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Edited Transcript of NXST earnings conference call or presentation 8-Aug-18 2:00pm GMT

Q2 2018 Nexstar Media Group Inc Earnings Call

Irving May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Nexstar Media Group Inc earnings conference call or presentation Wednesday, August 8, 2018 at 2:00:00pm 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

* Barton Evans Crockett

B. Riley FBR, Inc., Research Division - Former Analyst

* Clayton Keever Griffin

Deutsche Bank AG, Research Division - Research Associate

* Daniel Louis Kurnos

The Benchmark Company, LLC, Research Division - MD

* David Carl Joyce

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* John Janedis

Jefferies LLC, Research Division - Former MD & Equity Analyst

* Kyle William Evans

Stephens Inc., Research Division - MD

* Leo J. Kulp

RBC Capital Markets, LLC, Research Division - Associate

* Marci Lynn Ryvicker

Wells Fargo Securities, LLC, Research Division - Former MD & 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, everyone, and welcome to the Nexstar Media Group 2018 Second Quarter Earnings Call. As a reminder, today's call is being recorded.

And at this time, I'd like to turn the floor over to Joe Jaffoni, Nexstar Investor Relations. Please go ahead.

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

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Thanks, Greg. Good morning, everyone, and thank you for joining Nexstar Media Group's 2018 Second Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first I'll review the safe harbor disclosure.

All statements and comments made during today's conference call other than statements of historical fact may be deemed forward-looking statements within the meaning of the federal securities laws and are subject to known and unknown risks, uncertainties and other factors that may cause future results to be materially different from those expressed or implied in the forward-looking statements. Important risks, assumptions and other factors that could cause future results to differ materially from those expressed in the forward-looking statements are specified in Nexstar's filings with the Securities and Exchange Commission.

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

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

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Thank you, Joe, and good morning, everyone. I'd like to thank you all for joining us today to review Nexstar's record second quarter 2018 operating results. As outlined in this morning's release, Nexstar delivered another period of consensus beating growth across its revenue and cash flow metrics as we continue to identify new opportunities to improve our performance and profitability across our portfolio.

Our operating outperformance puts us solidly on pace to deliver on our free cash flow targets for the 2018-2019 cycle and combined with our share repurchase activity, that will all result in higher free cash flow per share. Tom Carter, our Chief Financial Officer, is with me as always this morning.

Our second quarter results reflect the value we continue to mine from our local content and business relationships, our accretive scale-building acquisitions and the ongoing development of complimentary revenue streams that are diversifying our revenue mix. The effectiveness of our local broadcast and digital advertising platforms as proven marketing solutions for both businesses and candidates are the drivers of our operating and financial growth and allow us to simultaneously be aggressive with our return to capital, our leverage reduction and select accretive M&A, which all come together to drive free cash flow growth per share and shareholder returns.

With over $148 million of second quarter free cash flow, we allocated a total of approximately $84 million to the return of capital and leverage reduction initiatives spread across share repurchases, quarterly dividend payments and debt reduction, and Tom will highlight each of those in just a moment.

Looking at Nexstar's Q2 results, the 5.5% rise in second quarter net revenue reflects solid television advertising growth as well as another quarterly sequential and year-over-year rise in retransmission and digital revenue growth. Reflecting these factors, Nexstar posted record second quarter broadcast cash flow, adjusted EBITDA and free cash flow with these metrics growing 13.5%, 15.3% and 6.6%, respectively, on a year-over-year basis. Our enterprise-wide focus on operating leverage and efficiency continues to support strong free cash flow margins, so on $660 million of quarterly net revenue, we brought about 22% to the free cash flow line, up from 20% in Q1, as we begin to see the operating leverage benefit and pacing to be record levels of political midterm advertising this year.

This is also evident in the BCF and adjusted EBITDA margins on Page 1 of our release as we posted a 280- basis point year-over-year rise in broadcast cash flow margins and a 300- basis points improvement in the year-over-year EBITDA margin. We expect results to continue to build over the second half of 2018 as Nexstar will see accelerated growth in midterm election spending, new PAC and issue spending related to the Supreme Court nomination process, new advertising related to the advent of sports betting in our markets, continued retransmission and digital revenue growth as well as the recurring free cash flow benefit from the Tax Cuts and Jobs Act.

So with record second quarter and first half operating results on the board, we remain confident in meeting our target for average annual free cash flow growth in excess of $600 million for the 2018 and 2019 cycle. Also as I noted earlier, Nexstar has taken advantage of 2018 market volatility with meaningful repurchase activity, which has reduced our Class A common stock outstanding, which, by the way, is our only class of shares outstanding, to approximately 45.5 million shares.

I'll now review the second quarter operating highlights after which Tom will go through the finances, including an update on our balance sheet and other items of interest. Total television advertising revenue rose 3.2%, reflecting record second quarter political revenue, which more than offset the reduction in inventory available for local and national spot sales. The fact is that during the second quarter on a consolidated basis in our audited markets, Nexstar grew our share of local spot revenue by a full share point over the prior year, and we saw an impressive bump in our new-to-television ad revenues even as we offered more ad time in the very active political cycle.

As noted a moment ago, we continue to address the core TV ad market for our aggressive focus on new-to-television ad revenue which for Q2 amounted to $15.3 million, marking an 8.5% improvement over this metric in Q2 of '17.

In total, our new advertisers accounted for approximately 7.7% of total second quarter local ad revenue, that's an increase of 7.1% in Q1 and about 5.7% over last year's second quarter. These increases reflect the application of Nexstar's local sales practices across the Media General markets, and we continue to see our local sales effort as a proven means of building our local in-market share.

