TEGNA Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 8 speakers on the call.

Operator

For standing by, and welcome to the 2nd Quarter TEGNA Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentations, there will be a question and answer session. As a reminder, this call is being recorded. I would now like to turn the call over to your host, Ms.

Operator

Julie Haskett, Senior Vice President of Finance and Investor Relations, please go ahead.

Speaker 1

Thank you. Good morning and welcome to our Q2 conference call and webcast. Today, our President and CEO, Dave Lougee and our CFO, Victoria Harker, will review TEGNA's financial performance and results and discuss TEGNA's stand alone outlook. After that, we'll open the call for questions. Hopefully, you've had the opportunity to review our Form 8 ks filed this morning with and Exchange Commission as well as our 2nd quarter earnings results.

Speaker 1

If you have not yet seen a copy of the release, it's available on tegna.com. Before we get started, I'd like to remind you that this conference call and webcast includes forward looking statements and our actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. This presentation also includes certain non GAAP financial measures. We have provided reconciliations of those measures to the most direct comparable GAAP measures in the press release.

Speaker 1

With that, let me turn the call over to Dave.

Speaker 2

Thank you, Julie, and good morning, everyone. TEGNA's second quarter results reflect our continuing momentum and sharp focus on delivering value for our shareholders. We achieved a record second quarter for subscription revenue and saw a sequential improvement in underlying advertising trends this quarter compared to the first. Importantly, our solid results, along with our strong balance sheet underpin our ability to create value for TEGNA shareholders, which I'll outline now in detail a little later in the call as well. Building on our initial steps to return accumulated capital to shareholders Pending from the during the merger the failed merger agreement, today, we announced that TEGNA's Board approved a second accelerated share repurchase agreement or ASR of $325,000,000 which is expected to commence after our 3Q earnings are reported in early November.

Speaker 2

This will bring our commitment this year of more than $0.75 We announced $300,000,000 ASR currently underway and the $136,000,000 termination fee paid in shares by Standard General. The Board also declared a 20% increase to the regularly quarterly dividend to $0.11375 per share, Which was previously announced in May. Taken together, these actions demonstrate our track record of acting on feedback we've been seeing from our engagement with shareholders over the past several months and our continuing commitment to returning capital to shareholders in a disciplined and thoughtful manner. As we continue to refine our longer term capital allocation priorities, we anticipate providing a more detailed update by year end. Next, I'd like to provide some of the highlights of our Q2 results, and Victoria will cover these topics in more detail.

Speaker 2

Total company revenue was down 7 Year over year, almost exclusively due to the reduction of political revenue from last year from the midterm election cycle. Excluding political, Revenue was down just slightly. Subscription revenue was a 2nd quarter record and grew 2% year over year. As a reminder, growth in the Q1 lapped a temporary disruption with the distributor last year, as well as an accounting true up. Therefore, 2nd quarter results reflect Our subscription revenue continues to provide stable and predictable cash flows supported by contractual rate increases.

Speaker 2

Later this year, we expect to reprice approximately 30% of our traditional subscribers, further improving clarity into our outlook. Despite broader macroeconomic challenges, advertising revenue trends were sequentially better than the 1st quarter. AMS revenue finished the quarter down 5% compared to the Q2 of last year. However, underlying advertising Underlying advertising trends were down low single digits when adjusting for the loss of a single premium national account we discussed at our last investor call. Automotive, our largest category within AMS, has steadily recovered and is generating strong year over year growth, And it did so in the Q2 for the 4th consecutive quarter and is doing it again as is strong in Q3 as well.

Speaker 2

Another factor in improved advertising trends is the accelerating shift of audience reach from cable to broadcast, a favorable impact for broadcast from cord cutting. While many of the traditional cable and satellite homes we lose are replaced by virtual MVPDs, as well as over the air antenna homes, The local cable interconnects in our many markets don't have that subscriber and viewer replacement mechanism, and their reach in any individual market Down dramatically in recent years. Advertisers are increasingly recognized in this dramatic and growing delta Between the reach of local broadcasting compared to local cable and the dollars will follow and that will be that will impact political dollars as well. Premion, our first to market and industry leading OTT advertising platform, continues to focus on growth in local OTT revenue, where it is uniquely positioned to win. Local Premion revenue continues its strong growth and Premion 2 will benefit from local cable's declining reach.

