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Edited Transcript of NXST earnings conference call or presentation 26-Feb-20 3:00pm GMT

Q4 2019 Nexstar Media Group Inc Earnings Call

Irving Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Nexstar Media Group Inc earnings conference call or presentation Wednesday, February 26, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Perry A. Sook

Nexstar Media Group, Inc. - Chairman, President & CEO

* Thomas E. Carter

Nexstar Media Group, Inc. - Executive VP & CFO

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Conference Call Participants

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* Aaron Lee Watts

Deutsche Bank AG, Research Division - Research Analyst

* Craig Anthony Huber

Huber Research Partners, LLC - CEO, MD, and Research Analyst

* Daniel Louis Kurnos

The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* John Kornreich;J.K. Media;Partner

* Kyle William Evans

Stephens Inc., Research Division - MD

* Steven Lee Cahall

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Joseph N. Jaffoni

JCIR - Founder & President

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Presentation

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Operator [1]

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Good day, and welcome to our Nexstar Media Group 2019 Fourth Quarter Earnings Conference Call. Today's conference is being recorded.

I would now like to turn the conference over to Joseph Jaffoni. Please go ahead, sir.

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Joseph N. Jaffoni, JCIR - Founder & President [2]

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Thank you, Travis, and good morning, everyone, and thank you for joining Nexstar Media Group's 2019 Fourth Quarter Conference call.

I'll read some safe harbor language, after which we'll get to management's commentary and your questions and answers. All statements and comments made by management during today's conference call, other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Nexstar cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during the call. For additional details on these risks and uncertainties, please see Nexstar's annual report on Form 10-K for the year ended December 31, 2018, Tribune Media's annual report on Form 10-K for the year ended December 31, 2018, and each of Nexstar's and Tribune Media's subsequent public filings with the Securities and Exchange Commission.

Nexstar undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that, it's now my pleasure to turn the conference call over to your host, Nexstar Chairman, President and Chief Executive Officer, Perry Sook. Perry, please go ahead.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [3]

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Thank you, Joseph, and good morning, everyone. Thank you for joining us today to review Nexstar's fourth quarter, our nearly complete integration of the Tribune Media operations, our recent strategic station transactions, the completion of new multiyear retransmission consent agreements and our most recent return of capital and leverage reduction initiatives. Taken together, Nexstar entered 2020 supremely positioned to leverage our scale, our focus on operational excellence and the already active political cycle to generate significant free cash flow growth and materially reduce our leverage and drive total shareholder returns. Our Chief Financial Officer, Tom Carter, is with me as always this morning.

2019 was a remarkable period for Nexstar in its 23-year history as throughout the year, we deployed a broad range of our proven M&A, integration, financing, operating and other strategies to create new, near and long-term value for shareholders. In mid-September, we closed a highly accretive acquisition of Tribune Media, creating the largest U.S. television broadcast station group with truly national reach and coverage, with Nexstar owned or operated stations now reaching approximately 69 million U.S. television households and combined web traffic that would be the nation's top site for news and information as ranked by Comscore.

The transaction also benefits our free cash flow visibility and profile from the consistent and meaningful contributions from our 31.7% TV Food Network ownership stake and our positive 9-digit cash flow from our national cable network, WGN America.

At closing, we increased our synergy guidance to approximately $185 million from approximately $160 million. And to date, we've realized nearly all of that target, and we fully expect to reach or exceed the full $185 million before the end of Q3.

Operationally, we acted quickly to integrate the Tribune Media assets into Nexstar's platform and have held our promise to expand relevant local programming and put our best teams on the front line to capitalize on the many growth opportunities we see throughout the portfolio.

Since closing, we've hired or promoted 11 general managers, 2 regional vice presidents and 4 finance department executives to support our expanded operations, and we named 4 senior corporate executives to manage content acquisition, WGNA, distribution, sales and corporate communications.

Today, the Nexstar Nation is comprised of more than 16,000 talented team members across America, united by a common commitment to localism, integrity, innovation and growth. During the year, we also entered into deleveraging purchase and sale agreements with Fox Television; completed new multiyear retransmission consent agreements representing approximately 70% of our subscribers; entered into new long-term network affiliation agreements with CBS, FOX and NBC; and realigned our digital businesses to drive future growth and profitability.

With the continued sharing of best practices between Nexstar and the former Tribune organization, coupled with key factors, including the Super Bowl on FOX, Summer Olympics on NBC, double-digit distribution revenue growth and expected record levels of 2020 election cycle spending, Nexstar expects to generate pro forma average annual free cash flow of approximately $1.175 billion for the 2021 cycle or $25.50 per share based on our basic share count of 45.7 million outstanding Class A common shares. That's an increase of over 15% compared to our guidance of pro forma annual average free cash flow for the '19/'20 cycle of $1.02 billion.

Our robust free cash flow from operations will be bolstered by meaningful proceeds from recent purchase and sale agreements and reinforces our confidence in attaining our post-Tribune closing priority of reducing Nexstar's net leverage ratio to 4x or below by the end of this year. With our integration strategy now playing out, I'm proud of the way the 2 organizations have come together as well as the enterprise-wide passion for professional excellence, all of which is reflected in our new 2021 guidance.