Political was the best performer in our second quarter ad-supported revenue streams, as political ad revenue rose fivefold over -- year-over-year to approximately $31.6 million. Reflecting our presence in states with high levels of political spending activity, 2018 second quarter political revenue outpaced our internal budgets and our consensus estimates.

Importantly, despite strong demand from the candidates, PACs and other advertisers early in the election cycle, the auto remained off record levels of last year, and we posted up or flat results in 4 of the top 7 categories with spending from Ford rising mid-teens on a percentage basis over the last year, although that was not enough to offset the lower spending from Dodge, Chrysler or Jeep that we've spoken about before.

During Q2, there were 24 primary statewide races across Nexstar markets, and we garnered a significant share of TV ad spending related to the battleground primary races in Nevada, South Carolina, West Virginia, Ohio and Indiana. Our political revenue stream also saw the early establishment of significant spending in Florida and Tennessee, which is carrying through to Q3.

By category, we booked about 60% of our Q2 political revenue from candidate spending, while PAC and issue spending made up the balance. Given our outperformance of our internal targets in the first half of 2018 and our strong bookings already in the back half of this year, this morning we are raising our 2018 political guidance from the low $200 millions to a range of between $215 million and $220 million for the year.

Over the last several election cycles, Nexstar has continued to invest in our news resources and reporting capabilities, including the expansion of both our Washington, D.C. and our state capital bureaus. As part of the company's expanded political coverage, Nexstar stations have taken the lead in producing over 120 debates since 2016, highlighted by this year's multi-debate series in the Texas gubernatorial primary. This series included 3 debates, which aired in 6 Nexstar markets covering the State of Tennessee.

In addition, Nexstar's Indiana markets produced a republican primary debate earlier this year for the U.S. Senate seat. This coverage brings the local communities we serve across the United States in direct access to local lawmakers and candidates, and these events provide an important public forum for the constituents to engage with local leaders on the issues that matter to local families and local communities. These events also strengthen the brand of our local news and other local programming offerings in our markets thus better positioning us as the requisite platforms for businesses, candidates and other advertisers seeking to reach and influence consumers.

Combined second quarter digital media and retransmission fee revenue of $340.2 million rose 7.6% over the prior year period and accounted for 51.5% of net revenue, illustrating again the positive and ongoing shift in our revenue mix and marking 100- basis points upward shift in this metric from the 2017 second quarter levels. Overall, the year-over-year increase in second quarter non-television advertising revenue reflects recent renewals of distribution agreements with multichannel video programming distributors and the establishment of distribution agreements with OTT providers and the January 2018 accretive acquisition of LKQD as well as organic growth across our profitable digital operations. These gains were partially masked by digital revenues included in the 2017 comparable second quarter period from certain unprofitable legacy Media General digital operations that were discontinued in the second half of last year. I'll add that MVPD subscriber levels in our markets remain consistent with our expectations and those embedded in our guidance, with the upside coming from new OTT agreements that are currently coming online.

Our long-term record of significantly expanding free cash flow by identifying, executing and financing accretive transactions, and our unmatched record in terms of our integration execution and synergy realization has been a cornerstone of our ability to enhance shareholder value.

To that vein, last week, Nexstar entered into definitive agreements to acquire stations in Springfield, Missouri and Huntsville, Alabama for aggregate purchase price of $19.45 million. The addition of these stations will result in Nexstar generating incremental advertising and net retransmission consent revenue growth without an increase in our U.S. total television household reach. Not only are these transactions accretive, but they are leverage-neutral on a pro forma basis. So we continue to expect Nexstar's leverage absent additional strategic activity and discretionary capital returns to decline to the mid- to high 3x range by year-end 2018. Given that both of our new transactions are expected to close in the fourth quarter, we'll see the full value of their contributions in 2019.

Throughout our history, Nexstar's organization-wide commitment to broadcasting excellence for local viewers and unparalleled marketing results for local advertisers have been fundamental to our success and growth. We're executing well on all facets of our business plan, including elevated levels of local content and service to local viewers, continued operational improvements and further optimizing the company's capital structure and cost of capital. With our singular focus on generating free cash flow and free cash flow growth, we remain disciplined in managing costs, while paying dividends, repurchasing shares and pursuing additional select accretive acquisitions.

During the first 6 months of 2018, we did over $271 million in free cash flow. We allocated approximately $166 million of that toward debt reduction, opportunistic share repurchases and cash dividends, while also funding the $94 million to acquire the fast-growing LKQD technologies for our digital tech stack. With our year-over-year and year-to-date progress on debt reduction, the biggest mid-term election cycle in the company's history right before us and the upcoming renewal of the larger percentage of our retransmission agreements in the upcoming 17 months as well as the completion -- upcoming completion of our recently announced tuck-in acquisitions, we have excellent visibility to delivering on or exceeding our free cash flow targets and a clear path for the continued near- and long-term enhancement of shareholder value.

With all of that said, let me turn the call over to Tom Carter.

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

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Thanks, Perry, and good morning, everybody. I'll start with a review of Nexstar's Q2 income statement and balance sheet data, after which I'll provide an update on our capital structure and some points of guidance.

To start, as noted previously, effective 1/1/18, the company adopted the new revenue accounting guidance issued by the Financial Accounting Standards Board. As a result, beginning 1 -- January 1, the company presents local, national, digital and political revenues net of their related agency commission. This morning's release also provided the 2017 second quarter and year-to-date local, national and political revenue comps adjusted to net out the sales of the agency commission similar to what we've done in 2018.

In addition, we no longer recognize barter revenue and barter expense related to the exchange of advertising time for certain programming materials. These changes don't impact the company's past or future income from operations, net income, broadcast cash flow, adjusted EBITDA or free cash flow. Also effective on January 1 of this year, the company adopted another accounting standards update, which requires pension and other postretirement plans cost or credit, other than service costs, to be presented outside of the income from operations category. Thus, the income from operations during the 3 months ended June 30, 2017, was decreased by a pension and other postretirement plan -- credits of $3.2 million.

