Nexstar Media Group - Earnings Call - Q3 2020

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Nexstar Media Group third quarter 2020 results call. Today's call is being recorded. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Joe Jaffoni (Head of Investor Relations)

Thank you, Keith, and good morning, everyone. I'm just going to read the safe harbor language, and then we'll get right into the call. All statements and comments made by management during this 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 31st, 2019, and Nexstar'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 over to your host, Nexstar Chairman and CEO, Perry Sook. Perry, please go ahead.

Perry Sook (Chairman and CEO)

Thank you, Joseph, and good morning, everyone. Thank you all for joining us to review Nexstar's record third quarter operating and financial results. During the third quarter, we continued to overcome most challenges presented by the pandemic, thanks to the ability of our outstanding operating teams to adapt and dynamically manage the business for continued growth. Nexstar delivered record third quarter net revenue, profitability, cash flow, and with each of these metrics all exceeding nicely our consensus expectations. As always, Tom Carter is here with me on the call this morning. As we announced a few weeks ago, Tom has assumed the additional responsibility of recruiting a CFO to replace himself as our team continues to focus on further leveraging Nexstar's position as the nation's leading local media company and the value of the enormous volumes of content that we produce to ultimately create new value for shareholders.

I'll touch more on that subject in just a couple of minutes. Third quarter net revenue increased 68.5%, and reflecting strong flow-through in our model, Nexstar generated record third quarter BCF, Adjusted EBITDA, and free cash flow, with these metrics growing 128.3%, 209.1%, and 268.3% respectively on a year-over-year basis. Throughout the quarter, we also made significant progress with our leverage reduction and return of capital initiatives as we lowered net debt by $162.5 million and allocated $150.4 million to share repurchases and quarterly cash dividends. At the same time, we had the pedal to the metal in terms of positioning the company for future free cash flow growth, further deleveraging, and increased capital returns to shareholders. In this regard, we completed two capital market transactions that allowed us to further lower our blended cost of capital while extending our maturities.

We expanded the share repurchase authorization by an additional $300 million. We announced the operational realignment that combines Nexstar Broadcasting and Nexstar Digital to create operational efficiencies and content monetization opportunities to enhance our financial results. This added the benefit of increasing the restricted payments capacity under our two outstanding bond issues by approximately $150 million, which allows now for more flexibility and activity under the just-noted expanded repurchase authorization. On the operating front, on September the 1st, we successfully launched NewsNation, WGN America's primetime national newscast, which reaches approximately 75 million television households across the country, as well as the accompanying NewsNation Now mobile app, and will provide some color on our first two months of operations of those new revenue sources in just a moment.

In terms of our primary financial performance metric, we generated approximately $223.2 million of free cash flow in Q3 and have generated nearly $854 million in the first nine months of the year before one-time transaction expenses. With expectations for a strong fourth quarter, Nexstar will finish 2020 with net leverage in the high threes. The strength of our business model and enterprise-wide focus on managing operations for free cash flow enabled us to bring about $0.2 of every net revenue dollar to the free cash flow line. Reflecting our repurchase of 1.3 million shares in Q3 and 2.25 million shares in 2020 year-to-date, we reduced our issued and outstanding share count to approximately 44.1 million shares. As a result, 2020 year-to-date free cash flow per share amounts to about $19.35 per share, compared with $6.90 per share at the same time last year.

Furthermore, with approximately $260 million remaining on our share repurchase authorization, we are on plan to continue to return capital to shareholders while aggressively reducing our leverage and pursuing select opportunistic accretive acquisitions. Turning back to Q3, Nexstar's industry-leading scale, diversified revenue sources, and consistent execution resulted in a 70.8% rise in third quarter total television advertising revenue, as we benefited from the recovery in advertising spending across key categories and drove year-over-year increases in same-station new-to-television business, as well as attracting a strong share of political spending in our markets, which, by the way, exceeded our internal projections. Nexstar's local sales initiatives continue to generate healthy levels of new business. In total, our sales teams generated $25.3 million of new-to-television revenue in the third quarter, marking a 22.2% rise over second quarter and a 30.4% rise over the comparable 2019 period.

While local and national advertisers initially reacted to the pandemic by modifying their spending, we saw rebounds in the third quarter across several key categories as we generated year-over-year growth in four of our top nine categories. We also saw month-over-month improvements in our same-station core advertising revenue performance, continuing from the second quarter throughout the third quarter and into the fourth quarter to date. Third quarter television advertising revenue of $514.3 million includes political revenue of $132.4 million and core advertising revenue of $381.9 million. Third quarter political spending by political action committees and candidates exceeded our projections, and with election day now behind us and the potential for additional spending with runoffs, we will exceed our prior 2020 full-year expectation for net political revenue in the low $400 million range by approximately 20%.

Looking ahead to the fourth quarter, we continue to see month-over-month improvements in our core pacing data, with the exception of October due to political displacement, and our expected record results will reflect the final five weeks of political spending that led up to election day. We are highly encouraged by the advertising rebound across our station footprint, most notably in auto, our largest core advertising category, which is pacing up significantly from where the third quarter finished. The resumption in auto category spending is complemented by a big resurgence in big box retail spending, as well as ad spending in fast food, home improvement, attorneys, alcohol, furniture, and a new category of sports wagering. Our new business strategies, ongoing sales training, education, development, and support, and performance-focused incentive structures have proven very effective in our ability to capture ad spend, both in broadcast and in digital.

Now more than ever, viewers rely on television news to stay informed about everything from the latest pandemic developments to the Supreme Court nominations to consumers' current appetite for political and election coverage. Similarly, the digital engagement statistics remain significant and continue to show a 20% increase over our prior year numbers. In terms of unique users, Nexstar's digital properties ranked number one for local news, number 15 in total news and information, and number 36 overall in August as measured by Comscore. With our market-leading stations, deep local national reach, and WGN's NewsNation, Nexstar now produces over 268,000 hours of content annually. We successfully launched WGN America's primetime national newscast, NewsNation, on September the 1st.