On the local programming front, as promised, we expanded local news programming in our Portland and Sacramento markets, while launching a new Capitol Bureau in the state of Missouri. We also began preparations for the summer 2020 launch of News Nation, the WGN America Primetime National Newscast, which will reach approximately 75 million U.S. television households and will be complemented by our new around-the-clock mobile news app, newsnationnow.com. News Nation will leverage the local market and regional expertise and resources of Nexstar's 5,400 local journalists, which is more than any other broadcast or cable network and 110 local news rooms around the country. By reallocating financial resources from WGN's syndicated programming towards News Nation, we intend to provide viewers with fact-based news and information without bias or opinion, while delivering attractive marketing solutions for national advertisers.

Nexstar's 2019 fourth quarter financial results mark the end of an outstanding year for the company as we delivered another period of record off-cycle political year operating performance with top line, profitability and cash flow metrics exceeding consensus expectations, while further extending our long-term record of delivering enhanced shareholder returns.

During 2019, we returned $82.8 million to shareholders in the forms of dividends. And in the fourth quarter, we allocated $45.1 million of cash from operations to opportunistically repurchasing approximately 440,000 Nexstar shares at an average purchase price of $102.57 per share which reduced our basic share count to 45.7 million outstanding Class A common shares at year-end. At the same time, the active management of our capital structure and free cash flow growth has provided us with the financial flexibility to support our leverage reduction and return of capital initiatives, including additional share repurchases, dividend payments, debt reduction and strategic business investments.

To this point, in addition to our share repurchases, last month, our Board of Directors approved a 24.4% increase in the quarterly cash dividend to $0.56 per share beginning this first quarter, marking the seventh annual consecutive rise in our cash dividend. We previously noted that upon completing the Tribune transaction, we were very near the ownership cap, but we saw the opportunity to continue to optimize our portfolio and free up some national cap space, in some instances, to position us in new strategic markets or markets where we believe we can generate greater growth and upside. In this regard, in Q4, we announced a set of station transactions with FOX. In addition to this -- the strategic benefit of those transactions, the FOX transaction will contribute to our ability to significantly delever in the near term as the result of approximately $240 million after tax proceeds, which we will receive later this quarter.

With respect to our expectations for net retransmission growth in the low to mid-teens percentage range in 2020, in the second half of 2019, we entered into new long-term affiliation network agreements with CBS, FOX and NBC. And as a result, over 80% of our Big 4 affiliations are now contracted through December 31, 2021, and over 70% of our Big 4 affiliations are contracted through December 31, 2022. At the same time, we successfully finalized new retransmission and distribution contract renewals, addressing approximately 70% of our subscriber base. And taken together, the affiliation renewals, which also include our OTT agreements and new retrans contracts, provide us with uniquely clear visibility for our net retrans revenue growth expectations in 2020 and beyond.

Turning to our fourth quarter results and reflecting the continued strength of Nexstar's legacy operations and the first full quarterly contribution from the former Tribune Media assets, we delivered double-digit growth in all of our nonpolitical revenue sources, including organic growth in core advertising during the quarter.

For the fourth quarter, net revenue rose 37.9% to $1.1 billion, despite a 73.9% year-over-year decline in political advertising. Transaction-related revenue gains, including the inclusion of WGN America and recent distribution fee renewals, drove the 56.7% rise in distribution revenue to a quarterly record of $445.8 million and a 14.2% increase in digital revenue to $74.3 million was also a quarterly record for Nexstar.

Notably, early active spending by presidential and gubernatorial candidates of both parties in the fourth quarter, combined with our expanded scale in key primary space, resulted in record fourth quarter odd-year political revenue spending of $36.5 million or more than double the comparable 2017 fourth quarter levels. Excluding political revenue, our fourth quarter net revenue would have increased approximately 62%.

In Q4 of '19, 16 of our top 25 ad categories were up on a same-station basis, which led to a 1.2% rise in same-station core ad revenue. In addition, Nexstar's local sales initiatives continue to generate healthy levels of new business revenue with Q4 new-to-television advertising revenue rising on both a quarterly sequential and year-over-year basis. Our sales teams generated $17.5 million of new-to-television Q4 revenue. That's a 9% rise over the prior year, and we see upside in this new-to-television ad revenue metric in 2020 as the former Tribune stations more fully adopt Nexstar's sales disciplines and we transition their sales teams to our Nexstar incentive plans.

With respect to political, our fastest-growing ad category had exceeded our budgets and benefited from the advent of spending of new candidates entering the presidential race as well as stronger-than-anticipated spending for the Louisiana gubernatorial race in the fourth quarter and continued healthy levels of PAC issue and proposition spending around the country.

Total combined fourth quarter digital and distribution fee revenue of $520 million rose approximately 49% over the prior year period and accounted for 47.3% of net revenue compared to 43.8% of net revenue in the prior year period. The year-over-year increase in fourth quarter nontelevision ad revenue reflects new distribution agreements reached in the second half of 2019 and the legacy Tribune Media revenue gains related to the after-acquired clauses in our retransmission consent contracts. Also added in is the WGN America carriage revenue and our realigned digital operations. With our successful 2019 renewal of approximately 70% of our subscriber base with approximately 15% of the base to be renewed in 2020, our significant net retrans revenue growth in 2020 will complement the strong political growth we're also seeing this year.