Now turning to the Q2 income statement. As Perry mentioned before, net revenue was up 5.5%, television advertising revenue, local, national and political was up 3.2%, political revenue driving all of that at $31.6 million for the quarter, which was a record for our second quarter. Retrans fees were up 9.2% to $276 million, all of those are on a same-station basis as well given no acquisition activity during the last 12 months, as of the second quarter. Obviously, that will change in the third quarter.

Digital revenues were $64 million, which on a comparable basis were up mid-single digits. Broadcast cash flow was up 13.5% to $257 million. Adjusted EBITDA was up 15.3% to $233 million and free cash flow was a robust $148 million.

Second quarter station direct operating expenses net of trade rose 8.6%, primarily reflecting the growth in broadcast ad sales as well as budgeted increase in network affiliation expense and expenses of LKQD in Q2 of '18, which were not there in Q2 of '17. Same-station fixed expenses, excluding programming expenses were up 1% year-over-year.

Our 6.7% decline in SG&A expense reflects our previously disclosed reclassification of certain digital administrative expenses to corporate expense. For 2018, we reclassified some of these expenses as part of the update from the accounting standards board and moved the pension and other postretirement plans out of corporate expenses to reflect them as nonoperating items, but include them in EBITDA.

Nexstar's second quarter corporate expense was $27.3 million, inclusive of approximately $9 million of noncash comp, $800,000 of onetime expenses relating to LKQD. This was in line with our guidance for the second quarter recurring cash corporate overhead, exclusive of stock comp, of approximately $18 million to $19 million, and that range, $18 million to $19 million, is a good quarterly run rate for Q3 as well.

Noncash compensation is expected to be $8 million to $9 million for the third quarter and $30 million to $32 million for the year, reflecting the issuance of new equity incentive awards in Q1 of 2018.

Turning to the balance sheet. I'll review the key items as of 6/30/18. Total net leverage was 4.69% (sic) [4.69x] which compares to 4.96x at Q1. First-lien covenant, which is the only material financial covenant we have, was 2.92 versus a covenant of 4.5 and that compares to 3.13 at 3/31 of '18. Outstanding net debt at 6/30 was $4.139 million that compares to $4.226 million, which as at end of Q1, which again is approximately a $90 million reduction.

We've already reduced net debt by approximately [$570 million] since closing Media General transaction in January of '17, or through 6 quarters of operation, even though -- even as we have allocated capital to other shareholder enhancement activities. As you will see in the 10-Q, which we expect to file later today, subsequent to quarter-end, we made additional voluntary debt payments on the Term Loan B.

With our expectations for significant free cash flows leading to the first senior debt -- leading up to the first senior subdebt maturity in 2022 and the flexibility to repay first-lien borrowings without penalties, we feel very good about our overall capital structure and weighted average cost of capital in a rising interest rate environment.

We remain on pace and continue to expect Nexstar's debt -- net leverage absent additional strategic activity and discretionary capital returns to decline to the mid- to high 3x range by year-end with a significant reduction in debt outstanding. We remain committed to applying our free cash flow to drive shareholder returns. And during the second quarter, we allocated approximately $85 million to return of capital and leverage-reduction initiatives.

During the quarter, we used $16.7 million of cash from operations to repurchase 0.25 million shares outstanding. We paid our 22nd consecutive quarterly cash dividend, which amounted to approximately $17 million. And as just noted, we reduced debt by $56 million (sic) [$50.6 million] and net debt by approximately $90 million given our cash build during the quarter.

As Perry noted, our record operating results, including $271 million of free cash flow in the first half of 2018 enables us to remain opportunistically active in taking action to increase shareholder value. And in the first 6 months, our return of capital and leverage reduction amounted to approximately $156 million in total. Additionally, we funded $94 million acquisition of LKQD technologies, our enterprise digital video advertising technology infrastructure business, in Q1 and cash on hand grew from $115 million at year-end '17 to approximately $147 million at June 30 of '18. Subsequent to quarter-end, we funded the recently announced $19.45 million acquisitions of WHDF and KRBK out of free cash flow.

Q2 total interest expense amounted to approximately $56.3 million compared to $55.4 million in Q2 of '18 -- I'm sorry, Q2 of '17, while cash interest expense was $53.7 million compared to $53.2 million in the prior year. We expect cash interest expense in 2018 to total slightly in excess of $200 million during the year and for the quarter, to approximately between $52 million and $53 million for Q3 of '18.

In Q2, we had operating cash taxes of approximately $32 million compared to $16 million in cash taxes in Q2 of '17. With the enactment of the Tax Cuts and Job Act in December, the federal corporate income tax rate was reduced from 35% to 21%. The tax act was timely in terms of benefiting Nexstar as NOLs were minimal at year-end, and we expect the cash taxes in 2018 to approximately $100 million.

Nexstar's CapEx for the quarter totaled $15 million, of which $13.5 million was related to station infrastructure with the balance of $1.5 million were station repack and relinquishment of spectrum costs. With the passage of the Ray Baum act in March, which provides an additional $1 billion for repack reimbursements, our FCC mandated repack costs are fully reimbursable. Through June 30, 2018, we've spent approximately $7 million, which is included in CapEx, and we've been nearly fully reimbursed as reflected in the income statement.

We will manage this cash flow item during the year to minimize any cash flow impact, and we expect Q3 2018 CapEx to be approximately $18 million with an additional amount for repack CapEx on top of that. Our Q2 free cash flow was $148 million, inclusive of the impact of $800,000 of onetime transaction expenses. As such, our second quarter recurring free cash flow was almost $149 million compared to the consensus expectation of approximately $135 million.