In addition to the live nightly newscast, NewsNation's team of reporters and producers are now delivering news 24 hours a day online through the NewsNation Now mobile app, which creates another opportunity for monetization and revenue diversification. We are very pleased with the NewsNation content and overall product, as well as the ability of the newscast to stay true to our goal of presenting news in an unbiased manner. Our ability to quickly compete with the incumbent cable news providers is reflected by the fact that our NewsNation Now app was the first to break the news on Justice Ginsburg's passing, President Trump's COVID diagnosis, the passing of the pitching great Tom Seaver, and the plot to kidnap the governor of Michigan. Going forward, we are focused on improving national awareness of the three-hour nightly telecast and attracting strong interest for the on-air and digital offerings from leading national advertisers.

As referenced a moment ago, last month we announced an operational realignment whereby we combined Nexstar's broadcasting and digital operations into a new company called Nexstar Inc. The new structure, along with the appointment of proven divisional leaders, is intended to accelerate growth as we maximize the value of our content, national reach, and significant consumer digital usage across all of our platforms. We expect a mid-seven-figure expense savings in 2021 as a result of the synergies, efficiencies, and streamlined reporting structures resulting from this realignment, and with local broadcast and digital news being the most influential and effective mediums for brands, we expect to see advertisers continuing to allocate increased spending to our broadcast and digital platforms, particularly as we offer business advertisers and brands unparalleled 24/7 marketing opportunities across all of our screens and devices.

Third quarter distribution fee revenue rose 82.6% year-over-year to $538.4 million, reflecting a full quarter benefit of the retrans consent synergies from last year's Tribune Media transaction, our renewal of 2019 retransmission consent agreements representing approximately 70% of our subscriber base, and MVPD and OTT subscriber counts consistent with our expectations. With approximately 18% of our subscriber base left to renew and reprice this year, continued growth from this source is projected for the balance of 2020 and beyond. I'll remind everyone that more than 50% of our annual Adjusted EBITDA is expected now to be derived from contractual distribution fee and equity income distributions.

Nexstar has solid visibility into our contractual distribution economics through December 2022, as in addition to the 2019 and 2020 multi-year retrans consent agreements that we're renewing, which total approximately 88% of our subscribers, we also have the bulk of our network affiliation contracts with CBS, Fox, and NBC under new long-term agreements, which were completed in the back half of last year. As a result, over 80% of our Big Four affiliations are contracted through December 31 of 2021, and over 70% of our Big Four affiliations are contracted through December 31 of 2022. With our focus on generating free cash flow, we remain committed to actively managing our capital structure, our cost of capital, and liquidity position to provide the financial flexibilities to support our business and enhance our shareholder returns.

During the first nine months of 2020, we allocated approximately $906.9 million toward debt reduction, opportunistic share repurchases, and cash dividends. Additionally, Nexstar maintains a strong balance sheet including $409.9 million in cash at September 30, with access to approximately $200 million under our revolving credit facilities. With record year-to-date free cash flow, historically low LIBOR rates, contractual distribution fee revenues, and record political revenue, we remain highly confident in our ability to maintain our liquidity position and path toward further deleveraging. Our growth to date in 2020 reflects a strong foundation of our assets, our operations, and our financial structure, and the adaptability of our teams coast to coast to take immediate actions to offset and, in many cases, overcome the economic impact of the pandemic.

We implemented a range of cost-cutting initiatives, which resulted in third quarter operating and corporate expense savings in excess of $25 million from budgeted levels, and that totals now over $70 million year-to-date, with additional fourth quarter operating and corporate expense savings in the area of $10 million. Reported third quarter direct operating expenses net of trade primarily reflect a full quarter of expenses related to the operation of the acquired Tribune stations and budgeted increases in network affiliation expense as a partial offset to Nexstar's rising distribution revenue. In summary, Nexstar's leading local platforms have performed exceptionally well despite the challenges presented by the pandemic. Our capital allocations in 2020 to date highlight that our free cash flow and active management of both our cost structure and balance sheet provide us with the financial flexibility to continue to support our shareholder value creation activities.

As a result, Nexstar remains highly confident in our long-term strategies of serving our communities, building our top line, maintaining close control of fixed and variable costs, and optimizing our balance sheet. These strategies will enable Nexstar to extend our long-term record of growth and shareholder value creation. With our 169% year-to-date free cash flow growth, contractual distribution fee revenues, our Food Network distributions, and historically low LIBOR rates, which have reduced our interest expense, we believe our operating and financial disciplines have strengthened the resiliency of our business and created unrivaled local marketing platforms, all the while supporting growing returns to our shareholders. With that, let me turn the call now over to Tom Carter for the financial review. Tom?

Tom Carter (CFO)

Thanks, Perry, and good morning, everybody.

As outlined in this morning's press release, the actual results for the three months ended September 30, 2020 reflect the company's legacy Nexstar broadcast and digital operations and a full quarter of results from Tribune Media stations, which we acquired on September 19th of 2019. The third quarter 2020 revenue from WGN America, also acquired in the Tribune transaction, is included in core television advertising revenue and distribution fee revenue. A full quarter of contribution from Nexstar's 31.3% ownership stake in the TV Food Network and other investments acquired in the Tribune transaction is included in the full income statement under income or loss on equity investments net, and in the cash flow statement under distributions from equity investments.

The comparable three-month period ended September 30, 2019 reflects the legacy Nexstar operations during that period and a stub period of results for the assets acquired under the Tribune acquisition from September 19 through September 30 of 2019. All actual results reflect the impact of $17.2 million and $34 million of one-time transaction expenses incurred in the quarters ending September 30, 2020, and September 30, 2019, respectively. With that, I'll start a quick update on the Q3 capital markets activity, which is reflected in a partial quarter in the operating results and on the balance sheet at quarter end. On September 3, Nexstar Broadcasting, Inc. and Mission Broadcasting entered into an incremental secured revolving credit facility in an aggregate principal amount of $280 million, of which $250 million was allocated to Mission and $30 million allocated to Nexstar.

Concurrent with the closing of the amendment, Nexstar also voluntarily prepaid $250 million of its existing Term Loan A with cash on hand, while Mission borrowed $225 from the aforementioned $250 million facility and repaid its Term Loan B3 in full. Mission also reallocated $3 million of available capacity under its existing revolving facility back to Nexstar. As such, on September 30, 2020, we had approximately $197.7 million available under the revolving credit facilities, with $172.7 million available to Nexstar and $25 million available to Mission. On September 25th, Nexstar Broadcasting Inc. completed the offering of $1 billion of 4.75% senior notes due 2028. The notes are senior unsecured obligations that are guaranteed by the company, Mission, and certain of both parties' existing and future restricted subsidiaries on a senior unsecured basis.