As I noted earlier, 2020 is off to a strong start in terms of core political and distribution revenue gains, and we expect to make further meaningful progress towards meeting our leverage targets in Q1. Our commitment to our shareholders is reflected in our recent dividend increase and fourth quarter share repurchases. And as we reduce leverage in the share count, we will be even better positioned to allocate our free cash flow to other shareholder-friendly initiatives.

Our ongoing dialogue with the investment community regarding our unrelenting focus on creating near- and long-term shareholder value is borne out in 2 data points that I'm proud to share with you this morning. As reported by Kiplinger and using the Russell 1000 as its universe of stocks, Nexstar ranked fifth overall of the top 10 performing stocks of the last decade with a total shareholder return of 2,974%. In 2019 alone, we delivered a total shareholder return of 52%, clearly outpacing the market. So while I started my comments this morning reviewing the activities and initiatives we undertook in 2019 to establish our next phase of significant growth beginning in 2020, I believe these data points underscore the fact that Nexstar is a company managed by shareholders for our shareholders.

With that, I'll turn the call over to Tom for the financial review and update. Tom?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [4]

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Thanks, Perry, and good morning, everyone. As outlined in this morning's press release, the actual results for the 3 months ended December 31, 2019, reflect the company's legacy Nexstar broadcasting and digital operations and a full quarter results -- full quarter result from Tribune Media stations, which we acquired on September 19, 2019.

Fourth quarter 2019 revenue from WGN America, also acquired in the Tribune transaction, is included in core advertising revenue and distribution fee revenue. A full quarter contribution from Nexstar's 31.3% ownership stake in TV Food Network and other investments acquired in the Tribune transaction is included in the full income statement on Page 7 under income or loss on equity investments net.

The comparable 3-month period ended 12/31/2018 reflects Nexstar's legacy broadcasting and digital operations. All actual results presented herein reflect the impact of $29 million and $5.5 million of onetime transaction expenses incurred in the quarters of December 31, 2019, and 2018, respectively.

With that, I'll start with a review of Nexstar's fourth quarter income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance. On a combined company basis and pro forma for the divested stations, fourth quarter same-station net revenue was down 11.8% or $137 million, due largely to the $187 million reduction in political advertising as compared to the fourth quarter of 2018.

Same-station core advertising was up 1.3%. Distribution fee revenue was up 12.8% on a same-station basis, and continuing digital revenues were down 5.7% on a same-station basis due to our continued deemphasizing of nonprofitable and marginally profitable business products. On the digital side, however, local station website revenue was up 13.9% on a same-station basis.

Total net revenue, excluding political, was up 4.9% on a pro forma same-station basis. Fourth quarter station direct operating expenses net of trade expense were approximately $432 million, up from $274 million in the prior year, reflecting the full quarter impact of incremental expenses related to the Tribune operations and the growth in budgeted increase in network affiliation expense as partially offset to our rising distribution revenue.

Same-station pro forma fixed expenses, excluding programming expenses, were down 4.7% over the previous year as our cost reduction efforts begin to take hold.

Fourth quarter station SG&A was approximately $197 million related to the fourth quarter of Tribune operations, while corporate expense was $64 million, inclusive of $9.6 million of stock-based comp and $29 million of onetime transaction expenses. When excluding the noncash comp and onetime transaction expenses, recurring corporate expenses were approximately $27 million, which came in better than our guidance we provided on the third quarter call of approximately $30 million.

Fourth quarter operating cash taxes were $46.9 million, while ongoing CapEx and transaction CapEx related to the Tribune operating system transitions totaled $64.5 million -- I'm sorry, $62.9 million. Included in that $62.9 million is $25 million associated with Tribune station integration and conversion expenses, cap expenses during the quarter.

Spectrum-related CapEx totaled approximately $23 million, which was partially offset by $16.3 million of reimbursements from the government on the FCC repack program. As a reminder, we anticipate being fully reimbursed for all spectrum repack-related CapEx over the course of the year. Fourth quarter CapEx came in consistent with our initial expectations of approximately $62 million.

Fourth quarter total interest expense amounted to $106.8 million, up from $53 million in the prior year, with cash interest of approximately $101.8 million compared to $52 million in the last year. All of this, obviously, is associated with the debt incurred for the Tribune transaction.

Fourth quarter broadcast cash flow of $417 million as well as adjusted EBITDA of $408 million and free cash flow of $203 million pre-transaction expenses, exceeding consensus expectations and primarily reflect transaction-related growth and distribution agreement renewals executed in the second half of 2019.

Looking ahead for the combined company, we project recurring cash corporate overhead exclusive of stock comp and transaction cost to be approximately $40 million for the first quarter, and we're on track to achieve a run rate corporate overhead of approximately $120 million by year-end, which is consistent with the guidance we provided upon closing of the Tribune transaction in September of 2019.

Noncash comp for the quarter is expected to be approximately $10 million and $45 million for the full year. Transaction expenses will be approximately $10 million to $15 million for the first quarter and will decline during the remainder of the year.

First quarter operating cash taxes are estimated to be approximately $40 million, and we're reiterating our prior guidance of approximately $350 million for the full year. First quarter CapEx should come in at approximately $35 million and $160 million for the full year, which is slightly above our initial guidance due to onetime capital associated with the build-out of new studios for WGN America's Primetime National Newscast, News Nation, which is expected to launch this summer.