We continue to believe our capital structure represents the ideal balance of fixed and floating debt and attractive weighted average cost of capital of approximately 5% in both prepayment and refinancing flexibility. We have a well-staggered maturity profile with no significant maturities until 2022, at which point we expect we'll have made further significant headway towards substantial debt reduction.

As it relates to management's focus on free cash flow generation, our positive outlook for Nexstar Media will follow the approach that we've successfully deployed in terms of building the top line, maintaining close control of fixed and variable costs and minimizing -- I'm sorry, optimizing the balance sheet and capital structure.

This plan will continue to support our goals of generating significant free cash flow growth, while allowing us to reduce leverage, pursue additional selective accretive acquisitions, pay dividends, repurchase shares and take other actions that can enhance shareholder value.

As we continue to benefit from expected significant 2018 mid-term political spending, the growing value of our retransmission consent agreements and the profitable operation of our digital assets, we have excellent visibility to meet our free cash flow targets in the current cycle and believe we have forged a clear path for the continued near- and long-term enhancement of shareholder value.

In summary, Nexstar continues to execute well across all functions, including operations, integration, capital allocation, capital structure and service to our local communities. As such, we are reiterating our guidance for annual free cash flow in the 2018-19 cycle of approximately $600 million or approximately -- a little over $13 per share on a fully taxed basis.

That concludes the financial review for the call. I'll now 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. Nexstar's execution consistency across our businesses and in the management of our financial and capital structures enables us to continually elevate service for our local viewers and advertisers while also upholding our commitment to enhance shareholder value with growing operating results and growing the return of capital to shareholders.

Now let's open the call to Q&A to address your specific areas of interest. Greg?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first we'll take John Janedis with Jefferies.

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John Janedis, Jefferies LLC, Research Division - Former MD & Equity Analyst [2]

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Two questions for me. First, you talked about your accretive scale acquisitions and increasing shareholder value, and with your focus on leverage reduction, how are you thinking about the potential for further large-scale broadcast M&A given the assets that are on the market? And then separately, Perry, you hit on the sports betting topic. On a practical level, when do you see that kicking in given your portfolio? And do you see the potential for it to be a category in, like, the top 5 or 10 range?

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

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I'll take the second part of that first, John. I mean, obviously, we have not seen any direct investment spend yet on the sport betting category. But as it goes on a state-by-state basis, we can see the purveyors ramping in and ramping up and most likely for us what happened in markets that are adjacent to major markets where the betting activity may take place and states that have already approved it. But I think it could become a significant category over time, and it will be a local category by and large, because it will roll out on a state-by-state basis. So I think that if I were to handicap it, I think we'd start to see spending perhaps in the back half of this year, but more likely -- more of it as spending in 2019. And I'll let Tom answer the leverage question and capital allocation question.

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

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John, is your question what is our leverage tolerance given potential M&A transactions? I guess, it was -- I wasn't exactly sure what your question was.

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John Janedis, Jefferies LLC, Research Division - Former MD & Equity Analyst [5]

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Yes, maybe it's rolled -- a few things rolled in. I guess, that's part of it. I guess, secondly, there's -- given your focus on leverage reduction, I guess, I was just wondering what is the appetite you have currently for maybe a larger scale M&A going forward given what may be on the market currently?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [6]

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Well, I would say, the appetite for leverage reduction is exactly so that we can participate in potential future consolidation of the space. We made a pledge to not only shareholders, but to the bondholders and the debt holders that post-Media General, we would operate down to below 4x to continue to improve the business model and the strong free cash flows. We are well on our way to doing that. We reduced leverage by 0.3 of a turn of cash flow between the first and the second quarter. And the third and the fourth quarters are going to have multiples of the revenue that the second quarter had in terms of political revenue. So we're going to see a substantial turbocharging of debt reduction going forward. Given potential leverage covenants or leverage timing and comfort levels, I would say, it's probably somewhere around a 5x level. And that's more deal specific, just in terms of the return on the actual acquisition and the free cash flow characteristics of that. But I would say, generally, that's probably a good number.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [7]

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Yes, John, I would just say, for a substantially accretive acquisition, we are happy to consider increasing our leverage profile, because it's a substantially accretive acquisition. Obviously, again, with a clear path towards delevering vis-à-vis synergies and operational improvements in the short-term thereafter, just as we've demonstrated with our acquisition of Media General in 2017.

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Operator [8]

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Moving on, we'll have Dan Kurnos from The Benchmark Company.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [9]

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Two questions. Just on core. Perry, interesting color around Ford. If you could just talk to kind of, sort of the underlying core trends as we head into Q3 understanding that there is incremental displacement. So if you also want to comment on displacement, auto being a focal point in core. And then on the OTT, I remember, asking you last call, I think you guys had just signed up NBC on YouTube. I think your subcount was kind in the mid-6s. Can you just talk about how OTT subcount is pacing kind of general subtrends there? And if you have any OTT renewals coming up and your expectations?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [10]

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Sure. Let's start with core, and first of all, kind of review a bit of Q2. We had roughly 5 of our top 10 categories that were flat to up and 5 that were down. The categories that were up were attorneys, medical health care, home repair and kind of infomercials paid programming, long form media. The categories that were down were auto, which was down about 10%, and I'll give you some more color on that in just a minute. Fast foods, furniture, other media, radio/TV cable and then service- various were down. So kind of a typical quarter in terms of half up and half down in our top 10 categories. As it relates to automotive, we think there are some things that are specifically influencing the category currently that are situational and not secular, and I'll give you our view on that. Car companies continue to spend on incentives. In fact, incentives now represent about 11.5% of the vehicle prices and that all comes out of the marketing budget. So they're moderating ad spent and co-op, I think, in order to stabilize those budgets as we approach the back-end of the year. So I think that's Item 1.