Speaker 2

Now turning to capital allocation. As I mentioned, following an initial review of capital allocation priorities and incorporation from investor feedback that's been a robust process over past several months. The Board has approved the return of additional accumulated capital to shareholders in the form of a $325,000,000 accelerated share repurchase program To commence after our Q3 earnings are reported in early November. The second ASR follows the initial steps we took in June after the merger agreement termination To immediately return capital to shareholders by entering into a $300,000,000 ASR, the current one in place, which we expect to complete by the end of the third quarter. The completion of these steps, the 2 ASRs and the stock transfer to satisfy the deal termination fee Will result in us retiring more than $350,000,000 of our shares by approximately the end of the Q1 of next year.

Speaker 2

Strong operating performance and disciplined use of free cash flow position us with an industry leading balance sheet. Even after both ASR programs in 20 23. We expect to end the year with net leverage under 3 times. Moving forward, we are laser focused On generating strong shareholder value. Our Board and management team has consistently taken a methodical approach to our long term strategic priorities and capital allocation.

Speaker 2

We are actively focused on refining our thinking on these topics as TEGNA evaluates its next chapter as a standalone company, and we strive to generate attractive durable growth for our shareholders for both the near and long term. Since the termination of our merger agreement, we believe our initial actions to commit to more than $3,250,000,000 in share reductions, As I just mentioned, send a strong signal on TEGNA's outlook. This management team and Board have a strong and disciplined track record of making forward thinking Organic and inorganic investments that have generated strong returns and augmented our competitive positioning amidst an industry backdrop that continues to evolve. We are in a fantastic position today as we assess these longer term opportunities, but again, through a very disciplined lens. Our balance sheet is industry leading and our financial performance remains strong, allowing us to consider accretive opportunities While returning capital to shareholders, we can do both.

Speaker 2

As we look ahead, we're excited about the go forward opportunities for TEGNA. Now to update you on a few strategic and operating highlights from this past quarter. VERIFI, our national brand that combats disinformation, End of the Q2 with approximately a 500,000,000 followers across its various dedicated channels, including on YouTube, which has seen nearly 100% increase in subscriber growth Over the past year, in June, we launched Apple TV streaming apps for all stations. We now have apps for all our stations on Roku, Fire TV and Apple TV. And by the way, when I say back to verify, I should have said a half 1000000, not a half 1000000000.

Speaker 2

But our apps are now generating 580,000,000 minutes of streaming, an 82% increase year over year, And we've begun testing station apps for Samsung, LG Chromecast and additional platforms and expect to launch on most or all of these platforms in the Q3. Locked on, our leading local sports podcast network, which is now on video and YouTube as well, with daily shows for all 4 professional sports league teams And most major college programs hit a new milestone in the quarter. The network exceeded 24,000,000 monthly audio downloads and video views for the first time in May. In the 1st 6 months of 2023, total views and listeners grew 44% year over year. As local broadcasters, we take seriously the important role we play in ensuring our editorial coverage and storytelling reflects all of the communities we serve.

Speaker 2

During the quarter, all new content employees who joined TEGNA since December of last year have completed our innovative inclusive journalism training program. We awarded grants to more than 30 of our colleagues to attend journalism conferences taking place this summer and right now in fact, where they can take part in important professional development and networking opportunities. As an example of the value of those network opportunities at last year's Investigative Reporters and Editors Conference, TEGNA Investigative Reporters collectively developed the idea for a project titled 7 Days, A 1000 Shootings, Which launched during the Q2. The title of this project comes from the fact that there were 1,000 shootings in the U. S.

Speaker 2

During that same time period in 2022. As part of the project, 8 stations followed up by these shootings, looking not only at gun violence, but hearing from families and communities On the steps that are being taken to find solutions, an issue that's obviously of critical importance in this country more than ever before. Delivering news that matters and impactful investigations that make a difference in people's lives are at the center of each and every one of our newsrooms and our purpose as a company. We are very proud of the determination and resilience of our engaged employees that enable us to fulfill our mission every day. And with that, I'll now turn the call over to Victoria.