Finally, we expect Nexstar's cash interest expense to approximate $95 million for the first quarter and less than $400 million for the full year, an improvement in our previously provided guidance due to anticipated debt reductions during the year.

Total net leverage at 12/31/19 was 5.18x, and the first lien covenant was 3.52 versus a covenant of 4.25. We expect leverage to reduce consistently throughout the year. And in that vein, in the near future, we expect to close on the sale of 2 stations to FOX and the purchase of 1 station from FOX which will net the company approximately $240 million of available cash, which we expect to use for debt reduction.

Net debt, as I mentioned before, at 12/31, increased to $8.26 billion compared to $3.84 billion in the same period of last year, reflecting the financing of the Tribune transaction. During the fourth quarter, we took actions to further lower our cost of capital and extend maturities as we completed the offering of approximately $665 million of 5 5/8% senior notes due in 2027. These notes were issued with the same terms as our existing $1.12 billion aggregate principal amount of 5 5/8% notes also due in 2027 as part of the original Tribune financing.

The net offering proceeds together with the cash on hand will be used to redeem Nexstar's 6 1/8% senior notes due in '22 and 5 7/8% due also in '22 and to pay related premiums, fees and expenses. By opportunistically accessing the capital markets, we were able to retire the most expensive pieces of our unsecured and near-term debt bonds -- I'm sorry, most expensive pieces of our unsecured debt. And our nearest term bonds are now due in 2024, at which time we will have materially reduced total net leverage.

Nexstar has consistently demonstrated prudent use of leverage and its ability to source capital at attractive rates to support our strategies for growth and the enhancement of shareholder value. Today, our capital structure weighs the proper amount of fixed and floating debt and attractive weighted average cost of capital and prepayment and refinancing flexibilities.

In addition to the balance sheet and capital structure improvements, Nexstar leveraged its strong free cash flow generation to invest in our broadcast and technology platform while enhancing shareholder value through our return of capital and leverage reduction initiatives. In this regard, for the year, we returned $82.8 million to shareholders in the form of dividends. And in the fourth quarter, we allocated slightly in excess of $45 million of cash from operations to opportunistically repurchase 440,000 shares of Nexstar's stock at an average purchase price of $102.57. That reduced our basic share count to 45.7 million outstanding Class A common shares at year-end.

In terms of capital allocation, we continue to strategically allocate our free cash flow in a manner that has resulted in substantial growth for the company and delivered significant value for our shareholders, while also reinvesting in the business, our local programming and our employees.

Over the last 3 years, we have completed 2 transformative transactions that were tremendously accretive to free cash flow, nearly tripling the size of the company. At the same time, we've allocated approximately $195 million towards opportunistic share repurchases at attractive prices and returned over $200 million to shareholders in the form of quarterly cash dividends.

Looking ahead, with continued double-digit growth in distribution revenue and what many expect to be substantial spending relating to the upcoming 2020 presidential election cycle, we have excellent visibility to delevering -- to delivering on our free cash flow targets.

For the 2020-2021 cycle, Nexstar expects to generate pro forma average annual free cash flow in excess of $1.175 billion or $25.50 per basic share, marking an increase of over 15% compared to our pro forma guidance -- pro forma average annual free cash flow guidance of the '19/'20 cycle of $1.20 billion. And additionally to our recently upsized dividend, we remain committed to allocating a significant portion of our free cash flow towards leverage reduction and are confident in reaching our target to reduce leverage to less than 4x by 12/31/2020.

In summary, our integration, synergy realization and operation plans are generating results; our capital structure is in great shape from a cost of capital maturity and ability to quickly address leverage; and our service to our local communities and local and national advertisers has never been stronger. Our disciplines in these areas have driven significant growth as well as consistency and visibility to our results. As such, we remain confident in our ability to deliver on the value of Tribune transaction through 2020, which will enable us to enter 2021 with an eye towards increased level of return to capital to shareholders.

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

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [5]

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Thank you, Tom. Our results since closing the Tribune transaction have served to fortify the high expectations for the great value this transaction has and will create for Nexstar shareholders. Over the past 23-plus years, we have completed, successfully integrated and generated growing value for shareholders from 36 separate M&A transactions, which have increased our scale, diversified our portfolio and enabled us to remain highly competitive in today's media and technology ecosystem.

From our shareholders' standpoint, the Tribune transaction will be our biggest and best transaction to date in terms of driving significant free cash flow accretion. Given the significant free cash flow from operations, we are aggressively reducing our leverage, and we intend to increase our return of capital to stockholders, while investing in our business and team members to improve our service to our viewers and advertisers. This focus, combined with our time-proven operating and integration strategies, will enable us to extend our strong long-term record of shareholder value creation.

We look forward to reporting on our continued growth and accomplishments throughout 2020. And on behalf of the more than 16,000 employees of the Nexstar Nation and our management team, thank you for your continued interest, support and for joining us today.