In our footprint, we have multiple dealers that are consolidating and in that instance, budgets have been put on hold, like the -- in Arkansas, for example, the Everett group buys the Landers group and so spending is on hold until the acquisition is completed. Most car companies have changed their executive management in the past 12 months as well as their ad agencies, which we believe impacted their media strategies for 2018. So that's a bit of color on Q2. I think as it relates to Q3, as we look at our categories, automotive is pacing better than it finished in Q2 at this point with a substantial amount of the automotive business on the books. Other categories that are pacing ahead are attorneys, medical health care, home repair, insurance, entertainment, utilities, real estate, lumber, hardware and along the way. I will say as it relates to -- so our pacing for Q3 core revenue is pacing ahead by a material amount over where we finished in Q2 on our core ad categories. I will say as it relates to automotive though, there is hanging like the sword of Damocles, the potential of a 25% import tariff, which could affect not only Asia, but Canadian and Mexican imports of domestic vehicles -- domestic nameplates, and that issue could impact ad placement across several of the foreign nameplates. And we think yet to be seen is the senior management changes due to the death of the CEO of Fiat Chrysler. We think that's already affected their already slowed and stalled marketing plans. And that's again, the advance placements have been cut back all year for Dodge and Chrysler and Jeep. And a reminder that Ford and Dodge place annual buys, every other OEM dealer places on a quarterly basis. So hopefully that is helpful on the core revenue as we see it.

From an OTT perspective, we estimate right now that we're somewhere in the 700,000 OTT subs. Reminder that the counts lag by 90 days as does the payment check. We did just sign and launched our NBC Affiliates on the DirecTV Now platform literally the week before the British Open. So we have no data yet on those sub-counts. But we now believe it will be likely the end of the year before we have sub-count trends for all the services in all the markets where they are launched. So hopefully, that's responsive to your questions.

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Operator [11]

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Next from Deutsche Bank, we have Aaron Watts.

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

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Bigger picture question. As you think about M&A opportunities, has the Sinclair-Tribune process with the FCC and DOJ altered your view on the likelihood of getting transactions of scale approved by the government?

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

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I don't believe so, given that we had a very definitive plan to clear through the regulatory agencies when we acquired Media General. I think, we would apply that same discipline and rigor to any other large scale. We are opinion, and it's just our opinion, is that a number of the situations that arose in the Sinclair-Tribune process are specific to that process. And I don't think there is a read-through that this is a general M&A trend. Having said that, I'll be in Washington next week at both the DOJ and the FCC and asking some of your same questions.

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Aaron Lee Watts, Deutsche Bank AG, Research Division - Research Analyst [14]

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Fair enough. And maybe you'll get more color on this next week, but also your -- is it still your view that the ownership caps, the 39% cap is still likely to move in one way or another over the near term?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [15]

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Yes. We think that there will be an increase in the national ownership cap proposed by the FCC at some point this fall, and we think it will be a substantial increase that will be coupled with the elimination of the UHF discount. As you know, our position is, if you raise it from 39% to some other arbitrary number, all you've done is replace one arbitrary number with another, and that the only answer that will likely survive judicial review would be a total elimination of the cap and allow us to compete with all of the unregulated industries and businesses and media space, primarily on the digital side that are not capped to only reaching or doing business in 39% of the countries. So that's the position we will continue to advocate. And where the FCC ultimately ends up, and ultimately, the courts end up, we -- I think it's too soon for us to speculate on that.

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Operator [16]

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Next we have from Stephens, Kyle Evans.

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Kyle William Evans, Stephens Inc., Research Division - MD [17]

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62% of your revenue today comes from duopoly markets, you just announced Springfield and Huntsville. How much more duopoly opportunity is there into the station footprints you got today?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [18]

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Well, we're now doubled up in 66 of our 100 markets. So in theory, 1/3 of the -- of our market footprint would create the opportunity for a duopoly. Now there may be some markets where there is just not a willing dance partner or it would -- in the DOJ's eyes, provide undue market concentration. So not all 34 of those markets will be actionable, but suffice it to say, we have conversations ongoing in any market where we only have a singleton station to see if there is an opportunity to create a larger revenue share in the marketplace and an increase in margin by running those 2 revenue streams off of a single fixed cost structure. So that continues to be where we will look to opportunistically expand as well as vertically taking our lead from what kind of capacity we would have under whatever a new national cap scenario might be.

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Kyle William Evans, Stephens Inc., Research Division - MD [19]

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Tom, on digital, do you mind spending a minute unpacking that line there? I know there is some discontinued from the prior year. Could you talk a little bit specifically about how LKQD is performing as well, please.

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

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Sure. Now LKQD is meeting our expectations in terms of the second quarter operating performance. It is materially profitable. So we're very happy with LKQD. But you're right. Q2 of '17, the digital number there, included revenue from federated and dedicated that is nonrecurring and those businesses were shuttered in the first half of 2017. So that amount was excluded from the '17 number in calculating the comparable growth numbers in revenue.

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Kyle William Evans, Stephens Inc., Research Division - MD [21]

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Got you. And lastly, you alluded to some progress on the new TV metric in terms of applying Nexstar practices in Media General markets. How much longer is the tail there? How much -- what inning are we in terms of getting the full revenue synergy pie?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [22]

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Well, when you have 100 markets and some get it probably a little quicker than others. So it's a continual process. Tim Busch and his regional vice presidents are in those markets, literally, on a weekly basis spreading the gospel as well as making sure that all of our legacy markets are continuing to perform to those expectations. But I think that in terms of sales practices and operating sales management, you will see that be a continued effort for us into and through 2019, being a nonpolitical year, business development is going to be increasingly in focus. A, we'll have inventory back that the politicians won't be laying claim to, and b, we're going to be looking to grow our core revenue in the absence of any potential displacements. So we tell our GMs all the time the quickest way to grow your share of market is to develop a piece of business that your competitors don't have because that's a 100 share piece of business. And obviously, we give visibility to it on every quarterly call. That's how important a mandated is in the company overall. And we kind of speak that talk every day in communications with our local markets.