Speaker 3

Thanks, Dave. Good morning, everyone, and thanks for joining us. As you've already heard, we achieved record second quarter subscription revenue as well as sequential improvement in advertising and marketing services revenue, which I'll cover in more detail shortly. We also successfully achieved outlook for all of the key financial metrics we previously provided. Before I drill down on our Q2 financial results and quarter ahead guidance, I'd like to share some additional information regarding our continued return of capital accumulated during the merger process, just as we committed during our last investor call.

Speaker 3

As Dave mentioned earlier, following our ongoing review of capital allocation priorities and incorporating feedback from you, our shareholders, over the past few months, TEGNA's Board approved an incremental $325,000,000 ASR program, which we expect to kick off After our Q3 earnings are reported in early November. This will follow the completion of our previously announced $300,000,000 ASR program. As you know, that program is already well underway and is expected to be completed by the end of the Q3. As a reminder, Both of these ASRs are in addition to the 20% dividend increase that we announced immediately after the termination of the merger agreement. Our current $300,000,000 ASR program reduces shares outstanding by approximately 15,200,000 shares, representing 80% of the ASR program value, which was delivered on June 6.

Speaker 3

For modeling purposes, the weighted average diluted share impact During the Q2 was a reduction of approximately 5,000,000 shares, which was just for the month of June. The full 15,200,000 share reduction will be in the Q3, including the remaining 20% settlement of the program or approximately 3,000,000 shares. Also during June, as Dave mentioned, Standard General's $136,000,000 termination fee, which was contractually required by the merger agreement was satisfied by their transfer of approximately 8,600,000 shares of TEGNA common stock to us, further reducing our shares outstanding during the quarter. For modeling purposes, the weighted average diluted share impact Of that transaction is a reduction of approximately 3,000,000 shares for just 1 month's worth. The full $8,600,000 share reduction will be captured in the Q3.

Speaker 3

So taken all together, since the termination of the merger agreement in May, TEGNA has committed to more than $0.75 of $1,000,000,000 in share repurchases already this year through both ASR programs and settlement of the merger termination fee in shares. As a result of this commitment, we expect approximately 40,000,000 to 50,000,000 shares to be retired by the end of March 2024 based on current market prices or more than 20% of shares outstanding. Beyond this, I'd also like to mention that last month we filled down a portion of our investment in MadHive, for which we received approximately $26,000,000 These proceeds will also be used to fund the $325,000,000 second ASR program as they've already been reflected on cash in hand. All of these efforts further highlight the strength of our balance sheet, which differentiates us in the current macroeconomic environment. As you're aware, we are very well positioned with no near term bond maturities until March of 2026 and all of our debt is fixed rate with a very attractive 5.2% on a weighted average basis.

Speaker 3

We ended the quarter with total debt of $3,100,000,000 and cash of $489,000,000 As a reminder, our only financial covenant is a 4.5 times leverage cap that applies to our undrawn $1,500,000,000 revolver, which doesn't expire until August of 2024. Net leverage ended the quarter at 2.57 times, slightly higher than where we left off at the end of the Q1 as a result of the initial $300,000,000 ASR program we entered into on June 2nd. Now let's take a look at the drivers of our 2nd quarter financial performance. My comments today are primarily focused on TEGNA's performance on a to provide you with visibility into the financial drivers of our business trends as well as our operating results. You can find all of our reported data and prior period comparatives in our press release.

Speaker 3

For the Q2, Total company revenue was down 7% year over year due almost exclusively to lower political revenue from the midterm election cycle last year. When excluding political revenue, total revenue was down 1% compared to the Q2 of 2022. Our record 2nd quarter revenue, which increased 2% year over year, was driven by subscriber rate increases tied to contractual rate escalators, partially offset by mid single digit to subscriber declines. As Dave mentioned earlier, growth in the Q1 lapped a favorable comparison against an interruption experienced with the distributor last year. As a result, this quarter's growth rate better reflects a normalized run rate.

Speaker 3

As we mentioned last quarter, We have an additional 30% of our traditional subscribers up for renewal by the end of this year. On the reverse comp side of the equation, we look to renew our agreements with ABC CNBC, which collectively account for approximately 60% of our big four subscribers, also by the end of this year. As a reminder, TEGNA's high margin subscription and political revenues, which produce annuity like EBITDA and free cash flow, now comprise More than 50% of our total revenues on a 2 year basis. Next, I'll unpack our AMS performance in the 2nd quarter and the drivers behind our results. AMS revenue finished the quarter down 5% compared to the Q2 of last year, and underlying advertising trends were down low single digits when adjusting for the loss of Single Premion National account that we discussed on last quarter's earnings call.