So now let's open the call to Q&A to address your specific areas of interest. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Steven Cahall, Wells Fargo.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [2]

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Maybe first, Tom, on the free cash flow guide, does that include any implied increase to your expectations for free cash flow in 2020? Or is the new guidance really about 2021 over the '19/'20 guidance with '21 being higher than '19 due to like net retrans or cash interest?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [3]

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I would say, obviously, the majority of it comes from the difference between '19 and '21. There is a slight increase in '20 because of the final disposition of the retransmission agreements at the end of last year, which do positively affect '20. But clearly, the majority of that increase happens between '19 and '21.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [4]

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Okay. And then I figured I'll try to pin you all down, if I could, on political. I think your pro forma '16 number or maybe it's '18 number is a little below $400 million. Any sense of what sort of percent increase you might be able to realize on that? And I was also just wondering if you know what percent of your revenue is thus far from Michael Bloomberg?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [5]

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I'll answer -- I'll take the first question. You're correct. The pro forma same station '18 comparable will be slightly less than $400 million. And given the relatively small sample size that we have so far and while it's positive, again, it's a low teens percentage of where we think things will come out from the first quarter relative to the entire year. We're expecting and the guidance includes a high single-digit growth in political advertising above 2018 levels.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [6]

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As it relates to Bloomberg, it's a good lead portion of our first quarter money, but there's some offset because we think there's some candidate and PAC money that's probably on the sidelines because of his spending right now. So -- and again, our -- as Tom said, the game is played in the 2 months before the November election. That's where 50% to 60% of our political revenue for the year will be realized. So we're off to a very strong start. In fact, we made our first quarter political budget for the quarter yesterday. But again, as Tom says, it's, in the scheme of things, a relatively small sample size to the overall year.

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Steven Lee Cahall, Wells Fargo Securities, LLC, Research Division - Senior Analyst [7]

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And then last one for me. Once you hit that leverage target of 4x or below, I'm guessing you don't have a lot of appetite to deleverage further. You're not too far from the cap. So I mean, should we kind of be thinking about 100% of free cash flow going back to shareholders thereafter?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [8]

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I would say 100% may be a bit aggressive, but we would certainly allocate more of our free cash flow to shareholders. And I think that's a topic for another day and several Board meetings before we get into any sort of situation like that. But I will tell you -- and as we experienced in the fourth quarter, we're not sitting on our hands with regard to shareholder -- return of capital to shareholders. If there's opportunities to do it efficiently and at what we believe to be reasonable returns, we're not going to have to wait, we can allocate some capital along the way to additional shareholder support.

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Operator [9]

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Our next question comes from Aaron Watts, Deutsche Bank.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [10]

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It sounds like it was a good quarter and the fourth for core advertising. Can you talk a little bit how auto performed underlying that? And also then what you're seeing in the first quarter so far for core and how auto is performing there, too?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [11]

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I can tell you that auto was down the lowest of single digits in the fourth quarter, which was its best performance on a relative basis in 2 years. And I would say that first quarter trends are about the same in terms of auto spending on the television stations.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [12]

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And then more broadly, Perry, how does overall core look relative to the 1.3% growth you saw in the fourth quarter?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [13]

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I think that we're kind of on the same trajectory, maybe a little less than that. There's probably going to end up being more than budgeted political advertising in the first quarter. But -- and we did a great job with the Super Bowl on our FOX affiliates. In fact, our Kansas City station -- Kansas City FOX station airing the game in the fourth quarter had a 97% share of audience, which in my 40 years of being in the business, I've never heard of a 97% share. So people obviously still watch broadcast television for big events and local news. And so I think our first quarter trajectory might be a little bit lower than the 1.2%, 1.3% same-station growth we had in the fourth quarter, but certainly, within our budgeted expectations.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [14]

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And we're still curious what the other 3% were doing.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [15]

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Yes, exactly. And separately, can you talk a little bit about the underlying subscriber base in the fourth quarter. What you're seeing in terms of changes in your MVPD distribution there?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [16]

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Sure. Well -- and actually, I appreciate that question. Fourth quarter -- and what we're going to talk about today is the first time that we're including Tribune in our results. And for the last year, on a same-station consolidated basis, including Tribune, our subs for the last 12 months are down 3.5%. Obviously, included in that 3.5% is a significant blackout on the legacy Nexstar stations for a 2-month period in Q3. And if you ex out those subscriber losses and try and isolate that and laser that out, it was down 2.2%. We're happy with those results. Tribune has a little bit different portfolio than Nexstar did in terms of composition and OTT, et cetera. But those are well within the parameters of our expectations for a combined subscriber performance.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [17]

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And that's balancing the traditional MVPDs with the over-the-top contribution today?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [18]

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That is -- you should think about that as total subscribers, yes.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [19]

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Okay, great. That's helpful.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [20]

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Again, we're seeing significant growth -- continue to see significant growth in the OTT, which partially offsets the decline in more -- in traditional MVPD subscribers.

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Operator [21]

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Our next question comes from Dan Kurnos, Benchmark Company.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD & Senior Equity Analyst [22]

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Nice print as usual, guys. Just, Tom, maybe just digging down a little bit more on that. Given that there is a little bit of difference in composition of the Tribune portfolio, just how are you thinking about maybe either geographic, large markets, small market differences going forward as it relates to sub count? And then just in terms of the News Nation launch, I don't know, Perry, if you want to just color that up a little bit more for us. Obviously, it'd be a little bit smaller, but probably invest in that first half and then just kind of your thoughts on how that can expand and help WGNA.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [23]

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Sure. I mean, first of all, it gives us content that we will own as opposed to content that we rent from others. It will allow us to have intellectual property and content to develop a robust newsnationnow app, none of which WGN America has currently today. So we think it adds value and the distribution part of the equation in terms of carriage and uptake on rate over time. And we obviously know that we've introduced WGNA to a whole category of advertisers, financials, and tech and other companies that weren't simply buying the network. Our first sale was to a non -- to a financial company and so -- at double our current CPM. So if that continues to work, obviously, it's going to increase the value of WGNA. And it's self-liquidating because the -- except for the CapEx, which will be realized this year as a onetime expense, building out the infrastructure for this national news channel and network in Chicago. But the operating expenses are being funded by the roll-off of certain syndicated program expense. So the growth there will be basically self-financed internally and not a big increase in OpEx.

As it relates to subscribers, again, I think the important thing to note is that we don't yet have kind of a new normal settled out because none of the Tribune stations, Big 4 affiliates were carried on any OTT platform until we closed on the acquisition. And as you know, we get those sub counts report in arrears. So we won't know until later this quarter, what fourth quarter looked like. And again, those launches were phased. We didn't ultimately get on some of the OTT platforms with the Big 4 Tribune stations until after the turn of the calendar to January of 2020. So it will be a little while before it settles out. I think, again, it's just important to note that our guidance implies sub count erosion greater than what we are experiencing and have experienced. So people should take comfort in that.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [24]

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And I would say that's exactly right. The portfolio differences between Nexstar and legacy Tribune are there. To put that in perspective, about 5% of Nexstar's total subscribers are OTT right now. That number for Tribune is closer to 3% as we close that gap, as Perry mentioned, with the launch of some of their Big 4 affiliates that weren't on the OTT platforms. I think we'll see growth moderate -- or attrition moderate as we recapture some of the lost subscribers from the traditional like, honestly, largely the satellite providers.

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Operator [25]

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Our next question comes from Kyle Evans, Stephens.

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Kyle William Evans, Stephens Inc., Research Division - MD [26]

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We just came off a call where one of your peers walked us away from net retrans margins as a indicator of network relations. I think you're renewed across the Board of your Big 4s. Perry, could you take a second and kind of step back and give us a high-level view of network relations?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [27]

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Well, I think we said in our prepared remarks and in the press release that we expect a low to mid-teens increase in our distribution margin in 2020. So we'll stand by what was said and what was written. And obviously, we have the data points to support that internally.

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Kyle William Evans, Stephens Inc., Research Division - MD [28]

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And low to mid-teen increase in distribution margin?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [29]

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No. In net distribution dollars, not the margin itself.

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Kyle William Evans, Stephens Inc., Research Division - MD [30]

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Got it, got it, got it. Net margin. Got it.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [31]

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Yes.

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Kyle William Evans, Stephens Inc., Research Division - MD [32]

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Net growth. Got it, okay.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [33]

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Yes.

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Kyle William Evans, Stephens Inc., Research Division - MD [34]

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Tom, we've been kind of weathering some headwinds on the digital side of the business. Can you remind us when we're going to annualize that? And it sounds like the TV.com, local station digital is very strong. Just maybe size that national digital piece for us as well.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [35]

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Sure. The national digital piece, I think you'll continue to see some variability on that. We have recently deemphasized a largely social platform that we had. We have kept elements of that business, but not the majority of that business. So I think you'll see total digital continue to bump along between flat to down slightly on a comparable basis to prior years. I would say that the good news is it's obviously -- digital, again, is comprised of 2 real businesses. The local business, which continues to grow at, as I mentioned here, almost 14% in the fourth quarter, and we see that continuing -- that pace continuing -- that kind of cadence continuing during the year. The national digital business is being deemphasized, and we're obviously seeing negative comps to prior years. So I think you're going to see on a combined basis, that, that will continue to be flat to down slightly probably for 2 or 3 more quarters.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [36]

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Yes, probably 2 quarters because by the -- back half of the year is when WGNA's newsnationnow app will begin contributing to our digital results. Our -- we have a burgeoning data business that is growing significant double-digit increases, albeit off of a low base, but this transition, I think you'll see the ultimate runout of it. We'll obviously have reported results because we're not up against the Tribune digital history that will be positive throughout the year. But again, I think we are -- we're in the seventh or eighth inning of the transitioning out of these businesses that add little to no margin.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [37]

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And those businesses have changed over the course of the last couple of years as some of the large service providers have really made it more difficult to access inventory that we have had historically resold. We're seeing -- the reseller business was always a lower-margin business. And now it's a marginal margin business.

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Kyle William Evans, Stephens Inc., Research Division - MD [38]

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Got it. One quick housekeeping question for those of us that are trying to build bottoms-up models. Could you share a total retrans sub count number with us?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [39]

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Absolutely not.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [40]

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No.