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Operator [23]

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Moving on, we have Leo Kulp from RBC Capital Markets.

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Leo J. Kulp, RBC Capital Markets, LLC, Research Division - Associate [24]

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So first question, when you think about doing further M&A, how do you think about what the ideal target would look like? Is there a particular type of station or size of market that you're targeting? Or is it really just about the financial impact?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [25]

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I would say, yes, it's -- the most accretive deal is going to be the deal that we gravitate towards first and foremost. There are situational things. We could potentially acquire Cox today under the current rules and be under the 39% cap with UHF discount. So that, obviously, would have regulatory certainty in today's environment. The environment could change tomorrow or in September or October. But -- so that, obviously [attractive]-- but it's the most accretive deal. We have CW affiliates. We have ABC, NBC, FOX and CBS affiliates. Money is money and opportunity is opportunity, and we would gravitate to the one that returns the biggest bang for the buck in terms of accretion to our shareholders.

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Leo J. Kulp, RBC Capital Markets, LLC, Research Division - Associate [26]

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Got it. And do you see a real strategic benefit from owning, say, non-big 4 stations in top 10 markets? Or is that just about accretion too?

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

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It's about accretion. I mean, I would say that we do well with -- we have done a great job, Tim and his team, with KRON in San Francisco, and Tim installed a new general manager out there, who has done a great job of making that station more local. We've increased the amount of local news. And what used to be an 8-digit negative cash flow is now an 8-digit positive cash flow. And so I started my career in independent television even before FOX existed and that can be a good business. I wouldn't say we want that to be our only business or our primary business, but, again, if you believe, as we do, that the next value lever for our industry is going to be spectrum monetization. And again, we believe that monetization is T plus 5 years or more, 5 to 10 years before we fully monetize our spectrum assets, then spectrum in larger markets and creating a larger footprint of spectrum across the country would be attractive. So that's one thing that might not be in everybody's vernacular, that would certainly be in ours. But the deal would have to stand on its own and be the most accretive opportunity in front of us before we would act on it just for spectrum purposes.

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Leo J. Kulp, RBC Capital Markets, LLC, Research Division - Associate [28]

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Okay. Appreciate that. And then last question. How do you think about doing a transformational deal on your own? Would you do it on -- do you have the financial capacity to do it? Or would you prefer -- you need to bring an outside investor?

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

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That's all very situational specific, and we'll do the most accretive thing for our shareholders. We're not excluding or including any or all opportunities, but that's -- you're asking a very hypothetical question, and I really can't answer any more specificity than that.

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Operator [30]

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Next we have Barton Crockett from B. Riley.

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Barton Evans Crockett, B. Riley FBR, Inc., Research Division - Former Analyst [31]

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I guess, a couple of things. One is, I know that there's been some kind of talk relatively recently about the potential that private equity may have a renewed interest in the TV station sector. I'll ask it kind of generally because you guys have some obvious kind of background around this. But what can you tell me about your current view of the suitability for a large company like Nexstar in this environment to contemplate being private versus public? How would you describe kind of the attractiveness and unattractiveness and the capacity for that given your current view of credit markets and the appetite for debt? And then I know there's been a history, years past, when private equity was very interested in active and TV stations maybe, less so on recent years. Are you sensing that there may be more interest generally in private equity and being active in this space again?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [32]

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Well, I think, Barton, I'd start with depending up on who estimates you read, there's a trillion dollars of money raised in private equity looking for a home. So -- could that necessarily mean that there is more interest in our sector and any other sector. We've said on our prior calls that our sector is tailor-made for private equity, given the high margins and the high free cash flow and the ability to delever quickly, that seems to be the first chapter of a private equity playbook, having been in business with a private equity sponsor for the first 7 years of the company's existence. Having said that, I think we would only go private if we were paid to do so. And if it were the best decision and to create the most value for our shareholders, then it would be something we would consider. We don't necessarily see it as a financing mechanism or a capacity creation. I mean, we've got a pretty stout balance sheet and equity that is highly valuable to us, and we think to others. So the only reason we would do it is if that were the -- in the best interest of our shareholders, and I think you can put a period at the end of that sentence.

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Barton Evans Crockett, B. Riley FBR, Inc., Research Division - Former Analyst [33]

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Well, if I could follow up a little bit on that is -- would going private be a bad idea in this environment given that it would take away stock as acquisition currency?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [34]

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I think you'd have to tell me. You'd have to ask our shareholder base at what price, and then you can tell me whether it was a good idea or a bad idea. There are people that want all cash. There are people that may want stock. I mean, you can give stock at a private company just as well as a public one. It will not be liquid, obviously, but I don't think that would drive any decision here. I think it would be made purely on the basis of what is in the best interest of our shareholders. And if someone were willing to pay a significant premium to what we have been able to generate for our shareholders in the public markets as a stand-alone company, then that's obviously -- the shareholders will get a chance to vote on that, if it ever came to that point. So beyond that, I mean, as Tom said earlier, these are kind of hypothetical and theoretical questions, and they're not things that really we've thought about it at this point.