Speaker 3

Despite macroeconomic challenges, Advertising revenue trends in the 2nd quarter showed significant improvement over 1st. Within AMS, we're excited to see automotive, Our largest advertising category within AMS generating continued strong year over year growth for the 4th consecutive quarter. We also continue to see year over year strength in home improvement services and travel and tourism. Now turning to Premion. Premion continues its momentum and is a fast growing streaming TV advertising space with Established, proven and unique sales channels focused on local.

Speaker 3

During the quarter, Premion delivered new advertiser innovations, including the introduction of sales conversion attribution, providing insights into the efficacy of advertising spend as well as Premion IQ, a comprehensive customer reporting dashboard that integrates campaign delivery and outcome metrics for improved transparency. That said, similar to last quarter, premium was down in Q2 due to unfavorable year over year comparisons impacted As we've mentioned, Premion's primary focus is on the growth in local OTT revenue, where it is uniquely positioned to win. Prevail and local revenue finished strong, up double digits this quarter. Now turning to expenses for the Q2. For the quarter, GAAP operating expenses were $450,000,000 down 20% year over year, driven by the merger termination fee of $136,000,000 from Standard General.

Speaker 3

The merger termination fee is reflected as contra expense, consistent with the way we've reflected merger related professional fees in our previous reporting. We've adjusted out both the termination fee and merger related fees in our non GAAP results to best reflect recurring operational results, including expense. Non GAAP operating expenses were $565,000,000 up 1% compared to the Q2 last year, driven by higher programming fees. Excluding programming fees, non GAAP operating expenses for the quarter were down 2% when compared to last year due to ongoing prudent expense management and operational efficiencies. Our 2nd quarter adjusted EBITDA of $194,000,000 was down 24 percent year over year driven by the absence of high margin political revenue and higher programming costs.

Speaker 3

We continue to generate Now turning to our quarter ahead and full year outlook. As you saw in today's release, we provided guidance on key financial metrics for the Q3 and remain on track to meet all of our key guidance metrics. As a reminder, 2023 net leverage will move up a bit to reflect the anticipated impact of the second ASR program we announced today. We expect to end the year just below 3 times on leverage. To help model our near term expectations, let's walk of $93,000,000 of high margin political revenue from the midterm election cycle last year.

Speaker 3

For the Q3, we expect total company revenue to be down by low double digits year over year, primarily driven by the absence of political revenue. We expect operating expenses in the Q3 to increase in the low single digit percent range compared to Q3 2022, driven by the increased programming expenses associated with higher subscription revenue. When excluding programming costs, we project 3rd quarter operating expenses to be down Now turning to our full year 2023 guidance elements. As a reminder, you can find our 2022 actuals for these metrics and comparisons in our investor presentation on our website. For the year, corporate expense is expected to be in the range of $40,000,000 to $45,000,000 Depreciation is expected to be in the range of $60,000,000 to $65,000,000 Amortization is projected to be in the range of $53,000,000 to $54,000,000 Interest expense is expected We expect capital expenditures in the range of $55,000,000 to 60,000,000 We forecast an effective tax rate in the range of 23.5% to 24.5%.

Speaker 3

As we've mentioned, we are updating our net leverage guidance for the year to reflect the impact of the second $325,000,000 planned ASR program, which will be launched later this year. As a result, we expect to end 2023 with net leverage just below 3 times, as Dave mentioned, as a result of all of our capital allocation actions taken together this year. And with that, we'll now turn to Q and A.

Operator

Thank you. Our first question comes from the line of Dan Kouros of Benchmark Company. Your line is open.

Speaker 4

Great. Thanks. Good morning. Just to level set on subscription. So Victoria, You kind of said that 2Q is sort of the clean quarter after there was some noise in Q1.

Speaker 4

And I just want to make sure we understand the puts and takes. There's no real benefit to renewal this year. Most of that comes up at the end of the year, the next 30% you talked about. And I think on the reverse side, you've got one at the end of September and then one technically at the end of the Is that the right way to think about the subscription piece?

Speaker 2

Hey, Dan, it's Dave. That's exactly right. And in order of magnitude on the reverse comp side, the one that year end is much larger than the one up earlier.

Speaker 4

Right. And just in terms of your SOV expectations, we'd be hearing a little bit of noise in Q3, but it sounds like it Still expected to sort of fall in that mid single digit range, is that of care assessment?

Speaker 2

Yes. It's actually been very stable In that in recent months in that mid single digits number. That's right.

Speaker 4

Okay, perfect. And then I just want to go back to your prepared remarks, Dave, just your ability to balance share repurchase and potentially look at accretive opportunities, Because I obviously, the ASR was a very welcome surprise. I think it's certainly what investors were hoping for, the incremental And you guys have a super clean balance sheet. So I guess I'm just trying to understand Order of magnitude desire for diversification, like what's kind of your thought process on What's out there? How much you'd be willing to flex the balance sheet or how much does it really matter that whatever you do, You still leave a lot of dry powder on the table to continue buying back stock at what you perceive as very undervalued level?

Speaker 2

I appreciate the question, Dan. So I definitely don't want to be signaling that we're talking about taking some big swing. We very much in this market especially like having a conservative balance sheet and our leverage position. What I'm really trying to say is that we've proven before Our ability to do some things that are frankly pretty low on capital that have a great return. Premion is a great example, frankly, We didn't spend any it was organically built from the ground up, right.

Speaker 2

So we made the money as we grew. So all I'm saying is, we may There may be some small bolt on M and A acquisitions that make a tremendous amount of sense, but definitely not trying to signal and try at all About major swings in M and A anytime soon. And we will But we have when I'm talking about the flexibility, we do have the flexibility to do things organically and as well as, if it makes sense, some Small bolt ons that will not impact our larger financial picture.

Speaker 3

And Dan, just as a reminder, even in the past when we have done larger M and A, We've always done accretive EPS and free cash flow in a very quick fashion. So we have the ability to flex up with the balance sheet we have and get right back to our current levels very quickly. And I think that historically has been our investment mode.

Speaker 4

Yes, I remember those days well, So thank you. To add

Speaker 2

on, Dan, like I said in the comments, we'll have obviously, Prior to the acquisition process, we had a, I think we're very proud of a very disciplined strategic machine as a company In terms of how to best use our capital and give the best returns to shareholder. Broadcast M and A is off table for the time being as we've talked about at length, from the regulatory standpoint. So you The ASR is not signaling that, that's the end of returning capital to shareholders. I think like I said, at the year end, We're going through the strategic process now and back with all the engines have been turned back on, if you will. But return of capital to shareholders It is a key part of our future.

Speaker 3

And as Dave said in his remarks, I mean, both the ASR programs are really just acknowledgment of accumulated cash that we did not for shareholder value creation during the pendency of the merger. So it is not replacing or instead of an ongoing capital allocation strategy.

Speaker 4

Got it. Perfect. Thank you. Appreciate it.

Operator

Thank you. One moment, please. Our next question comes from the line of Craig Huber of Huber Research. Your line is open.

Speaker 5

Great. Thank you. Dave, I guess on the outlook here for the Q2 for revenue down low single sorry, low double digits, Seems like that sort of infers that ad revenue down about 6% to 7%. Do I have that right? Maybe if you can just comment a little bit

Speaker 6

further on that.

Speaker 2

Sorry, did you say second? I'm sorry, could you say Q2 or would you Q3?

Speaker 5

Q3. Q3, it seems like Your outlook seems to infer down 6%, 7% of the 3rd quarter ad trends. Do I have that right? Maybe just chat about what you see in the current quarter?

Speaker 2

No, we haven't given a guide on MS per se in the quarter, but no, I don't think that we would not agree with that.

Speaker 5

You're referring better than that than you're suggesting?

Speaker 2

Yes.

Speaker 5

Yes. Okay, good. And then just to further clarify here, You're saying your retrans revenue in the Q1 was abnormally high. People should use the 2nd quarter number is more of a true underlying number. What's going on right now?

Speaker 1

Yes, that's correct.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of James Goss of Barrington Research. Again, Mr. Goss, your line is open.

Speaker 6

Thank you. A little bit more on retrans in a broader sense. I know you have some renewals coming up, But are you hit do you sense you're hitting any sort of a wall in terms of retrans net of programming fees? Or are you getting some relief on the programming side from the streamers who might be spending less on New programming and maybe that gives you a better argument. And maybe you could tie in the comments you made about the station streaming apps And the economic value you might be creating thereby getting some of The local station access back in terms of sort of a contributing factor to our gaming Toward the retrans fees?

Speaker 2

Well, first of all, hi, Jim. Let me take the second question first, and I'm going to ask you to restate the first question, because I Didn't quite follow that completely relative to streamers on the first question on retrans, but as it relates to our own apps, it's additive, right. So we're these are really focused On the core never homes, right. So we're really it gives us access to our product and add dollars in homes that don't even don't have any So that's the value of that. The money is small today, but the audience growth is very fast.

Speaker 2

And so we're pretty bullish on what that might look long term and we'll continue to, I think, look at strategic options and how we might Accelerate that through distribution agreements and the like. Now, Jim, on your first question on retrans, you asked me I followed you until you talked about the streamers. Could you restate that for me again?

Speaker 6

Okay. On the streamer side, I'm wondering, most of The networks are owned by companies that have streaming services. There's a big focus on Profitability that wasn't there to the same extent a couple of years ago when the services were launched. And it seems like there could be some Maybe a reduction in allocation of spending toward new programming. And I wondered if it might provide any A better argument for you to justify not paying huge increases in programming fees.

Speaker 6

But in the meantime, you do as time goes on, this is retrans obviously is a huge base of revenues. As you say, more than half of your total, that doesn't go away. But to the extent that it grows the way it has been, Seems like it might be a tougher thought.

Speaker 2

Well, I'll take the last part of that first. I think We're continuing to see the kind of rate increases we expect and deserve on the deals we do. Obviously, Those rate increases somewhat offset by on the traditional side by cord cutting, but we are getting just under a 50% replacement of every traditional we lose, we gain a virtual. And while we talked about the different economics of that in the past, they're still very they're additive to our bottom line in a very, very good way. I think your point is a good one relative to the network streaming services.

Speaker 2

And I think they're found themselves in a difficult situation in that. They all were sort of in a race with Netflix and it turned out that's not turned out to be a very profitable business for anybody. And some of the networks more than others have really, because they don't just don't have the kind of programming to compete with Netflix, Have taken programs off the mothership networks or double running them, which does make their program less valuable to us And does change the nature of a negotiation with the network about what we should pay, which I think is what was key to your point In your question, right.

Speaker 6

Exactly. So it can at least be somewhat of a mitigating factor

Speaker 2

It will be in upcoming negotiations.

Speaker 6

One last thing, You have a number of new initiatives here and there, VERIFI, locked on. I'm wondering, DBL in the past and some other sort of things. I'm wondering as you try to look at new growth options for the whole enterprise Beyond broadcasting, what ones do you think are significant in terms of potential monetization?

Speaker 2

I think for competitive reasons, I don't really want to get into that. And obviously, right now, as I mentioned earlier, to the previous question, we've Turn back on all the strategy machine engines, if you will, and we're also in a process of assessing that. Because it's interesting in just the basically, The negotiating of and dependency of the merger agreement that was terminated was really 2 years of us on ice from a strategy standpoint, But it's been fascinating to see how much has changed. We were right before we sort of turned off that engine, we were looking at a lot of initiatives and Our premises behind a lot of those turned out to be true, but other opportunities have developed just in the last two years, AI being the most obvious and most broadly abused as a word probably, but there's a lot out there relative to AI, both In terms of operating the business from an expense standpoint, as well as both threats and opportunities. But I wouldn't focus on one particular sector other than to simply say, when you look at our assets and capabilities, we have very strong brands in A lot of markets across this country and there's a lot less local competition in the brand world than there is in the national side.

Speaker 2

And that remains a very big asset for us and partners and given our scale and size, Any kind of creative conversation out there where there might be value creation, let's just say with digital companies and A broadcaster will be in those conversations given the both the quality of our stations and the size. And to the earlier conversation, that doesn't mean We've got to do any kind of M and A or capital outlay. Our capital there are the assets that we leverage, Right. So much like we did with Premion. So it's a long winded answer, but I'll just simply say, There's a lot for us to consider and look at, but all again through a very disciplined financial lens and we're not certainly not in the near term looking at any Massively big financial swings at all.