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Operator [41]

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Our next question comes from Jim Goss, Barrington Research.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [42]

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Okay. A couple of them. One, a little bit more on WGNA. Is it intended to be a complement to the existing markets? Or do you think -- do you envision trying to extend it beyond the -- I think you said it was a 75 million household reach right now by buying either another cable platform to put it on or something of that nature.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [43]

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I think we'll invest in WGNA as it is a current asset of the company. I don't think you'll see us beyond our existing investments in the Food Network and the Cooking Channel in combination with Discovery, who manages those assets. We're a 31.7% shareholder and have a seat on the Board, but a relative passive participant there. But I -- we're going to program prime time as a counter programming strategy. All other networks are either in entertainment, news -- entertainment, sports or opinion shows, and we see an appetite for news. It will be 7 nights a week in prime time, repeated in late night, and that will grow if it is successful, but at this point, that's entirely what we're focused on. We think not only the timing is good, but we've got 3 pages of advertisers now we can talk to nationally that had no interest in the channel prior. And then so it's -- our job is to wring growth and create value out of our existing assets, and that what we -- that's what we are first and foremost focused on.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [44]

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The best way that we can grow WGN America is to make its programming more relevant and more unique, and that's what we're doing. When we do that, then we think that the MVPDs will see the value in it because they -- their consumers and their customers will see the value in it. And we'll be able to potentially expand distribution simply because the product is better.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [45]

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Okay. And I recall way back with Tribune, there were always rights issue complications to even getting programming onto the cable channel. So I gather you're going to be more of a news focus pretty much all the time and not as much entertainment in the other dayparts as well?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [46]

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Well, we still have significant programming commitments. And I think the rights issues you were talking about were back when it was a super station. It has been converted to a 100% basic cable network. So we play in that universe. Again, the beauty of this is we have 5,400 journalists around the country that will form the backbone of our reporting. And we'll be on the ground where the story happens before anybody else can charter a plane to get there and parachute in, and we'll have the local context. Now we're hiring 140-plus individuals, not only to produce and present the news in Chicago, but to fill in white areas where we may not have a station presence and hopefully this will work both ways, right? The stations will provide the material on a bottoms-up basis that the network will use to compose its national news cast, but we also, over time, look to become the national news source for our local television stations. If you subscribe to CNN, you're not exclusive, and obviously, News Nation can be exclusive video content back to our stations. And Sean and Jen Lyons, who are manning the effort to head up this channel and this news effort for us, are talking to third-party providers that could provide us international news video that we may want, and so those talks are ongoing.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [47]

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Okay. And maybe one final question. Are there any best practices coming out of Tribune's existing operations that could extend to a broader Nexstar platform?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [48]

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Oh, absolutely. I mean the beauty of this is that good ideas don't necessarily wear a certain uniform. So we're sharing our best practices with the acquired stations, the acquired stations are sharing their best practices with us. One of the things that started in Tribune that we've taken on and are expanding is the concept of a Nexstar diversity council, where we're pulling people from around the company to kind of staff and our [committee] that will quantify and create best practices in terms of diversity and inclusion in our hiring process, in our activities and things that we do. That was a Tribune idea. So that's just one example of a best practice that we traveled over into the combined company.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [49]

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And the other one I would mention in my world is the distribution side of Tribune is based in Philadelphia. And we have retained the vast majority of those people. It's 10 or 12 people from an administration side of retrans and carriage fees from all of our properties. Also an affiliation side, again, contractual as well as financial administration of all of that as well as a deeper bench for the actual management of those contracts and negotiation of them.

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Operator [50]

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Our next question comes from Craig Huber, Huber Research Partners.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [51]

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I have a few questions. Perry, just for extra clarification. Were you trying to say the first quarter core ad revenue was tracking up a little less than, I think you said, 1.2% or 1.3% for the fourth quarter?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [52]

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I think that's a fair assessment. It's a slightly lower trajectory than that.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [53]

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And just given a lot of concerns out there about this coronavirus and all that. I know it's obviously early here in the U.S. and hopefully, nothing comes with it. But just any sense, Perry, from talking to your various advertisers in all the various markets you have if there's any angst out there? Any issues coming up where you might see some pullback on advertiser or it's just too early to know and speculate?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [54]

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In a back handed way, if you're quarantined in your home and one of the few things you can do is watch television, I think advertisers see the benefit of that. We've had absolutely no discussions of people. I think the angst is kind of fanned by the drumbeat of the coverage, but we don't think it will have a negative impact on our operations. In fact, it could -- if it becomes more widespread in the United States, and there's more quarantine in home and all of that, then it could potentially benefit our business because we'd be the primary source of entertainment, I think.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [55]

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And then I think you mentioned, Perry, 3% to 5% of your subs come from OTT platforms and other stuff. Just if you could just expand upon that a little bit. If you think about a typical market or across your whole footprint, how does this sort of break down the households in a given market that don't watch any of your top 4 -- Big 4 TV stations versus the percentage that get it through a traditional MVPD versus the part that's an OTT versus the percent that comes from over the air? How do those 4 numbers sort of break out in your mind in the average market for you guys?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [56]

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I don't think there is an average market.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [57]

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Yes, that's -- I think that we're about 84% paid, 16% over-the-air and that's virtually status quo for the last half a dozen years or so. Within the 84% in the pay TV ecosystem, I think that you heard Tom say 3% to 5%, depending on which side of the house you're looking at today, but let's just call it 5% when all the Tribune stations get activated or something close to that. So it's 79% traditional MVPD and 5% virtual MVPD. That's about as exactly as I can get for you, because I'm not sure pricing and dicing it across 115 markets, you're going to have variations on the theme. And so -- but that gives you some snapshot of what it is.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [58]

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And I think there's a statistic out there that's somewhere between 90% and 95% of the population is reached by broadcast television during a given week. So your question is how many don't watch any television? I think it's single-digit percentages.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [59]

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Okay. That's very helpful. And then can you just talk a little bit about the categories? You talked about auto, but I mean, services, insurance, et cetera, anything that's really outliers from a positive side you'd want to maybe talk about what you're seeing now? And also on the flip side, the ones that are doing significantly worse than the average?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [60]

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Yes. I would say, retail probably in the fourth quarter was below our expectations. But again, if you look internally here, insurance and attorneys were both up basically double digits. The financial category banking was a pleasant surprise. That was in the positive as well as service areas. And then you get into kind of our next group of product categories, home repair, entertainment, lottery spending, grocery stores, drug stores and pharmaceuticals was our -- one of our highest percentage growth on a category basis. Telecom, travel, packaged goods, home electronics and appliances, HVAC, utilities were all up literally double digits and some substantially in the double digits. So again, 16 out of 25 is probably the best scorecard we've turned in, in a while. And we feel pretty good about the underlying economy and the underlying strength of the economy.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [61]

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Then also, Perry or Tom, I wanted to ask, did you sort of think about this new evolving advertising category, sport betting you sort of think out here over the next 3 to 5 years, how would you sort of think about just -- would you quantify that maybe how significant do you think that could be for your core advertising maybe as a percentage? And how much do you think it really could add by the time it gets to the middle of this decade as more and more states allow sports betting?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [62]

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Our view, I think, is you're correct. It's on a state-by-state basis. And so it will grow kind of organically, and we don't see it as a huge category contributor. We're -- the one instance that we have right now and -- is where all the states surrounding the market participate in sports betting in Philadelphia, Pennsylvania, New Jersey, Delaware, and our revenue is in the tens of thousands of dollars, not the hundreds or millions. So I think that, if anything, it will increase engagement in the actual broadcast. If you've got skin in the game, a bet or a prop bet, I think it will probably -- whether it's a golf telecast or a football or basketball game, I think there will be more engagement which might help viewing levels and viewer retention. But we're fairly sanguine on it being a game-changing category. I think it will grow over time, but we don't have enough data points to give any real projections. But we're not looking at it as being the next big thing, if you will.

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Operator [63]

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Our next question comes from John Kornreich, J.K. Media.

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John Kornreich;J.K. Media;Partner, [64]

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I have a couple of questions. On the subject of food channel, can you give us an idea what the latest annualized dividend was to you?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [65]

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It was for 2019, just south -- distribution, it's not a dividend, the cash distribution was just south of $200 million.

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John Kornreich;J.K. Media;Partner, [66]

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Okay. And is your expectation that it should at least be up somewhat this year?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [67]

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We haven't given specific guidance, but I don't think we're expecting large amounts of growth off of that, but some.

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John Kornreich;J.K. Media;Partner, [68]

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Okay. Tom, you're a renowned market observer, as we all know. What's your reaction here to a 15% increase in free cash flow per share and the stock is down 3%?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [69]

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I don't think they're related at all. I think the down 3% on the stock price has to do with investors, obviously, trying to get some liquidity, rearranging their portfolios, risk off trades, et cetera. We can only control what we can only control. And clearly, this is more of a market phenomenon than a fundamental phenomenon as it relates to Nexstar stock.

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John Kornreich;J.K. Media;Partner, [70]

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Could you reclarify what you said about the slight downdraft in core growth in the first quarter? Did I hear you say it was primarily due to political being bigger than you had originally expected?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [71]

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Yes. I mean we're going to have growth in the first quarter. I'm only 2 months into the quarter, and my net revenue on core is ahead of where it was last year. So I don't want to leave the impression that we're not going to have core growth, I just yet can't quantify where we will come out. I know where we're projecting to come out, and it would be growth over the prior year.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [72]

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Our expectations are for core to grow in the first half of the year and then to take a holiday from growth because of political spending in the back half of the year.

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John Kornreich;J.K. Media;Partner, [73]

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Okay. Going back to food channel. Is this for the time being a long-term keeper for you?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [74]

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Unless someone came and approached us with an offer that was accretive to our shareholders. And keep in mind, obviously, the distributions are valuable to us. And part of the issue, as we've said over and over again, is the fact that a lot of the basis -- the tax basis in the Tribune assets, are very low because of the bankruptcy. And as such, an outright sale of an asset, whether it be WGNA or the Food Network or a station, comes with a tax build, and it has to be accretive to us on an after-tax basis from an asset sale versus the value of the cash flows. And that equation does not work in our favor from a sales perspective at this point, given where markets are.

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John Kornreich;J.K. Media;Partner, [75]

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But the distributions are fully taxable also?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [76]

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Sure, as is all of our EBITDA from all of our stations.

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Operator [77]

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There are no further questions in the queue at this time. I'd like to turn the call back over to today's presenters.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [78]

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Thank you, Travis, and thank you all for joining us here today. I guess I'd end the call by saying, with the stock down 3% with the news we put into the market today, that sounds like a great buying opportunity. But you all on the call will take your measure of that and so will we. We look forward to joining you in a couple of months to report on our first quarter results and progress. And thank you for your time today.

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Operator [79]

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Thank you, ladies and gentlemen. This concludes today's teleconference, you may now disconnect.