We used the net proceeds from the offering to redeem in full the $900 million 5.75% senior note offering due 2024 and to pay related premiums, accrued interest, unpaid interest, and fees and expenses, with the remainder available for general corporate purposes. I'll now review Nexstar's Q3 income statement and balance sheet data, after which I'll provide an update on some points of guidance going forward. On a combined company basis and pro forma for the divested stations, third quarter same station net revenue was up 19% due to approximately $132 million of political advertising and growth in distribution fee revenue, marking a sharp improvement from the 35% decline we endured in Q2, and continuing along with consistent monthly sequential improvements we've seen since April and into Q4.

Same station distribution fee revenue was up 38%, outsized from prior quarters due to the depressed 2019 Q3 levels related to the AT&T carriage dispute, and continuing digital revenues were down 19%, with local agency services up approximately 16% and station website revenue down approximately 10% due to softer local customer buying trends related to the pandemic. To offset the anticipated impact of COVID-19 on our commercial advertising revenue, late in the first quarter, Nexstar implemented a range of cost-cutting initiatives. These resulted in operating and corporate expense savings in excess of $25 million from the budgeted levels in Q3 of 2020 and had driven savings in excess of $75 million since the onset of the pandemic. All of this, in addition to the fact that we have done this without requiring layoffs, furloughs, or pay freezes among the general workforce.

As noted in this morning's release, given that, effective November 1, we combined our broadcasting and digital operations, commencing with the fourth quarter of 2020, we will no longer report Broadcast Cash Flow because of that. However, investors will still be able to calculate a comparable metric for the combined operations by adding back corporate expenses to Adjusted EBITDA, which, of course, we will continue to report alongside free cash flow. Third quarter direct operating expenses net of trade were approximately $421 million, up from $318 million in the prior year, primarily reflecting a full quarter of incremental expenses related to Tribune and the budgeted growth in network affiliation expense as a partial offset to our rising distribution fee revenue. Third quarter station SG&A was approximately $187 million inclusive of the Tribune operations.

Same station pro forma fixed expenses, excluding programming expenses, were down 14% over the prior year due to the synergies realized from the Tribune acquisition and the previously mentioned expense reduction activities in response to the pandemic. Corporate expense was $39.7 million inclusive of $12.4 million of stock-based compensation, and as previously mentioned, there were approximately $17.3 million of one-time transaction expenses during the quarter. Third quarter operating cash taxes were $136.6 million, reflecting the previously disclosed shift of some tax expenses from Q2 to Q3. Ongoing CapEx and transaction CapEx totaled approximately $34.2 Spectrum Repack CapEx totaled approximately $19.4 million, and we received approximately $12.9 million in reimbursements from the FCC during the quarter. As a reminder, we anticipate being fully reimbursed for all CapEx related to Spectrum Repack as those activities wind down during 2021.

Third quarter total interest expense amounted to $77.3 million, down from $93.2 million in 2019. Cash interest expense was $72.9 compared to $55.4 in the prior year's quarter, with the increase due to the incurrence of debt to fund Tribune, partially offset by lower interest rates and lower first lien borrowing levels. Third quarter Adjusted EBITDA of $461 million and free cash flow of $223 million, all before transaction expenses, exceeded consensus expectations. This reflects the realization of synergies and growth related to the Tribune transaction, robust political revenues, the Q3 rebound in core, distribution agreement renewals executed in the second half of 2019. Adjusted EBITDA and free cash flow include approximately $10 million in distributions from equity investments related to our 31% ownership in the TV Food Network. Year-to-date, we've received approximately $207 million of TV Food Network distributions.

As a reminder, we receive cash distributions from TV Food Network on a quarterly basis, with the largest payments recorded during the first quarter of each year. For the fourth quarter of 2020, we anticipate recording approximately $9 million in TV Food Network distributions. For the fourth quarter, we're projecting recurring cash corporate overhead, exclusive of stock comp and transaction costs, to be approximately $30 million, and we will come in for the full year well below our 2020 cash corporate overhead guidance of approximately $120 million. Non-cash comp in the projected quarter is expected to be approximately $12 million and $48 million for the full year. Transaction expenses will be approximately $30 million for the fourth quarter. Operating cash taxes are expected to be approximately $133 million in Q4, and we're still expecting operating cash taxes between $240 and $250 million for the year.

Fourth quarter CapEx should come in at approximately $37 million, with our full year expectation unchanged at approximately $160 million. The investment related to the launch of NewsNation on September 1 came in as expected, and we have prioritized capital expenditures to maintain maximum financial flexibility in the current environment. Finally, we expect Nexstar's cash interest expense to be approximately $7 million for the fourth quarter and $320 million for the full year, reflecting the interest rate savings related to the decline in LIBOR and the aforementioned refinancing of some of the senior notes.

Turning to the balance sheet, reflecting the capital markets transactions noted at the beginning of my comments and the $162.5 million of debt reductions in Q3, Nexstar's outstanding debt at September 30th was $7.88 billion and consisted of approximately $5.1 billion in first lien term loans, with the balance in two senior note issuances, the 5.75s, which is approximately $1.8 billion, and the new 4.75s, which is a billion-dollar face amount. Total net debt amounted to approximately $7.5 billion, as I mentioned before, compared to $8.3 billion at 9/30/2019. Net debt for the first lien covenant purposes was $4.9 billion, with net cash limited to $200 million. Our net first lien covenant ratio at 9/30 was approximately 2.69 compared to 3.52 at year-end 2019, which is well below our first lien covenant of 4.25.

As a reminder, our first lien covenant permits netting of cash to a maximum of $200 million at any time. Our total net leverage at quarter end was approximately 4.11 compared to 5.18 at year-end 2019. As a reminder, Nexstar's only meaningful financial covenant is our first lien debt, which is the aforementioned four and a quarter times. At the onset of the pandemic, Nexstar took immediate actions to adapt our business to operations in the current environment and to preserve liquidity in order to best position the company for long-term success as we return to normalized operations. In this regard, we continue to prioritize cash retention and ended Q3 with approximately $410 million of cash on hand and approximately $200 million available under various revolving credit facilities.

