt balancing act so to speak and that’s the one to keep our eye on.

Matt Devine

Okay.

Bishop Sheen - Wachovia

Thank you.

Operator

Gentlemen, we have no further questions at this time. I’ll now turn the conference back to you.

Joseph Jaffoni

Thanks again everyone for joining us we look forward to reporting our second quarter results in about 3 months’ time. If you have any specific questions, please feel free to contact us after the call.

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Source: Nexstar Broadcasting Group Inc. Q1 2008 Earnings Call Transcript

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