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Barton Evans Crockett, B. Riley FBR, Inc., Research Division - Former Analyst [35]

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Okay. And then switching gears, one other question, if I could. One thing that came out of Sinclair's problems with the FCC was essentially some pushback on what I would describe as sidecar arrangements. I'm just wondering, do you think that the FCC pushback on Sinclair that -- suggesting that maybe they were deceptive in some of that? Is there anything in that, that makes sidecar arrangements generally problematic? Or do you think it's just so specific to Sinclair? And I say that to assume that if you are working with a sidecar that they'd be someone you had a long-standing business relationship or friendly with. So I'm just curious if you think that there's any broader issue in the way the FCC has come down?

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

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I'll go back to my earlier statement that I think that inferences coming out of the Sinclair-Tribune transaction are specific to that transaction. I don't think there is any read-through to the broader marketplace. I would tell you that all of our VIE or sidecar arrangements, if you want to use that term, are with broadcaster -- veteran broadcasters that have experience in the industry. And so we believe that those have been -- and we did our first one in 1998, obviously. So we've been around for a long time and the FCC has had plenty of time to review them. And I believe that they passed the inspection. And we don't anticipate any issues with our sidecar relationships and think that any of the commentary you're speaking to is probably deal specific and not a read-through to the broader market.

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Operator [37]

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Next we have Clay Griffin from Deutsche Bank.

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Clayton Keever Griffin, Deutsche Bank AG, Research Division - Research Associate [38]

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Tom, I think you mentioned the run-rate for corporate expenses. I wondered if could just [leave it at that]. But just at a higher level, just curious what kind of opportunities there are for further efficiency in your non-programming OpEx? And how we should think about that over the next quarters?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [39]

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When you say, are there efficiencies in non-programming, are you specifically speaking to corporate?

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Clayton Keever Griffin, Deutsche Bank AG, Research Division - Research Associate [40]

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Well, just corporate SG&A, just kind of non-programming station expenses. Just kind of the opportunity you guys might have for further efficiency gains there.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [41]

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Sure. Absolutely. I mean, there are all the time. We are long on real estate post-Media General. I think you will see us -- and we have been taking action to monetize or to exit leased inventory from a real estate perspective in order to reduce costs. Clearly, we're also automating wherever possible, not only on the business hub and traffic side, but also at the station level from a master control perspective, et cetera. Those projects are ongoing, and we chip away at that on an annual basis. So yes, there's plenty of opportunities there, and it's up to us to wring that towel as much as we can. Some of that does require capital in order to put in place technology in order to generate some of those efficiencies, but all of that is ongoing and a continual process.

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Clayton Keever Griffin, Deutsche Bank AG, Research Division - Research Associate [42]

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Great. And then as we think about -- other folks have asked about the cap and opportunities to get -- to achieve greater scale. I'm curious about the -- if your view on in-market consolidation has changed over the last quarter or 90 days, and then as a follow on, just how you see collaboration opportunities like the TIP Initiative and others progressing from here?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [43]

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Sure. With regard to in-market, obviously, we've executed on that in the last 30 days. Some of those opportunities take a little time, a little handholding to get them over the finish line, but obviously those are, in our view, massively accretive. We just wish that there were more immediate and larger opportunities out there. Those do exist, but they take some time to get to the finish line.

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Operator [44]

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Next we have Marci Ryvicker with Wells Fargo.

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Marci Lynn Ryvicker, Wells Fargo Securities, LLC, Research Division - Former MD & Senior Analyst [45]

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I want to follow-up on another -- I guess, a bunch of questions. If you were to do a larger transaction, I know you levered up for the MEG deal to about 5.5x. Is that the level you're comfortable with or is it something below that?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [46]

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It's -- like I said before, Marci, it's all deal specific with regard to how quickly we can deleverage and get back down. Generally, I would say, since we did the MEG transaction, the cost of debt is higher. Therefore, our appetite for debt is probably marginally less now than it was before. But in terms of trying to put a specific number on that, it's difficult because every transaction is different.

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Marci Lynn Ryvicker, Wells Fargo Securities, LLC, Research Division - Former MD & Senior Analyst [47]

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Okay. And there's a thought out there in the marketplace that should Tribune and Sinclair not consummate their deal, that Tribune may still be up for sale and that Nexstar would be the most natural buyer to take a second look because you took a first look. Can you comment on that sentiment?

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

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No, other than to say, our eyes are wide open as to opportunities that are out there. And I would tell you that at our Board retreat last week, we discussed the point that in Nexstar's history there probably hasn't been this much supply or potential supply in the near term. And so that's -- of interest to the company, we are a consolidator. We will continue to attempt to grow where it makes sense for our shareholders and financial sense in operation and the synergies are dramatic. So we look at everything, and we have a bright-line walk-away price from everything. And if we can transact inside of that, and that means it's more accretive than buying back our stock, then that's what we're kind of paid to do. So I think that we'll have to see how that situation plays out and the time frame on which it plays out. And what the downstream, legal situation is with all of the entities involved and what those contingent liabilities could look at. But that's not anything for us to comment on specifically because it's hypothetical as of this point in time.

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Marci Lynn Ryvicker, Wells Fargo Securities, LLC, Research Division - Former MD & Senior Analyst [49]

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Okay. And then last question is on fundamentals. I know you're one of the only companies to give a 2018-19 free cash flow guide. And Tom, I can't remember if you talked about what the underlying expectation is for core in that free cash flow guide.

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [50]

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Flat to up slightly. But that was also based on a political number, which has now been increased.

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Marci Lynn Ryvicker, Wells Fargo Securities, LLC, Research Division - Former MD & Senior Analyst [51]

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So for '18, it would be lower than that. For '19, it won't be affected, correct?

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Thomas E. Carter, Nexstar Media Group, Inc. - Executive VP & CFO [52]

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Well '19, political is really not that important.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [53]

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Yes. I would just point out, Marci, that not in the original guide, where the 2 acquisitions that were announced last week, and the increase in the political guide that was announced this morning.