Speaker 6

All right. Thank you very much. Appreciate it.

Speaker 2

Thanks, Jim. Thanks, Jim.

Operator

Thank you. Our next question comes from the line of Steven Cahall of Wells Fargo. Your line is open.

Speaker 7

Thank you. Good morning. So, maybe just to continue with some of the discussions on net retrans. Dave, I think you're in the midst of your biggest affiliation renewal. And a lot of what your peers have said is that they're seeing improving trends in reverse I think that's something you've talked about relatively recently as well.

Speaker 7

What we kind of worry about on that is it's an improvement in the cost escalator. But as we're seeing more and more vMVPDs and as we're seeing more programming fees be fixed rather than based on subs, It just seems like it's going to be really hard to grow net retrans in the medium term. So I was wondering if you could give, without giving guidance, kind of more of an outlook to The overall net retrans picture, because we're a little worried about where it's headed for the industry over the next few years. And then maybe just on advertising, Victoria, you talked about seeing some improvement over the Q1 and the Q2. I think we heard last night that maybe national is looking a little better.

Speaker 7

So I was wondering if you could talk about that. And is it right that even excluding Political displacement in the back half of the year that we should expect some sequentially improving ad trends? Thank you.

Speaker 2

Thanks, Stephen. I'll take the net retrans and I'll let Julie take the advertising question. So, yes, obviously, Net retrans growth has slowed from where it once was. But in our situation, Given the number of pieces we have up for negotiation in over in less than the next 6 months, we have a lot of opportunities to reset that. There's a lot of repricing on both the top line and even more on the bottom line.

Speaker 2

And so, I'm not going to I I don't want to pre negotiate with our network partners on these calls because they do listen in and I listen into theirs. So but I think Just as I signaled on the last call, Stephen, and to Jim's previous question, the equation has changed as they've had to make some Or have made some decisions about making some key program that we pay for non exclusive, so that changes the dynamic on the negotiation. And yet, As you're seeing, broadcasting remains core. You're following the Pac-twelve Negotiation right now with its own universities, and they're trying to do an exclusive deal with Apple, and the universities are balking about not being on broadcast. So, I think that our value in the ecosystem remains going to remain very, very high.

Speaker 2

And How it plays out over time remains to be seen. But I think one thing for us, Because we do not have many Minets or CWs or any extraneous cable channels, We do not have to compromise at all on the rate we get for our big four subscribers. And I don't think that's probably true for most everybody else, depending on what their portfolio is. So that's a consideration and understanding Our success in retrain on the top line negotiations.

Speaker 7

Yes. And then on the core advertising side?

Speaker 1

Yes. Hi. Advertising and marketing services is continuing to improve sequentially, so we signaled that with Q2 numbers, which you can compare to Q1. And I would say the same in Q3. Some of that does have to do with political displacement, so we should see the back half continuing to have sequential improvement.

Speaker 1

And to your local and national question, yes, we too are seeing improvement in national. National is still weaker than local. Local continues to hold on hold in there, and is doing good. But national is improving sequentially quarter over And I would expect that to continue into Q3 as well. Q4, it's really far out.

Speaker 1

So Not as much color on Q4 at this time, but you would expect similar trends.

Speaker 2

Yes. And Stephen, just to add color to what Julie said, Just a lot of our local advertisers, given the size of our markets are really large agencies that we call on locally, but they behave and act just like national agencies, because in fact they are. So, but to Julie's point, put more color on it. The local direct business, right, just Main Street Business is the local car dealer, it's sales in, advertising dollars out, that business is very good. So our local has Even pulled down a little bit by even though it's very solid by these larger agency businesses, and those larger agency businesses, we'll call them national, But they hold on to their dollars to the last minute, right.

Speaker 2

So we just we have less visibility than ever because they're able to place us On very short order, so we're seeing improvement throughout the quarter, for instance, in our pace and yet Our biggest month from an inventory standpoint is we have all the NFL and college football inventory beginning in September. So we're going to we're continuing to see pace improve Throughout the quarter and we won't have a lot of political displacement. I don't think Julie is right, this in September as The big piece is the 4th quarter from a displacement standpoint. We'll have some in September, but not a lot.

Speaker 1

That's exactly right. And I would also just Highlight what you heard Dave say in his remarks and Victoria as well. Automotive continues to be strong, not just 4 consecutive quarters, which was Through Q2, Q3 is also positive, so that's 5 consecutive quarters and it is strong.

Speaker 2

I would also add color on that. Automotive strong across the board, all three tiers. Tier 1, 2 and 3 are all seeing growth and we don't often See them often behave in unison, and that's frankly a really, really good sign.

Speaker 4

Great. Thanks for all the color.

Operator

Thank you. One moment please. Our next question comes from the line of Aaron Watts of Deutsche Bank. Your line is open.

Speaker 4

Hi, everyone. Thanks for getting me on here. You covered a lot of ground. I just had One last question around the leverage. With the recent share repurchase announcement, you Took your leverage for your end up a little bit.

Speaker 4

And I was just curious as you think forward, What's your maximum tolerance for leverage? Or where would you like to see that live? Will it continue to be around that 3 times? Or could it go a little higher with Other capital allocation actions that you're considering?

Speaker 3

Sure. I'll take that. And we've talked about this in the 3 times is a comfortable target for us. It's not a financial policy. We in the past, as I've mentioned, when we've done Really M and A of any size will be done very highly accretive and very quickly accretive both EPS and cash.

Speaker 3

So we flexed up above And then came right back down again from a leverage perspective. As Dave mentioned also, we're not looking at anything in terms of big swings right now, so it would not be materially Moving the number, but again, it's a target where we're comfortable, particularly in this macroeconomic environment. So I would consider it a Target, but not a financial policy.

Speaker 4

Okay. That's helpful. Thank you. Sure.

Speaker 2

All right. Thank you. I think that will conclude the Q and A portion. But before we conclude the call, I want to share a brief update that Victoria will be retiring as TEGNA's Chief Financial Officer. She plans to step down from the role at year end, But we'll continue to assist us with the transition through March of next year.

Speaker 2

As you know, from navigating the complexities of spinning off Gannett to Successfully steering us through numerous strategic acquisitions and a lot, lot more things, Victoria has been a key leader of the company these past 12 years. She's one of the main reasons we've evolved to the position of size and strength we enjoy today. And we think she's going to be with us a while, but we thank her for everything she's done. I'm also very happy to share that Julie Heskett, whom you've all gotten to know, We'll succeed Victoria's CFO at the end of this year. Julie has been with the company for 20 plus years in numerous roles, knows the business inside out, And most recently has been a key strategic player as Senior Vice President of Financial Planning as well as in Investor Relations.

Speaker 2

Now I'll turn it over to Victoria for a few words.

Speaker 3

Thanks for those kind words, Dave. With 17 years 68 earnings calls now under my belt, I decided to step down CFO at year end as Dave mentioned. We plan to continue serving companies and nonprofits in a variety of ways into the future. Over my career as a CFO, I've had the unique opportunity to support several large complex organizations in 4 different sectors through their own strategic transformations And I'm very proud of all the work we've done here over the past 12 years, first is Gannett and then here at TEGNA. As a result, I have every confidence in the company's bright future and its talented and resilient leadership team.

Speaker 3

I'm also equally and personally very proud of the 8 public company CFOs I've helped launch along the way I'm equally confident in Julie's financial leadership and business acumen. As you already know, Julie has worked with me side by side through the past years, demonstrating both skill and care with both internal and external constituencies. As Dave mentioned, I'll be working with Julie and the TEGNA finance team through the end of March to ensure a smooth transition and a clean year end. I very much appreciate all the investor community support over

Speaker 2

And remember, Victoria, there's at least one more

Speaker 6

earnings call.

Speaker 2

Well, thank you, Victoria, and thank you in a large way. Obviously, we'll have more time to thank Victoria in the months ahead, but also congratulations to Julie, And

Speaker 4

we're going to

Speaker 2

have obviously a very seamless transition with a succession plan that you would expect from our company. So thank you everyone for your time today. If you have any questions, you can call Investor Relations at 703-873-6747 or you can email them at investorrelationsat tegna.com. Thank you, everyone.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating and have a great day.

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Earnings Conference Call
TEGNA Q2 2023
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