At the same time, during the quarter, we returned $150 million to shareholders through the repurchase of $1.3 million of Class A shares and through our quarterly cash dividend payment of approximately $25 million. We also made the aforementioned $162 million in debt repayments during the quarter. As reflected by the new revolver and the 4.75% bond issue, during the first nine months of 2020, we have actively managed our capital structure, cost of capital, and liquidity positions for our business and enhanced shareholders' returns. Year-to-date, we have allocated approximately $1.1 billion to our shareholder value creation opportunities, including approximately $800 million in debt reductions, $75 million in dividend payments, and $200 million in share repurchases. With our share count now at 44 million shares, we believe these actions represent approximately $25 per share of value creation.

We believe this is conservative given our financial strength and the consistent execution we have exhibited. In September, we announced that the board of directors approved an expansion of the company's share repurchase authorization for up to an additional $300 million, bringing the total capacity under our share repurchase program to approximately $384 million at the time. Reflecting the 1.3 million shares repurchased during the quarter, we have a remaining authorization of approximately $260 million of share repurchases. Our expanded repurchase authorization and recent repurchase activity reflects our confidence in the company's growing free cash flow from operations and our long-term commitment to deploying capital in a manner that can enhance shareholder value. We intend to remain opportunistically aggressive in this front. In addition, the merger of Nexstar Digital LLC into Nexstar Inc.

is estimated to increase the restricted payments capacity under the two outstanding bond issues by approximately $150 million, thereby allowing for more aggressive shareholder repurchase activity in the future. Looking ahead with the continued double-digit year-over-year growth in distribution revenue, the upturn in core, and what we now expect to be approximately $480 million in political advertisement for the year, with a meaningful amount to be booked in Q4, we have an excellent visibility into the strong year-end 2020. As such, we remain committed to our dividend payments and allocating the vast majority of our free cash flow towards leverage reduction, and are confident in exceeding our target for reducing total net leverage to the high three range by 12/31/2020, while always remaining optimistic on share repurchases and potentially accretive acquisitions.

Nexstar has already made significant progress on our leverage reduction plan, and we enjoy a strong cash position with additional capacity under our revolver. In addition, the reduction in interest expense related to our favorable LIBOR rates, operating expense savings, our capital expenditure prioritization, and recent capital markets activity will also serve us well as we finish 2020 and begin 2021. Looking ahead into 2021, Q1 will be the most like any quarter in 2020 given the strength early in the year and the offset in political revenue. Q2 and three will be substantially over 2020, while Q4 will again see the cyclical impact of political advertising. In summary, despite the unprecedented challenge of the pandemic, our scale leadership and flexibility, our synergy realization, and operations are generating results, while our capital structure is in great shape with a cost of capital and maturity perspective that is favorable.

We have accelerated our repurchase activity and will benefit from the organizational structure changes we announced last month. Finally, our service to our local communities and the local and national advertisers has never been stronger. We continue to drive significant growth and have consistent and healthy visibility into our results, and we remain confident in our ability to enhance shareholder value going forward. That concludes the financial review for the call, and I'll turn it back over to Perry for some closing remarks before Q&A.

Perry Sook (Chairman and CEO)

Thank you very much, Tom. Our results in 2020 and our comments today highlight the actions we continue to take to drive shareholder value. While maximizing shareholder value is a key focus for our management team, supporting our local communities is the ultimate goal of the thousands of Nexstar Nation employees who work across our portfolio.

With election day now behind us, I want to close by briefly highlighting some of our employees' essential work. Our core value of serving our communities with the local news and critical information they need has allowed us to successfully navigate through the evolving pandemic. In this regard, Nexstar has produced year-to-date 77 separate town hall meetings addressing the state and regional responses to the virus. Additionally, Nexstar stations have produced 34 different specials related to recent civil unrest and race relations in our country. As the nation prepared for this year's election, Nexstar produced 117 debates in markets across the country covering gubernatorial, Senate, and local races, allowing the voters to hear directly from the candidates seeking their support. Last month, Nexstar's local news operations earned a total of four National Edward R.

Murrow Awards, including a national award for the exclusive series of special cross-platform stories about immigration and everyday life along the border of the United States and Mexico. Earlier in the year, 30 Nexstar stations received a total of 50 regional Murrow Awards. Nexstar is also proud to be honored with 61 Emmy Awards in 2020. Finally, in October, Nexstar received the 2020 Catalyst Award, which recognizes a communications company that creates strategic programs to advance meaningful social change. We look forward to catching up with you with another positive report in February highlighting our Q4 results. On behalf of the entire Nexstar Nation, our board, and our management team, thank you for your continued interest, support, and for joining us today. Let's now open the call to Q&A to address your specific areas of interest. Operator?

Operator (participant)

Thank you.

Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Dan Kurnos with The Benchmark Company. Please go ahead.

Dan Kurnos (Analyst)

Thanks. Good morning. That's a new one for me. First off, just publicly, congratulations, Tom. Well-deserved, obviously. And then maybe to Perry, your core commentary is a lot more optimistic, better, frankly, than I think the peer group right now. You explicitly called out auto. I'd love to hear more about kind of pacings and what's driving that outperformance and optimism right now.

Perry Sook (Chairman and CEO)

I think it's the fact, and the facts are that we have seen sequential monthly improvement in core advertising results since the low ebb of April. That continued uninterrupted through the third quarter, with every month finishing better than the month before in relation to the prior year. That is continuing in Q4, with the exception of October. Obviously, half of our political revenue for the year came in the month of October, so there was displacement there. Even with all of that, our fourth quarter auto pacing is better than 20 points better than where we exited auto for Q3. The sports betting category is now a double-digit millions per quarter business for us, an eight-digit category on a quarterly basis. That didn't exist last year.

And Tim Busch and his teams have done a great job of generating new-to-television revenue, which is up substantially, as we just reported, on a year-over-year and quarter-over-quarter basis. So our teams are really hustling, and I just can tell you that the results, I think, indicate that.

Dan Kurnos (Analyst)

That's really helpful. And then, obviously, there's been a lot of noise, I think, around net retrans lately. Just timing, I think you were pretty clear, Perry, unless I misheard you just in the call, that you still expect that to be a source of growth even with a smaller footprint coming up at the end of this year. So I just want to confirm that you're still anticipating strong net retrans growth in 2021.

Perry Sook (Chairman and CEO)

Yes, we are.

Tom Carter (CFO)

Yes. And we don't have any mismatched timing contracts.

If you go back and look at our 10-K, you'll see that we have approximately 18. We have 154 Big Four affiliates, and we have approximately 18% of those coming up for renewal in 2021. If you look at and we have approximately 18% of our subscribers on the retrans revenue side renewing between now and year-end. So we've got a much better match of the renewing revenue and the renewing expense contracts. So we don't see any material impediments from that perspective.

Perry Sook (Chairman and CEO)

And there are also annual escalators in our existing contracts that, by and large, reset at the beginning of a calendar year.

Dan Kurnos (Analyst)

Perfect.

Perry Sook (Chairman and CEO)

The short answer to your question is yes. We expect continued net retrans growth.

Dan Kurnos (Analyst)

Yes. No, thanks, Perry and Tom. Just quickly, I don't know. Perry, I know you spent a lot of time discussing capital return.

You guys are probably going to end the year within spitting distance of your original free cash flow guidance despite all the noise we've had this year. And with the incremental cost savings.

Tom Carter (CFO)

Wait a minute. Dan, say that again. Say that again one more time.

Dan Kurnos (Analyst)

I'm pretty sure you're going to end the year within spitting distance of your original pre-COVID free cash flow guidance, unless my math is wrong. So feel free to correct me, Tom. But with your incremental cost savings here, you guys have incredible optionality at this point. And I know, Perry, there's the FCC Supreme Court case, and there are some things that you could do. But at what point how do you just view the balance here? I mean, you guys have this tremendous amount of flexibility. So when do you get more aggressive on either the dividend or the buyback?

I know you're focusing on debt near term, but just any incremental color there would be really helpful.

Perry Sook (Chairman and CEO)

I can tell you that, again, because it's factual and timely, Tom and I talk about this literally every day. I mean, there are some small accretive acquisitions in the digital space that we're looking at. There are the occasional in-market television opportunities. I think we're waiting for clarity on the Supreme Court activities, which probably will come in May or June of next year as to what that landscape looks like. And in the meantime, we have been very aggressive in reducing leverage and paying down absolute dollars of debt while spending a fair amount of money on buying back stock. And obviously, our dividend is constant and constantly increasing on an annual basis, something north of 20%.

So we think maintaining that option value is, right now, the right thing to do, but we know what all the options are.

Tom Carter (CFO)

But Dan, I would also point out we bought back almost 3% of our stock this quarter in the third quarter. So if you annualize that, that is, it's a substantial amount of the stock. And we see at current levels, we see that as being opportunistic and a potential going forward as well. So I know a lot of people like to kid me when I say this, but we can walk and chew gum at the same time. I've been quoted on that several times. But I think this is going to be an example of that because, again, the free cash flow in the fourth quarter, because of the great work that we've done on political, is going to be massive.

And so we have some great optionality. And it's interesting. And I guess I really never had a great appreciation for this, but the timing of the TV Food Network distribution in Q1, Q1 is traditionally in the broadcast business your low point of the year from a seasonality perspective. Well, we don't have that problem anymore because we get a massive infusion of cash from TV Food Network in February of every year. So Q1 is going to be another good quarter from a free cash flow perspective. So as I've said before, I think we've got really good visibility, and it gives us some great options, and we'll be able to, I think, execute in a number of different aspects simultaneously. And you get the Super Bowl in 2021 on CBS, so that doesn't hurt you either.

Dan Kurnos (Analyst)

All right. Congrats, guys. It's a great all-around print.

Thanks very much for the color.

Perry Sook (Chairman and CEO)

Thank you.

Tom Carter (CFO)

Thanks, Dan.

Operator (participant)

We'll take our next question from Kyle Evans with Stephens. Please go ahead.

Kyle Evans (Analyst)

Hey, thanks. I'm going to push a little bit harder on the Supreme Court stuff. I appreciate the timing there, the May, June. But if we get from them what was originally kind of on the books for in-market, could you put some brackets around the opportunity there? I know you have pre-Tribune, we had a good understanding of what your duopoly contribution was, and I'm not sure I have that today. Just some help there would be appreciated.

Perry Sook (Chairman and CEO)

Well, Kyle, as you know, the case before the Supreme Court would deal with in-market ownership restrictions and has nothing to do with the national cap.

So I would call your attention to the major market CW and MyNetwork stations we have that are tremendously successful but are standalone operations. The opportunity to combine with other stations in-market is something we would certainly take a look at if the opportunities presented themselves. But again, approximately two-thirds of our markets operate deriving economic benefit from more than one station. So it's the other third. And now, the way the portfolio is constituted, many of those opportunities are toward the top end of our market list.

Kyle Evans (Analyst)

Got it. You mentioned sequential improvement in core since April with a little bit of displacement pressure in October. Could you put some brackets around kind of what you saw intra-quarter 3Q and give us a number for October?

Tom Carter (CFO)

I would say, generally speaking, Q3 as a quarter was down mid-teens on a same-station basis core.

With the exception of October, I would say it's going to be down mid to high single digits so far in Q4.

Kyle Evans (Analyst)

Thank you. And then, Perry, you ripped through those network renewal metric numbers for 2021 and 2022. I'm sorry. Could you replay those again?

Perry Sook (Chairman and CEO)

I'm sorry. What was that?

Tom Carter (CFO)

You're talking about retrans renewals?

Kyle Evans (Analyst)

You gave the network. I thought there were network renewal numbers for 2021 and 2022. Maybe I misheard that.

Tom Carter (CFO)

Well, it's not so much renewal. It's what we have booked. And again, this is on page, it's either page 14 or page 16 of the 10-K where we list out by the Big Four affiliates what is coming up. And if you do the math, through the end of 2021, we have approximately 80% of our affiliates done. If you think about that, that's call it 20% up for renewals.

We have 18% of our retrans renewals up between now and the end of 2021. So that's the synergy and the lack of any sort of arbitrage with regard to the retrans revenue and the affiliation. And then through the end of 2022, we've got 70% of our network affiliations under contract. So really, the bulk of the renegotiation of the affiliation comes in 2023 and beyond.

Kyle Evans (Analyst)

Got it. Last one. Is WGN America's core material to the model today, and what would it look like in 3Q? Thanks.

Perry Sook (Chairman and CEO)

Are you talking about WGN America?

Kyle Evans (Analyst)

Yes.

Perry Sook (Chairman and CEO)

WGN America's advertising revenue is a nine-digit number, fairly low in the nine-digit range.

Tom Carter (CFO)

I would say it's high single digits of total core advertising.

Kyle Evans (Analyst)

That's fair.

Perry Sook (Chairman and CEO)

Great. Great.

Kyle Evans (Analyst)

Thank you.

Operator (participant)

We'll take our next question from Zack Silver with B. Riley. Please go ahead.

Zack Silver (Analyst)

Okay. Great. Thanks for your question.

Just a high-level one for me. We've had a huge political cycle in 2020. We've got maybe a couple more cycles of really healthy rate step-ups on the retrans side before you sort of reach the viewership and dollar share parity that you've talked about. It'd be really interesting to hear from you guys what you think drives the next leg of growth for Nexstar. Thanks.

Perry Sook (Chairman and CEO)

Sure. Well, we're not done with political for this year. There'll be one, potentially two runoff races in Georgia for the runoffs to be contested on January 5th of next year.

I think you're going to see from our One Nexstar approach, and we spent literally a year putting this together where we brought digital and broadcasting and cable and everything under one roof and one P&L, one silo, if you will, and the synergies, not only financial but operating and sales, go-to-market synergies of this one company multi-platform approach. While it may be a little wonky and in the weeds to talk about with investors, that is really what we see being the next leg of our organic growth. We think we have opportunity to make some select accretive acquisitions in digital. I will tell you that in terms of ATSC 3.0, we have a dozen markets on the air and operating or will by the end of this year. Our target internally next year is to launch another 20 markets with ATSC 3.0.

And these are some big ones: Los Angeles, San Francisco, Dallas, Houston, Cleveland, among others. So we hope to have, by the end of next year, approximately a third of the U.S. covered with Nexstar ATSC 3.0 signals. And again, the business case for that is both offensive and defensive. It will allow us to put a 4K signal out over the air, and that's noticeable to the eye difference over even current HD. And it also is an IP-based transmission standard which will allow people to ultimately seamlessly go from device to device. And we think that that is the next leg of growth for the business. But we think the monetization period is probably still four or five years off before that becomes meaningful.

So again, if you look at the free cash flow generating power of this machine, this platform, it's going to give us optionality in terms of how we want to create value just with the amount of free cash that will come out the process here on an annual basis for the next several years.

Tom Carter (CFO)

After we did Tribune and prior to really the Supreme Court agreeing to take up the FCC case with regard to in-market ownership, we are singularly focused on improving the operations and mining additional value from the assets we have. I think the poster child for that right now is NewsNation on WGN America, taking something from nothing, reruns, and turning it into a product that clearly has value from our perspective and we do from advertisers' perspective.

If you go back and look at the political coverage, the largest advertiser in the political coverage on WGN America, NewsNation, was Facebook. So kind of strange bedfellows, I know, but they clearly see the value in this. And also, Perry mentioned it before, it's these large market CWs that have historically underperformed. As a matter of fact, as CWs, they've underperformed to such a degree that in a number of the large markets, we're really more about local news than we are any sort of secondary network affiliation with either the CW or MyNetwork. So it's really taking those assets that we believe to have substantial value and are just underperforming from a financial perspective and to make that and to realize that on the income statement in terms of greater potential and greater cash flows contributions to the financial side of the business.

So there are strategic, there are tactical areas that we're all working in both long and short term to create value.

Zack Silver (Analyst)

Got it. That's really interesting. And then just on NewsNation, apologies if I missed this, but in terms of viewership and engagement with the new NewsNation offering, any numbers you can give? Or if not, is viewership and engagement meeting your expectations given that it's early days?

Perry Sook (Chairman and CEO)

Sure. Well, I guess the headline is that 12% of America knows that NewsNation is on WGN America in prime time seven nights a week. So that is job one, is increasing awareness. As you know, the project basically finances itself other than the initial CapEx outlay, which is now in the rearview mirror. Not renewing rerun contracts allows us to invest in NewsNation launch and now going forward in expansion. And we have plans to do that.

So I'm very pleased with the product. I don't know if you happen to see any of it on election night. I tend to watch a little bit of it just about every night. And we are working very hard and staying true to our mission of balance, not bias, and facts, not opinion. And we had 35 correspondents from around the country from our Nexstar Nation stations as well as correspondents that NewsNation employs directly reporting. We had more live shots than any other news organization in the country providing news from the states and localities where it was happening, not a round table of pundits talking about what was going on. And that's our point of differentiation. And again, I can't tell you, we've never had political revenue on WGN America in its existence. And this year, that was $1 million.

Facebook has never done business with WGN America. Pharma has. I mean, financials have never done business with WGN America. And they're all now advertising clients. So we're in it for the long haul and very pleased with the early results. But obviously, awareness is the number one issue that we will attack as we continue to expand the product into more dayparts as time goes on.

Zack Silver (Analyst)

Got it. Thanks, Perry. Thanks, Tom.

Operator (participant)

We'll take our next question from Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber (Analyst)

Great. Thank you. I guess a housekeeping question first. Maybe I missed this, but the retrans subs, how much was that down year-over-year? I think you told us three months ago it was down 5%-6% for the second quarter.

Tom Carter (CFO)

It was down mid-5%, and it's down slightly less.

The most recent quarter was on a trailing 12 basis, the best of any quarter. Seasonally, it's that way anyway. But I would say if it was down between 5%-6% on a trailing 12 basis last quarter, it's down between 5%-5.5% currently on a trailing 12-month basis. So slightly better.

Craig Huber (Analyst)

Okay. Appreciate that. And then I think you guys said for the month, except for October, the fourth quarter core advertising is down mid-to-high single digits. Do I have that correct?

Tom Carter (CFO)

That is correct.

Craig Huber (Analyst)

Can you give us a sense how I know there's a huge amount of political displacement in October, but can you give us a sense how October ended up doing? Near-term question.

Tom Carter (CFO)

I would say low double digits.

Craig Huber (Analyst)

So held up pretty well in the scheme of things. Okay. I appreciate that. Big picture question.

Within your various markets, what percent of the viewers do you think consume your content for your Big Four TV stations over the air as opposed to through MVPD?

Perry Sook (Chairman and CEO)

It depends on the market, but the average across the company over-the-air viewership is approximately 15%-16% of TV households. I mean, that's in terms of distribution. But because the over-the-air viewers have fewer choices, necessarily, the viewership in those homes to the over-the-air stations would be higher just because it's not a 500-channel universe. It's maybe a 40 or 50-channel universe.

Craig Huber (Analyst)

Great. That's all I had. Thank you.

Operator (participant)

We'll take our next question from Bryan Kraft with Deutsche Bank. Please go ahead.

Bryan Kraft (Analyst)

Hi. Good morning. Just had a few quick ones. First, any update on the relationship with Peacock? Has that evolved at all yet? Wanted to ask you also on the balance sheet.

Just how are you thinking about the mix of bank versus bonds? Does it make sense to refinance more of the term loans into fixed-rate debt at this point, given where interest rates are? And then last one, are you seeing any impact from? I know the ad revenue trends are very encouraging, but is there any underlying kind of negative impact there from the lack of full broadcast schedules on your viewership? For example, is it hurting your lead-ins to evening news or anything? Thanks.

Perry Sook (Chairman and CEO)

I'll answer the first and the last and leave the middle question for our CFO, COO, and President, who now has more titles than me. Obviously, the networks through September and October did not. We're patchworking schedules together.

I'll remind you that network prime time revenue that we generate here at Nexstar represents between 15% and 16% of our ad-supported revenue, where over half of our ad-supported revenue comes from local news, and those viewership levels have continued to be up year-over-year, and they've come down from probably the high increases in second quarter, but we're still up virtually across the board with our local news products, so if anything, it's been a net positive in the areas where we make the most of our money, but there's been no real effect in terms of the network's patchwork quilting their schedules so far, but as you know, the Big Four are rolling out, even as we speak, their originals and return to their series programming over the month of November, and I think it'll look a lot more normal going forward.

The first question was about Peacock. No. I mean, Peacock is what it is and currently doesn't include the local affiliate stream. That's not their model. It's really kind of a video on-demand model. Discussions continue as to whether involving the affiliates is a good thing or not, but it's in such infancy at this point. It's not been a focus of NBC or Comcast at this point. So life goes on without the affiliates being a part of it. That could change at some point, but I don't know that it's necessarily material.

Tom Carter (CFO)

And with regard to the debt capital structure, we look at opportunistic refinancings all the time. Obviously, we did that. We upsized the bond deal slightly above and beyond what was required to take out the $900 million of notes. But look, the debt capital structure is driven by the strategy.

And the strategy continues to be, at this point, to look at acquisitions. I would say, ask me that same question this time next year, and I'll have a better feel for where the strategy is taking us just with regard to acquisitions versus return of capital to shareholders. If we go towards more return of capital to shareholders, I could definitely see a higher percentage of fixed-rate debt. I would just say it's probably a little too premature to go there right now, but clearly, I could say that would be in the playbook going forward.

Bryan Kraft (Analyst)

Got it. Okay. Thank you.

Perry Sook (Chairman and CEO)

Well, we also need something to pay down with our free cash, and it's more expensive to pay down fixed-rate debt. So I think you'll continue to see a mix here. So we have optionality as to what to do with our free cash.

Bryan Kraft (Analyst)

Fair point. Great.

Thank you.

Operator (participant)

We'll take our next question from John Janedis with Wolfe Research. Please go ahead.

John Janedis (Analyst)

John Janedis, I've got a follow-up from Dan Kurnos. Coming off the top of the hour, guys, just with the headlines around COVID continuing, are you seeing any change in advertisers' willingness to commit into or out of the holidays? It doesn't feel like it, but just wanted to confirm. And has the improving digital engagement or changes you spoke to accelerated demand for the digital offerings?

Perry Sook (Chairman and CEO)

Well, obviously, engagement on our digital offerings is up. So yes, we're focusing on that. And Karen Brophy and her team are building out additional offerings and updating our websites to continue to make them even more user-friendly and improve the engagement time spent on-site. That's standard operating procedure, but yes, all of that is going on. We've not seen a reluctance.

At this point, our pacing is solid for post-election through the end of the year here. And again, you look at the categories that outperformed in Q3: medical healthcare, home repair, home improvement, as we mentioned, lottery and gambling, sports betting, and the various service categories. And again, this 20%+ increase in pacing of auto for the fourth quarter. And we're into the second month of the quarter now. So it's not a timing issue. It's absolute dollar quantum being spent that's better than 20 points better than where we exited third quarter in results versus the prior year. So we're not back to flat yet, but we anticipate our exit velocity from fourth quarter being the best that it has been all year and the closest to flat that we have been.

Now we'll have a leg down in first quarter, as Tom mentioned earlier, because that's the only unaffected quarter for COVID in our LTM. But after that, I think you'll see substantial increases over prior year because of the low base of Qs 2 and 3 in terms of core revenue performance during what we hope is the worst of the pandemic.

John Janedis (Analyst)

All right. Just one last thing on gambling. It feels like it's still early days there. I mean, does that have the potential to be, let's say, a top five or 10 category or materially higher from here in terms of a $10+ million win rate?

Perry Sook (Chairman and CEO)

Well, yes. I think if you look at lottery and gambling all in, it is a top 10 category. And you've got state lottery business and all of that that is ongoing.

But for example, if it was double-digit, if it was high teens all in, the sports betting probably made up 70% of that in Q3. And we actually have more dollars on the books for Q4 than we exited Q3 in that category. So I see it growing. And I can tell you that we're talking to all of the companies involved in that business that want access to our distribution, might like to produce long-form and short-form content for us in addition to buying advertising. And those discussions are ongoing. So I think we're fully engaged in the category. So I do expect it will continue to grow because it's not fully built out now. And again, it's on a state-by-state basis where the gambling is permitted. And as that footprint continues to grow, we think the category will continue to grow. Thanks, Dan.

Operator (participant)

We'll take our next question from Steven Cahall with Wells Fargo. Please go ahead.

Steven Cahall (Analyst)

Thanks. First, maybe just trying to understand some of the benefits of the reorganization. It seems like this is a pretty big deal. So I'm sure this is a lot bigger than just the back office savings. So I was hoping you could just expand a little bit on what the potential long-term revenue benefits are from that new initiative. Then I got a quick follow-up on the guidance.

Tom Carter (CFO)

Well, I would say there are a number of them, but one area that we have not participated in to a meaningful degree historically has been national partnerships where, again, with 1.5 billion page views and broadcast signals that reach 70% of the country, we have the reach that they're looking for and can tailor-make information.

And most of that are obviously consumer products, whether it be autos, used auto sales, could be direct-to-consumer, a number of areas where we can do multi-platform delivery of really good demographics and reach to some categories that really have kind of escaped us because our focus has been and will continue to be local. But these are areas that we now, with the addition of the assets from Tribune and the large markets, we have substantially more reach than we did before. And those partnership agreements can be quite lucrative and large contractual dollars. I would say that's job one, and that's immediately in front of us.

Steven Cahall (Analyst)

Great. And then, Tom, on the outlook for next year, you kind of said Q1 would look a lot like last year. Q2 and Q3 would be up, and then Q4, you comp against political.

Was that top line, or could we think that also being the same for EBITDA or free cash flow or all of the above? Thanks.

Tom Carter (CFO)

Well, the comment was specifically geared towards revenue. And obviously, we're going through the process right now from an entire 2021 budget perspective, but I would say a lot of it could be attributable to EBITDA as well.

Steven Cahall (Analyst)

Great. Thank you.

Operator (participant)

We'll take our next question from Jim Goss with Barrington Research. Please go ahead.

Jim Goss (Analyst)

Okay. A couple of them. First, there has been talk about additional fundraising at the national level regarding potential challenges to the election results. I'm wondering if you think that can add to your political dollars in the fourth quarter.

Perry Sook (Chairman and CEO)

Yes. We have a avail request pending as we speak.

Jim Goss (Analyst)

Okay. And secondly, regarding NewsNation, I'm just wondering about the relevance of it beyond the presidential election period.

It probably does pay for itself just in terms of viewership that does not require the content costs with the rerun payments. But are you in the process of refining the programming, and do you think there will be any letdown as perhaps the attention to news dips a little bit perhaps after the election?

Perry Sook (Chairman and CEO)

Well, Jim, I'd kind of turn the question around and say if there's a Democrat in the White House, what is MSNBC going to have to talk about? And our focus has been on news and no opinion. We're talking about expanding shows into other dayparts, which would be personality-driven like a morning show. We're talking about potentially launching, to borrow a PBS term, a Crossfire show to have people on opposite sides of an issue debate that issue every night.

And we have some other things in the works, and I don't want to tip our hand there. But again, I think that we've got a swim lane here, which is, give me the don't tell me what to think. Just tell me what's going on, and I'll make up my own mind, which we think is the largest swim lane potential rather than being to the far left or the far right. And it's also the right thing to do. So we will continue to mine that. And we are obviously a lot smaller than CNN or Fox at this point, but therein lies the opportunity. And we're pleased with the launch and the start, and we think our prospects are good. Again, opening up a whole new category of advertisers that buy news that don't buy reruns of Blue Bloods.

And then it helps us validate our distribution revenue stream. And quite frankly, when I look at the distribution revenue or affiliate fees that Fox and CNN generate, that is our largest opportunity, even greater than the advertising opportunity, which in and of itself will continue to grow. So as Tom said, we spent 24 years assembling this portfolio, and now we are laser-focused on maximizing organic growth from this portfolio. And this is one example of it. And we think as awareness grows, NewsNation will continue to grow. And again, we've got a long way to go until we have the operating profit of CNN, let alone Fox News. So I would say just stay tuned.

Jim Goss (Analyst)

Okay. Well, you did say half of your ad-supported revenues are from local news. So I guess it would be the same sort of opportunity there.

One other related area, ATSC 3.0, can it have some implication for NewsNation in terms of maybe having certain very localized content be done in part of a program that is unique to that broadcast area versus all of it be the same across the country?

Perry Sook (Chairman and CEO)

There is some potential to localize it through either diginets or through the app. Quite frankly, that's a little further out on the horizon. We just got started two months and four days ago. But yes, I think there is opportunity there. And I'm glad you brought that up because it does bring up another area. But right now, we've got folks coming out of the woodwork that would like to partner with us for our distribution potential in linear to develop new diginet concepts. I mentioned sports betting and esports.

And we made an investment in an esports company recently that you probably read about. But there are other folks who are talking to us about our distribution platform. And I bring that up in that right now, we can probably squeeze no more than five streams out of our current signal. But with ATSC 3.0, that can be three times that. And not that we need 200 diginets out there, but there are opportunities for ancillary uses of our spectrum in ATSC 3.0 in addition to being the wireless connector of the Internet of Things, which I think is our highest and best value creation opportunity. But there are a lot of things, given the scale that this company has uniquely in linear television, to generate ancillary business opportunities. And we have one diginet now that we own.

By this time next year, we might have two diginets that we own and a couple of others we partner with in addition to the folks that lease spectrum from us to get their diginets distributed throughout the country. So it's not a huge revenue and profit category. It is double-digit millions into the 20s of millions of revenue already. And with the folks that lease spectrum from us, it's into the 40s and 50s millions of revenue and has a nice profit margin with it. But that's in the scheme of a company that did over $1 billion in net revenue this past quarter. But it is an area for growth. And again, we're mining all of those organic growth opportunities that we have, given the size and scope of the company we've assembled.

Jim Goss (Analyst)

Okay. Thanks for your perspective.

Operator (participant)

We have no further questions in the queue.

I would like to turn the conference back to your speakers for any additional or closing remarks.

Perry Sook (Chairman and CEO)

Well, thank you very much, everyone, for joining us today. We look forward to reporting, in early February, our Q4 results, and at that point, we'll give you a perspective on guidance for 2021 and 2022, so thanks for joining us, and have a nice afternoon.

Operator (participant)

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.