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Operator [54]

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Moving on, we have David Joyce with Evercore ISI.

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David Carl Joyce, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [55]

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Couple of questions on digital and targeted advertising. First on the digital side. Can you discern if the digital -- if you're taking a share from other digital platforms? Or is it from advertisers who are allocating new spending into digital?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [56]

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I don't know that we're taking it so much from other platforms today, although as we build our digital business, our vision is that our local sellers and our local brand identity can perhaps be the tiebreaker that would allow our local sales people to be the concierges to help SMBs navigate through this morass of opportunity. So we do think that will be an opportunity going forward. I would say that it is either increased spend that is allocated to digital or a lot of our digital growth in our local sites has come from -- frankly, from newspaper over the past several years.

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David Carl Joyce, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [57]

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Second question is, if you could just provide an update on the ATSC 3.0

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Is there any new learnings there, any adjustments to the -- an earlier strategy, maybe as you've been moving along in those 2 markets?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [58]

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No. It's, obviously, very early days. We have agreed to be the first 3.0 lighthouse in Phoenix for that full market conversion. That will happen later this year. It hasn't happened yet. And here in Dallas with the buildout of the SFN network with American Tower as a partner, those are just beginning. So there is nothing really up and running yet. We're all in the early stages of the transition, which will lead to kind of the test and the learnings will come out of all of that. And I would say, we are learning all the time. Brett Jenkins, our CTO, is navigating both the spectrum consortium and the Pearl consortium, and our representation in both. We're the only group that's represented in both of those. So I think we will have the highest and best learnings out of both of those 3.0 transitions as they develop. And again, it's not as if Phoenix is transitioned or Dallas has been fully built out yet. Those things are ongoing, but we still have a ways to go.

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Operator [59]

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Next from Barrington Research, we have Jim Goss.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [60]

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Perry, given that you're headed to D.C., are you expecting that this -- the regulatory issues are about to become or be better defined or is that still vague and in process?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [61]

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Well, I think it's kind of the Texas 2 step, Jim, that the regulatory season will propose change and there is likely going to be predictable blow-back from special interest groups regardless of what that change is, whether it's a point increase in the cap or total elimination. So often these things end up in the courts and jurisprudence would prevail. But I think the affirmation of the UHF discount creating an effective 78% cap today, while it was -- it occurred on a technicality, it still occurred, and I think that, hopefully, will give Chairman Pai some additional momentum to deregulate here. So we're hopeful, and we'll, obviously, be in discussion with that and other topics of issue to the local broadcast market. And I think with the DOJ to make the case that total television ad spend as a percentage of total local ad spend is about 14% of the marketplace. And so I'm not sure how anyone could see that 40% -- or 14% is undue concentration of anything at this point in time, because, obviously, video is video and these -- the sources are replaceable, which is an underlying tenant of DOJ regulation. So we'll be trying to understand that more and have conversations there that are substantive and make our case and kind of see where things go. But I do think the FCC will take action before the year is out, that's my belief. I don't know anything more than anybody else does, but I do believe that the FCC will make a proposal to increase the national ownership cap from 39% and eliminate the UHF discount item as part of that review. And I believe we'll see some action from the FCC before the year is out. It could roll into next year after the elections, but I don't think so. But again that's just one man's opinion.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [62]

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Do you also --are you inclined to wait until the regulatory does settle before you pull the trigger on any sort of acquisitions? Or do you just continue the negotiations behind the scenes based on what you assume will happen and just wait until that sort of thing happens?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [63]

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Yes. We're not really waiting for anything. As I mentioned, there is a particular potential acquisition that could be done under the current rules, but that is going to have to be an accretive acquisition, an opportunity for Nexstar or we won't act on it. We continue to look at in-market and other acquisitions that would increase our national reach. As you know, we're at about 26-and-change against the 39% cap today. So we have running room with the UHF discount in place. And then, obviously, more running room if the cap is raised substantially or eliminated. So -- and I think we would price the risk accordingly in any transaction that was in discussion, while the rules were being reviewed.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [64]

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Okay. One final thing. There is a general assumption that as you make acquisitions or become bigger, you've better negotiating leverage in terms of things like retrans. Given that you doubled your size effectively or more so with MEG. Have you found that to be the case that you do have a better positioning and that's been beneficial to you in that way?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [65]

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I do believe that scale matters. And I do think we have seen incremental benefit from doubling the size of the company in 2017. And both vertically, larger reach and then horizontally having more outlets in a marketplace that are wholly owned that you can bargain for, I think both of those -- scale matters, and scale matters in MVPD discussions, scale matters in discussions with the networks. As we become more important partners to one other, I think that scale is increasingly an asset. So

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scale is incremental negotiating leverage.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [66]

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And it's helped in the reverse kind of issue as well?

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [67]

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Never know, because we're not a control group, obviously, but we feel it does. We're an important customer with each of the networks. We're either a #1 or #2 affiliate group for all networks now, and so it's important to be important, we believe. So I think we have good relationships. We have constructive business discussions, and we have very spirited negotiations. But at the end of the day, both parties have to be

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Operator [68]

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All right. And ladies and gentlemen, that concludes our question-and-answer session for today. I'd like to turn the floor back over to Mr. Perry Sook for any additional or closing remarks.

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Perry A. Sook, Nexstar Media Group, Inc. - Chairman, President & CEO [69]

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All right. Well, thank you very much. We look forward to continuing to report on our growth and accomplishments in the second half of 2018. And on behalf of the 9,200 employees of the Nexstar nation, thank you for your interest and ongoing support and for joining us today.

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Operator [70]

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And once again, ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect.