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Nexstar Media Group, Inc. (NASDAQ:NXST)
Q2 2019 Earnings Call
Aug 7, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

[Operator Instructions]. Good day and welcome to Nexstar Media Group 2019 Second Quarter Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Joseph N. Jaffoni -- Investor Relations

Thank you, Ryan and 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. Statements and comments made by management during this conference call may include forward-looking statements. Nexstar's based these forward-looking statements on its current expectations and projections about future events.

Forward-looking statements include information preceded by, followed by or that include the word guidance, believes, expects, anticipates, could or similar expressions. For these statements Nexstar claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The forward-looking statements contained in today's call concerning among other things, the ultimate outcome and benefits of the announced transaction between Nexstar and Tribune Media and timing thereof. Future financial performance, including changes in net revenue cash flow and operating expenses, involve risks and uncertainties and are subject to change based on various important factors, including the timing of -- and any potential delay in consummating the first transaction.

The risks that are conditioned to closing of the first transaction, may not be satisfied and the transaction may not close. The risk that a regulatory approval may be required for proposed transaction is delayed is not obtained or is obtained subject to conditions that are not anticipated.

The impact of changes in national and regional economies, Nexstar's ability to service and refinance outstanding debt. Successful integration of Tribune Media including achievement of synergies and cost reductions, pricing fluctuations in local and national advertising, future regulatory actions and conditions in the television stations' operating areas, competition from others in the broadcast, television markets served by Nexstar, volatility and programming costs, the effect of government regulation of broadcasting, industry consolidation, technological developments and major world news events.

Unless required by law Nexstar undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this communication may not occur, you should not place undue reliance on these forward-looking statements, which speak only as of the date of today's conference call.

For more information on factors that could affect these expectations, please see our filings with the Securities and Exchange Commission.

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

Perry A. Sook -- President, Chairman and Chief Executive Officer

Thank you, Joseph, and good morning, everyone and thank you all for joining us today to review Nexstar's 2019 Second Quarter Operating Results. Today, we'll review the quarter and our outlook as well as other ongoing initiatives to drive free cash flow growth and shareholder returns. Most notably, the progress we've made toward completing the Tribune transaction, our ongoing leverage reduction as well as the upside presented by the financings and announced divestitures for the transaction.

As always, our Chief Financial Officer, Tom Carter is here with me on the call this morning. Full-year 2019 operating expectations before one-time expenses remain on plan. As we've shared before, 2019 represents the start of the next significant growth cycle for Nexstar, as we balance our focus on the upcoming completion of the highly accretive Tribune Media transaction with our current operations, including our preparations for the 2020 election cycle and a significant number of 2019 retransmission consent agreement renewals in front of us.

With respect to current operations, the second quarter results reflect improving spot television advertising trends and further progress in bringing value parity to our leading viewership of our local stations on MVPD and vMVPD bundles resulting in double-digit distribution revenue growth. These factors were offset by the absence of cyclical political advertising as well as approximately a $10 million payment in other revenue related to a one-time spectrum repack payment in our year-ago period.

All told, Nexstar's second quarter net revenue ex-political was up 2.7% compared to the prior year period. Overall, second quarter broadcast cash flow and adjusted EBITDA before one-time transaction expenses were in line with our expectations, while free cash flow was impacted by the transaction costs and the timing of 2019 operating cash tax payments as well as capital expenditures. Our 2019 full-year budgets for cash taxes and capex remain unchanged. So this situation will self-resolve over the balance of the year and as a result, our stand-alone 2018-2019 free cash flow guidance remains unchanged at $615 million for Nexstar's legacy operations or approximately $13.50 per share. Last week we received conditional approval from the DOJ through a settlement they filed with the DC Circuit Court. With the court's approval of the DOJ settlement, which includes the divestitures, which we announced earlier this year, once we have FCC approval we will be in a position to close the Tribune transaction. During the second quarter we priced our $3.1 billion term loan A and $675 million term loan A facilities and when combined with the $1.1 billion of senior notes issued earlier in July comprise all of the primary financing components necessary to complete the transaction.

In addition, during the quarter, we entered into an agreement to sell two Indianapolis stations to our minority led broadcaster Circle City Broadcasting thereby completing our divestiture plan and putting the pro forma entity in compliance with FCC local and national television ownership rules. In aggregate, and concurrent with the closing of the Tribune transaction, we will divest a total of 21 stations in 16 markets for gross proceeds of $1.36 billion. The total gross proceeds from the proposed station divestitures exceed our initial estimate by approximately 36% while the divested cash flow inclusive of the elimination of certain synergies is less than in our prior projections.

All of the financings were completed at attractive terms and blended rates below our internal forecasts. I'll now run through some of the quarterly highlights, after which Tom will go through the numbers, including an update on our cap structure, our 2019 expectations and other items of interest to those of you who are on this call. Excluding political total second quarter spot television ad revenue decreased by $2.6 million or 1% , reflecting 4.6% year-over-year declines in national partially offset by a 0.4% increase in local revenues. Overall second quarter spot television advertising trends improved meaningfully over the first quarter 2019 levels with quarterly sequential growth in both local and national spot revenue of 6% and 7% respectively.

For the 2019 full year, we continue to expect low single-digit growth in non-political television advertising revenue versus the comparable 2018 period. In Q2 '19, five of our top 10 television advertising categories were flat to up and overall our local sales initiatives continue to generate healthy levels of core new business revenue. With Q2 new to television ad revenue of $17.3 million, which was a 14% rise over the prior year. Combined second quarter digital media and retransmission fee revenue up $370.5 million rose 8.9% over the prior year period and collectively accounted for 57.1% of net revenue, compared to 51.5% of net revenue in the 2018 second quarter that reflects both the lower levels of political advertising in the current period and the ongoing evolution in shift of our revenue mix.

Our way of comparison in Q2 '17 the last off-cycle year, our combined second quarter digital media and retransmission fee revenue was $317.1 million and accounted for 50.6% of net revenue. So we've grown these revenue streams on a combined basis by 17% over the last 2 years. Second quarter retransmission fee revenue increased approximately $38 million or 13.8% over the prior year period, reflecting recent renewals of distribution agreements with MVPDs, growing contributions from OTT distribution agreements, and overall subscriber levels which remained largely constant.

Total second quarter digital revenue declined approximately $7.8 million or 12.1% as we continue to experience the marketplace changes that impacted select demand side platform customer buying in the first half of 2019. We expect these trends to continue and to improve as we cycle through these market changes. Importantly Nexstar's second quarter local digital advertising revenue grew at a mid-teens percentage and our digital agency services business also achieved the mid single-digit growth over 2018 second quarter.

Our local digital businesses in Q2 benefited from custom packages we did for the Masters, the NFL Draft, and the ND 500 demonstrating again that we have more upside here as we better execute on our strategies to leverage our premium local content across our local digital operations.

Moving on now with a few additional updates on the Tribune transaction which remains on track for a timeline to close this quarter. As I mentioned earlier, the $1.36 billion of gross proceeds from the announced station divestitures is in excess of our initial estimate of $1 billion.

In addition, the blended multiple for all the stations to be divested amounts to approximately of 10.6 times the average -- two-year average broadcast cash flow of these stations. As a result, our borrowings and leverage will both be lower than anticipated at closing. Our last public guidance was the net leverage at the closing of the traction -- the transaction would be approximately 5.1 times, and given that we now completed the financing, we are looking at opening leverage below 5 times.

Nexstar and Tribune have completed all of the steps and satisfied all of the merger agreement, conditions necessary to finalize the planned transaction, including entering into the agreements to divest stations we mentioned before, to achieve ownership and other regulatory compliance approvals, securing approval from Tribune shareholders and putting in place all of the necessary financing. With the DOJ's conditional approval last week, we are now waiting for FCC approval and court approval of the DOJ settlement and certain other customary closing conditions. And once again we continue to expect that the transaction will close in this current quarter.

We have high expectations for the value that the Tribune transaction brings to Nexstar shareholders. Over the past 23 years we've completed successfully integrated and generated growing value for shareholders from 3,000 transactions, which have increased our scale, diversified our portfolio, and enabled us to remain highly competitive in today's media and technology ecosystem. From the standpoint of accretion to shareholders, the Tribune transaction will be not only our biggest but our best transaction.

The Tribune transaction reflects ongoing consistency with all of our M&A criterion as it marks further progress toward our goal of improving our competitive position by strategically expanding our operating base to realize the benefits of scale, increasing our strategic and financial flexibility, and ultimately driving shareholder value. With the industry's most proven management team, our long-term record of maintaining operating disciplines and a focused approach to managing our capital structure and cost of capital, the acquisition of Tribune Media represents a tremendous near and long-term opportunity for Nexstar, the markets we serve, and our shareholders.

With our active management of our capital structure and our strong free cash flow we acted on several opportunities to enhance shareholder value in the second quarter through our return of capital and leverage reduction initiatives, which included reducing debt by approximately $112 million and returning approximately $21 million to shareholders through our quarterly cash dividend.

Through the 6-month period ended June 30, we've allocated approximately $204 million of cash from operations to reducing our outstanding debt. Notably, after giving effect to the Tribune transaction the incurrence of debt, transaction expenses, and the expected first year synergies the divestiture proceeds. We see a total clear path to rapid deleveraging with the free cash flow generated from our soon to be expanded base of operations and we continue to expect that Nexstar's net leverage will decline to something less than 4 times by the end of 2020.

With that all said, let me turn the call over now to Tom Carter for a review of our financials. Tom?

Tom Carter -- Chief Financial Officer

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 current capital structure and some points of guidance. As Perry mentioned overall net revenue was down 1.7% really driven by the lack of returning political revenue during the year. And just as a note same station results will approximate actual prior year results this quarter as acquisition activity in prior years does not materially affect the results there.

Total spot revenue was down 1% to $267.6 million as Perry mentioned with local revenue being up and national revenue being down, the political revenue, as I mentioned before, decreased from approximately $32 million to $3 million for the quarter and overall net revenue was up 2.7% which was driven really by the 13.8% retransmission fee increase during the year which was as expected.

Overall second quarter spot revenue advertising trends continue to show improvement over the first quarter 2019 levels with local and national spot revenue growth on a quarterly sequential basis of 6% and 7% respectively. Second quarter non-television advertising growth of 8.9% to $307.5 million reflects the 13.8% rise in retransmission fee revenue to $314 million, which was partially offset by $7.8 million reduction in digital revenue. As we stated on last quarter's call we anticipate top line growth in digital would be impacted in the near term due to our de-emphasis of non-profitable and marginally profitable lines of business at the end of 2018, and in early 2019. In addition to certain market place changes that impacted select demand side platform customer buying in the first half of 2019. Nexstars second quarter core digital advertising revenue as Perry mentioned, meaning our hyper-local websites increased 16% year-over-year and our digital agency services business, which is also a local business achieved a 3% growth over second quarter 2018 levels. We believe the early success of our strength in digital sales and marketing initiatives, we expect this -- to see continued improvement in the digital revenue trend in the second half of 2019.

Second quarter station direct operating expenses, net of the trade expense increased approximately 8%, primarily reflecting budgeted increases in network affiliation expense. Same station fixed expenses excluding programming expenses were up a modest three-tenths of 1%. Second quarter SG&A expense at the station level was relatively flat compared to the prior year period, while corporate expense was in line with our expectations of $31.8 million, which included $9.7 million of stock-based compensation and $5.1 million of one-time transaction costs relating to it from you.

Excluding one-time transaction expenses in stock comp, recurring corporate expenses declined slightly, which was consistent with our guidance for the second quarter. Looking ahead to the third quarter of 2019, on a Nexstar's stand-alone basis, we project recurring cash corporate overhead to be similar to Q2 levels of approximately $17 million, exclusive again of the stock comp and the Tribune related transaction costs. Non-cash compensation is projected to be approximately $10 million similar to the prior quarter and $37 million for the year, reflecting the issuance of new equity incentive rewards late last year.

Cash transaction expenses primarily professional services fees and severance that cannot be capitalized are variable for the quarter based on the likelihood and the timing of a potential closing for Tribune.

Turning to the balance sheet, I'll review a key -- couple of key items as it relates to June 30, 2019, total leverage was 3.9 times, which compares with 3.57 at the end of Q1 and 4.23 at the end of 2018. Covenant first lien leverage was 1.96 versus a covenant of 4 in a quarter. And again, this compares to 2.09 at the end of Q1 and 211 -- 2.11 at the end of Q4 '18. So you can see our deleveraging initiatives have paid handsome dividends from an overall leverage perspective.

Net debt at June 30, amounted to approximately $3.7 billion compared to $3.76 billion at $3.31 2019 and $4.7 billion in January of 2017 when we closed the MEG transaction. In the second quarter, we reduced funded debt by $112 million. We remain committed to applying our growing free cash flow to take further action to enhance shareholder value through our return of capital and leverage reduction initiatives, which in total amounted to approximately $133 million during the quarter, including $21 million in dividend payments and the aforementioned $112 million in funded debt reduction.

Subsequent quarter end, we repaid an additional $12 million on our term loan balance in early July, bringing funded -- total funded debt reduction for the first seven months to approximately $215 million. Second quarter, total interest expense amounted to $51 million compared to $56 million in the prior year's period with cash interest expense of $49 million compared to $54 million in 2Q of '18. Obviously, this is reflective of that aforementioned debt reduction as well as the favorable interest rate environment.

We expect Nexstar's cash interest expense, exclusive of interest paid on escrowed funds and any acquisition commitment fees to be approximately $48 million in Q3 of 2019.

Second quarter operating cash taxes were $50 million, while operating station in digital capex totaled $18 million. Spectrum repack capex totaled $23 million, which we believe is fully reimbursable from government funds in the due course.

Overall, second quarter broadcast cash flow and adjusted EBITDA before one-time transaction expenses were in line with our expectations, while our Q2 free cash flow was impacted by the timing of 2019 operating cash tax payments, which were slightly higher than forecasted for the three-month period.

It's important to note that year-to-date cash taxes of $52.4 million are on track with our expectations of approximately $115 million for the year. First half capex excluding the aforementioned reimbursable repack costs were $36.4 million consistent with our expectations for the year of approximately $70 million.

As a result, our steady state 2018-2019 free cash flow guidance also remains unchanged at $615 million for Nexstar's legacy operations or roughly $13.50 a share.

Q3 cash taxes are estimated to be approximately $26 million while third quarter capex again absent repack capex is approximately $19 million. As it relates to our funding of our pending acquisition of Tribune Media, we're fortunate and opportunistic in tapping the leverage finance and secured loan markets in June and July and completed the offering of $1.12 billion of 5% and 5.8% senior notes and priced our $3.1 billion term loan B and $675 million term loan A facilities.

Together we've fully addressed the plans financing for the transaction. This structure allows Nexstar's to take advantage of favorable rate environment and the secured loan market has historically been less volatile than the high-yield market and brings lower interest rates than a high-yield bond financing in addition to having no prepayment penalties.

Our capital structure weighs the proper balance of fixed and floating rate and attractive weighted average cost of capital and prepayment and refinancing flexibility. In addition, we have a well staggered maturity profile with no significant maturities until 2022, at which point we expect will have made significant headway toward substantial debt reduction. Reflecting the above capital structure are soon to be updated $160 million in year one synergies and our expectations for continued significant political ad spend in 2020, our last guidance for the deal assumed total leverage of approximately 5.1 times at transaction close with a covenant leverage decreasing to 4 times by year-end 2020.

We'll give more color on this once the transaction closes, but our expectation is that these metrics will improve, given updated information. As it relates to management's focus on free cash flow generation we remain confident in our ability to delever pro forma for the annual free cash flow of approximately $900 million for the combined operations, which is 46% higher than Nexstar's record stand-alone free cash flow projections.

As Perry mentioned, we expect there to be substantial upside to our free cash flow given the identified synergies, recent operating results, the good results from the divestiture proceeds, and lower than anticipated leverage at closing. Our intent is to increase our guidance at the time of closing, which we continue to expect to be sometime in the third quarter.

In summary, Nexstar is executing well, all functions including operations, integration, synergy realization, capital structure and service to our local communities. Our disciplines in these areas have driven significant growth as well as consistency and visibility to our results.

With our financial results and the value we expect to derive from our pending accretive acquisition of Tribune, we continue to believe we have forged a clear path for continued near and long-term enhancement of shareholder value. 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 A. Sook -- President, Chairman and Chief Executive Officer

Thanks, Tom. With significant and growing free cash flow, an attractive weighted average cost of borrowings and a long-term record of success in fully integrating acquired stations extracting synergies and enhancing operating results while improving our service to viewers and advertisers, Nexstar is prepared to complete the highly accretive acquisition of Tribune Media. As with our past transactions, we've developed a comprehensive integration plan and we remain confident in our ability to deliver on the value of this compelling combination, given our current operating management disciplines in our history of success and outperforming our synergy targets.

In terms of capital allocation, our substantial annual free cash flow combined with our strong balance sheet and attractive weighted average cost of capital will provide us with the financial flexibility to continue investing in our business and our employees while meaningfully reducing leverage and returning capital to shareholders.

Nexstar's organizing -- organization wide commitment to excellence and local content for viewers and users as well as unparalleled marketing results for our advertising partners has been fundamental to our success in our growth. With the pending increase in our geographic diversity and audience reach a large number of distribution contracts up for renewal, between now and year-end 2019, and the return of the political cycle with the upcoming 2020 presidential election, Nexstar has excellent visibility to delivering on our free cash flow, and leverage reduction targets in the current cycle and the continued near and long-term enhancement of shareholder value.

With that, I'd like to thank you all for joining us today. So now let's open the call for Q&A to address your specific areas of interest. Operator?

Operator -- President, Chairman and Chief Executive Officer

[Operator Instructions]. We'll take our first question from Dan Kurnos with Benchmark Company. Please go ahead.

Daniel Kurnos -- Analyst

Yes, good morning. Hey, Perry and Tom. Look obviously with all the good free cash flow upside news, the only thing unfortunately on people's minds is kind of the AT&T blackout. So Perry if maybe you want to address that whether Locast is playing a part in any of this? How you think that kind of resolves itself over time and the potential financial impact if you think there will be one short-term ?

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well, with respect to AT&T and DirecTV, we continue to trade proposals and to negotiate. However, we're not going to do that publicly. So I'll just leave it at that. Locast is really not playing any factor in these negotiations. With the network suit last week, I think you will see the beginning of the end of Locast and it will end up in the same dustin that Aereo and FilmOn and others that have tried the same trick before.

So I think at that point we continue to make progress in our AT&T negotiations, and obviously, when we have something to announce we'll be sure to tell you.

Daniel Kurnos -- Analyst

And then just in terms of subs, Perry, you did say constant, I am assuming that means flattish. Just in terms of visibility or any outlook to net retrans going forward would be helpful.

Tom Carter -- Chief Financial Officer

Dan your specific question with regard to subscribers, we've looked at this and on a total payrolls -- total paid subscriber base year-to-date, we are down less than one -- 0.1% and since 01/012018, we're actually up about 0.1% in terms of number of paid subscribers. Obviously, that's driven by continued growth in the OTT products and some reduction in traditional MVPD, but overall paid subscribers are basically flat.

Daniel Kurnos -- Analyst

Got it. And Tom, just any change on the net retrans outlook, I'm assuming not with that backdrop?

Tom Carter -- Chief Financial Officer

No. Obviously, we've got some pending deals outstanding. The puts and takes well affect it, but we don't believe it to be material and obviously, we earlier this week, we announced a renewal for all of the legacy Nexstar stations, near-term renewals for Nexstar's stations with CBS and we're pleased to get that announced and I think it came in as expected.

Daniel Kurnos -- Analyst

Perfect. Thanks guys.

Operator -- Analyst

Thank you. We will take our next question from David Joyce with Evercore ISI. Please go ahead.

David Joyce -- Analyst

Thank you. Appreciate you gave us some color on the advertising, but was there anything that had decelerated during the second quarter? Or it was -- where there some crosscurrents of different sectors? And if you could delve into that some more and really what's your upside on the digital advertising this year given of course that you did shut down some of the digital businesses earlier in terms of how much more is digital playing a role in your overall negotiations with your advertisers? Thanks.

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well, I would say that in second quarter automotive actually was a category that strengthened versus first quarter and we reported kind of locally 6%, national 7% sequential improvement quarter-over-quarter. The strength in automotive is really coming from the development work of our local teams with the Tier 3 advertisers, which are our local dealers. We can see that continuing into third quarter.

July revenue was in the books and core revenue and digital revenue book performed better than our second quarter numbers that we just posted this morning. Our digital revenue has got two components to it obviously roughly equal. One is the local digital revenue that is generated by our sites by our sales forces in our local marketplace. We reported as you heard Tom say earlier up double-digit percentages there.

Obviously, the decline has been in our national digital revenue due to some market changes for supply side dynamics as well as exiting some businesses that were unprofitable, and we were cycling through that here in the back half of the year, but again our local digital revenue performed better in July than the results we posted for second quarter and we see that continuing through the balance of the year.

David Joyce -- Analyst

And how much of a role is the TIP Initiative on standardizing programmatic playing a role yet? What's the progress on that please?

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well, the interesting thing is that advertisers now are beginning to demand that people design and implement through the TIP interface standards, and that's actually a watershed event for us. This is primarily in the area of log reconciliation and kind of the back-office piece of that, but it is being adopted. And I would say we probably had more forward momentum in the second quarter than we've had for a while. And we expect for that to continue as we implement more lines of code if you will for other elements of the buy-sell process.

But right now, our efforts are focused primarily on trying to streamline and automate log reconciliation make goods and billing practices which obviously would save the agency's money which make us more attractive counterparties to do business with.

David Joyce -- Analyst

Great, thank you very much.

Operator -- Analyst

Thank you. We will take our next question from Zack Silver with B. Riley, FBR. Please go ahead.

Zack Silver -- Analyst

Okay, great. Thanks for taking the question. So post CBS renewal, do you guys still expect net retrans margins remaining at levels over around 50%? And then could you give us some updated thoughts on how you see the economic share of retrans over time evolving between the networks in the affiliates?

Tom Carter -- Chief Financial Officer

Sure. I'll take the first half of that question. And yes, our indication and the math that we're running continues to have net retrans margins in excess of 50% for the balance of this year and for next year. And I think once we get a hold of the Tribune properties, we'll be able to reevaluate that longer term than that, but for the immediate future yes, in excess of 50%. And I'll let Perry talk about kind of longer-term trends.

Perry A. Sook -- President, Chairman and Chief Executive Officer

Yeah, I mean long-term listen the networks negotiating and asking for more from us and we in turn are asking for more from the MVPDs and the revenue line is greater than the expense line. So if they move in tandem we actually increase our margins. So we see no change in outlook in that dynamic for the foreseeable future, and as Tom says, our foreseeable future is probably three years out post the Tribune transaction but just looking at the normal cadence of deals with networks and with MVPDs we see no change to the outlook or the ecosystem.

Zack Silver -- Analyst

Okay, great. And then I guess this is the second quarter in a row where the core is come in a little bit light of informal guidance that you guys provide in our calls and just wondering what you can say about that and what dynamics are maybe causing less visibility inter-quarter ?

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well, I think we view it as kind of a low single-digit world and I would say that national revenue for us coming in at 4.5% behind the prior year was less robust than we had expected, but other than that I don't think we see any changes. We've got to obviously weigh, the puts and takes of a trade war and tariffs and what that does to our various lines of business, but things that we can control, it's kind of a Goldilocks world right. It's not too hot, it's not too cold. It's just kind of plugging along. And again, total spot revenue down 1% is within our forecast range of the bandwidth.

Tom Carter -- Chief Financial Officer

And I'll just add to that. I think from our perspective, we view the national dollar as being a lot more -- a lot faster money and quick to change the local dollars obviously are stickier from our perspective. So I would say the national ad environment [Technical Issue] and I think we saw that toward the end of the second quarter.

Zack Silver -- Analyst

Okay, great. Thank you, Perry and Tom.

Operator -- Analyst

Thank you. We will take our next question from Marci Ryvicker with Wolfe Research. Please go ahead.

Marci Ryvicker -- Analyst

Thanks. I appreciate you not wanting to negotiate with AT&T in public, but I think one of the reasons why your stock is down is the fact that you have reaffirmed your free cash flow guide and the market doesn't seem to believe you since you're dark on AT&T for a while. So are you assuming retroactive payments, like you've gotten historically or does your reverse go down enough, so you can hit the free cash flow guide? Anything you can talk to for the guide and then specifically for Q3 retransmission consent revenue, I assume we should expect a sequential step down from Q2 at this point?

Tom Carter -- Chief Financial Officer

Marci, as I said in my comments, our guidance is based on a steady-state. We don't know what the outcome of any negotiation with AT&T is at this point, whether it be retroactive or otherwise. And so I think, we are sticking with what we have and the knowledge that we have until we have more concrete because we are not going to play a game of updating guidance based on any particular win that may be going one way or the other. When we have concrete information we will update our guidance accordingly.

Marci Ryvicker -- Analyst

And then, just a comment on Indianapolis as it relates to Tribune, their press reports saying that you might require either a waiver from the FCC or another station divestiture if you can comment on that.

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well, there is a talk for waiver in place in Indianapolis along with Tribune that owned the two stations that they own there. There would need to be a reauthorization of that waiver, which we fully expect in due course, so I don't think there is anything to see there. And I would just add, Marci, you know -- should know this that we have internal targets that are in excess of our guidance to get to our free cash flow numbers that we give you.

So we're not going to comment on whether the AT&T deal will be retroactive or not, but I -- we're confident that we will deliver our free cash flow guide and we'll just put a period at the end of that sentence. And that's what we'll say.

Marci Ryvicker -- Analyst

Okay, thank you.

Operator -- Analyst

Thank you. We will take our next question from Kyle Evans with Stephens Incorporated. Please go ahead.

Kyle Evans -- Analyst

Hi, thanks. I just wanted to follow on on the digital question from earlier and be a little bit more specific. Which quarter do you expect us to formally cycle some of those SSP, DSP national issues? And does that mean maybe growth in that piece of the business or just slower to clients? And then I've got some follow-ons.

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well, I would say that the situation is somewhat self revolving as -- resolving as we move through the year, but in terms of lapping those unprofitable businesses, it will be through the balance of this year, but I think we've seen the bottom of what the marketplace changes would produce in terms of results for us and we are doing better than that now. So I would expect incremental improvement through the balance of the year.

Kyle Evans -- Analyst

If my memory is correct, I think, when you guys were last blacked out with Cox, they pulled ads from the system. Is AT&T doing that?

Perry A. Sook -- President, Chairman and Chief Executive Officer

The short answer is no. But I'm not going to comment beyond that.

Kyle Evans -- Analyst

Fair enough. And then maybe a longer-term outlook for the auto industry. I know it's been kind of a moving target for the last two years.

Perry A. Sook -- President, Chairman and Chief Executive Officer

That's not our primary business. I guess, we can all speculate, but listen I think that there is cost pressure in the automotive business. There is probably less profitability in the local dealerships than there was 10 years ago. So I think that is a pressure. I think there are a lot of folks competing for auto dealers' attentions. Our job is just as an example is to go to our local dealers and say listen, there is no reason for you to be paying for six auto intender websites because there is virtual duplication, pay for one and put the rest of that money back into television and we can not only help with your brand, with your image, but we can drive people to the one auto intender site that you do stick with. And that's having some resonance with our local dealers.

We have also internally in our sales staffs designated an auto specialist in every market. That is his or her job to know as much about the car business as the people we are calling on and so I think that our job is to do a better job of being a partner rather than a purveyor to the auto dealers. And I think we are seeing the results of that in our internal numbers. And I think it will manifest itself over time, but I can't imagine that you're going to see fewer drivers and fewer cars on the road five years from now than you do today despite everybody's prognostications.

So I think it's a steady-state business. Is it a double-digit growing business? It's -- the only -- the recent time when it has been it has been after a recession when it dropped down and we were up against easy comps. So -- but our automotive business is improving on a sequential basis. And again through the end of the year and absent credit or extraneous shocks or tariffs that would affect the price of some vehicles we don't see that changing in a material way.

Kyle Evans -- Analyst

All right. Thank you so much.

Operator -- Analyst

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

Jim Goss -- Analyst

Thanks. I was wondering if there is an optimal network mix for your portfolios, from your standpoint. And since Tribune would have a different sort of mix of those networks I wonder if that shift sits well with you? Or have you adjusted for some of that with the divestitures you've made?

Perry A. Sook -- President, Chairman and Chief Executive Officer

Sure. I would say, the local news presence, local brand is every bit as important, if not more important to the success of the station and its network affiliation. But having said that, pro forma for the Tribune transaction, we will continue to be the largest distribution partner for CBS in terms of national reach. We will become the largest partner -- distribution partner for Fox in terms of national reach, as well as the CW will be number 2 with NBC and number 3 with ABC. So I think it's important to be important in your network relationships and I think we will have that standing with every one of the networks.

Jim Goss -- Analyst

Okay. And since history of yours suggests that you never really sit still once another deal is done what would a trade up of your station portfolio be within the -- keeping within the existing 39% cap assuming no change of that particular area?

Tom Carter -- Chief Financial Officer

I'm sorry, Jim, I don't know -- when you said trade up, I'm not sure what you mean by that.

Jim Goss -- Analyst

Yeah. I mean to the extent that you would have to probably divest something to make room for something else that would be more attractive. Is there something either related to this network mix or to get to a bigger NBC position or something else that you would be looking for like if you're trying to adjust your station portfolio without -- without an ability to change the 39% reach?

Tom Carter -- Chief Financial Officer

Sure. Obviously, there is always opportunities to optimize things in our stations that underperform that we think we can make material improvements in. There were -- there was more interest in the divestiture process than we had stations to sell. So I think there may be some of those available as well, but yes there are chips to be played here. It's just that obviously that's tab 3, 4 or 5 we've got to get sufficient about and get Tribune closed and then integrate it. And then I think you will see us try and look at continued value enhancements post closing.

Perry A. Sook -- President, Chairman and Chief Executive Officer

Okay Jim I would just add to that. I think that our goal would be to derive an economic benefit from more than one television station and any market that we are in and spread our fixed cost base across multiple revenue streams. So any time we have the opportunity to do that, whether it's pairing a CW affiliate, whether Big four affiliate or whether it's swapping to get two in markets and exit other markets. When we close on the transaction, we will be fairly close very close to the national ownership cap with UHF discount. So there is not a lot of cap room per se, but you can create cap room by exiting markets double up in others. And again, we'll be opportunistic with that, just like we are with the acquisition piece of the M&A.

Jim Goss -- Analyst

Okay. And lastly, is there any shift in capital allocation priorities as your leverage goals are met? And sort of in a related area, are you thinking there would be some debt rating improvement that you should expect as you get down to 4 times or lower?

Tom Carter -- Chief Financial Officer

Well obviously there is a shift in capital allocation to debt repayment, but we've been pretty heavy on that over the course of the last eight months, since we entered into the Tribune transaction. We are not exclusively and we are not bound to only reducing debt. We can be opportunistic from a return of capital shareholder perspective, but clearly, our goal is to deleverage and the best way to affect that is to pay down debt and that's the allocation of free cash flow. So I think that's where you should expect the majority of the coming absence some dislocations in markets where we could have an opportunity to buy back stock. But we're not there right now.

Jim Goss -- Analyst

Okay, thank you very much.

Operator -- Analyst

Thank you. We will take our next question from Clay Griffin with Deutsche Bank. Please go ahead.

Clay Griffin -- Analyst

Hi, good morning. Perry, I'd love to get your initial thoughts on the potential house legislation -- legislative efforts coming from Scalise and Eshoo, maybe we could start there.

Perry A. Sook -- President, Chairman and Chief Executive Officer

The Scalise, Eshoo I think notably there were no other cosigners on that legislation. So I think the prospect of it making out of committee are -- it's a very long path. So that would be our quick take on that.

Clay Griffin -- Analyst

Okay, great. And then just looking at just the growing volume of disputes across the industry both in terms of frequency and duration I guess, does that really have an impact on how you or maybe your network partners are approaching affiliation agreements from the perspective of fixed versus variable on the reverse side?

Perry A. Sook -- President, Chairman and Chief Executive Officer

The short answer to your question is at least in the short-term, probably not. I would encourage you to look at -- there is connected tissue among all of these disputes or most of these disputes and it comes down to a couple of common denominators. And so, I don't think there is an industry issue. Look we're being aggressive, the networks are being aggressive everybody is being aggressive. So there is also I think the head of our trade association, Gordon Smith called this kind of a political maneuver to create noise in front of the Stellar Reauthorization discussions that will be had when Congress is back in session later this year.

There could be an element of that theater in this current environment but time will tell. And again we're not negotiating in public or giving details of our negotiation in public and we'll continue to work constructively to make a deal that is good for the company and its shareholders and we'll just leave it at that.

Clay Griffin -- Analyst

Okay. Maybe just one quick one for me. What can you tell us about NBC's upcoming streaming product in terms of integration of your content?

Perry A. Sook -- President, Chairman and Chief Executive Officer

Don't know. We don't know enough about it yet. And so -- we were told at the affiliation meeting that in terms of our involvement it would probably look a lot like CBS All Access where there was a local streaming component, but the details of that have not been shared in detail with the affiliate bodies. So I guess we will all have to stay tuned.

Clay Griffin -- Analyst

Okay. Thanks.

Operator -- Analyst

Thank you. We will take our next question from Craig Huber with Huber Research Partners . Please go ahead.

Craig Huber -- Analyst

Great, thank you. A few questions. Perry, if we could start with a macro commentary. If I could hear from you on what's your sense given the trade war, the tariffs what's your sense given you guys are in 100 markets or so around the US when you talk to your various large advertisers out there, what's your sense on the US economy now? What are you hearing from the ground please?

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well, I think that people are generally optimistic. I don't think people are wringing their hands just waiting for the recession to start. I don't get that sense from our advertisers at all. I will tell you that when you go into the Midwest and the upper Midwest where farmers have been told for a couple of years now that just to kind of eat it because the tariffs are a necessary element of the trade negotiation. Are they buying one fewer tractor or one less truck or whatever we don't -- I can't tell you but I would tell you that Mid-westerns and farmers are generally pretty stoic people and they are not going to wear their heart on their sleeve either, but I think that as I said earlier it's Goldilocks right? It is the longest expansion we've had post recession but it is also probably the most muted. So perhaps there is a math equation there where lower growth is sustainable for a longer period of time and so we reached the end of the business cycle.

I would find it absent -- I find it hard absent an extraneous shock to the system that there would be a recession in an election year. I just think that forces combine to almost ensure that that doesn't happen particularly incumbent forces. So we are not anticipating any real change to the economic outlook here probably at least through the end of next year. I think let's get past the election and see what all that means and then we can have a better lens into 2021, 2022 and 2023 but at this point, we don't see anything hugely positive or negative affecting the economy here in the next 12 to 18 months.

Craig Huber -- Analyst

Thank you for that. And I also want to ask you, Perry or Tom, your ad revenue for July I think you said -- obviously you said July was closed, it was better than the, I guess down 1% number you had for the whole second quarter. Should I infer that's maybe flat to up 1%, year-over-year? That's the first question. My other question is before the second quarter, obviously the pace engine you were talking about, three months ago on a similar call you thought the quarter will be up 1% to 3%. Should I infer that the month of June, came in worse than expected?

Perry A. Sook -- President, Chairman and Chief Executive Officer

I think, you could assume, all of that what you said. So, if core revenue was down in the second quarter 1%, we are better than that. So -- if you wanted to assume a flattish to slightly uppish. But I wouldn't get too enthusiastic there. And then, yeah, I think June particularly in national, we saw a drop off and decline of demand in the month. And so it performed worse than expected. But then, we came back in Q3, at this point with pacing that I think we'll stabilize.

Craig Huber -- Analyst

And if I could ask a regular -- regulation question if I could. There's 39% ownership cap obviously for years. People have been expecting that to get changed here. What is sort of your sense, with an election year coming up here? Do you think it is going to get changed at all here in the next 1.5 years? And the corollary question is who actually has the jurisdiction at the end of the day? Do you think its Congress or the FCC, to be able to change that 39% ownership cap? Thank you.

Perry A. Sook -- President, Chairman and Chief Executive Officer

Well that's the -- the second part of your question is the question because, it is an open debate in Washington as to whether the FCC has delegated authority or whether it's statutory authority with Congress. There are many people claiming to have been in the room, when it happened that have different views on what exactly did happen there. We are of a camp that the FCC has the statutory authority to change the cap. Others including our friends at Fox have taken a different position to that. But I would tell you that, I think political realities are setting in. I would not expect a change this year in the national ownership cap. But always be surprised. But we are not anticipating it even though, we are lobbying for it. But I would also tell you that, I think it gets even harder in an election year to make those kinds of changes.

But again, that is just one man's opinion. So we are not contemplating or counting on any change in the ownership cap to run our business, for the next 18 months.

Craig Huber -- Analyst

Great, thank you very much.

Operator -- Analyst

[Operator Instructions] We'll take our next question from Davis Hebert with Wells Fargo. Please go ahead.

Davis Hebert -- Analyst

Hi, everyone. Thanks for squeezing me in here. Just one question for me, on the closing of the Tribune transaction. Essentially all we are waiting for I think you said, is the FCC approval. Do you anticipate that in short order here? And if we do get that approval, you should be able to close, pretty quickly thereafter, correct? I just want to confirm that. Thanks.

Perry A. Sook -- President, Chairman and Chief Executive Officer

Yes. We are waiting for the judge to sign the settlement with the DOJ. The DOJ's settlement of the suit that they brought with the settlement and that's the way things get approved at the DOJ. So, the judge has to sign off on that order. And the FCC has to grant the transaction. And we still believe that, that will be a Q3 event. We are very confident in that.

Davis Hebert -- Analyst

Okay, great. Thank you.

Operator -- Analyst

Thank you. It appears at this time there are no questions. So I will turn the conference back over to our speakers.

Perry A. Sook -- President, Chairman and Chief Executive Officer

All right, well, thank you very much for joining us today. We look forward to our next communication with all of you, which we would -- expect will be to announce the closing of the Tribune acquisition and to give you all an update on our pro forma 2019/2020 free cash flow guidance. Thanks again and have a good day.

Questions and Answers:

Duration: 54 minutes

Call participants:

Joseph N. Jaffoni -- Investor Relations

Perry A. Sook -- President, Chairman and Chief Executive Officer

Tom Carter -- Chief Financial Officer

Daniel Kurnos -- Benchmark Company -- Analyst

David Joyce -- Evercore ISI -- Analyst

Zack Silver -- B. Riley FBR -- Analyst

Marci Ryvicker -- Wolfe Research -- Analyst

Kyle Evans -- Stephens Incorporated -- Analyst

Jim Goss -- Barrington Research -- Analyst

Clay Griffin -- Deutsche Bank -- Analyst

Craig Huber -- Huber Research Partners -- Analyst

Davis Hebert -- Wells Fargo -- Analyst

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