Gray Media Inc (GTN.A) 2002 Q1 法說會逐字稿

Please stand by. Your meeting is about to begin. Please be advised that this conference call is being recorded.

Good afternoon and welcome to the Gray Communications first quarter earnings conference call for May 15, 2002. Your host for today will be Bob Prather and Jim Ryan. Mr. Prather, please go ahead.

Thank you very much. I want to thank everyone for being with us today. I hope all of you got our earnings release this morning and we're very pleased with our first quarter: Media cash flow up 16 percent, which we feel is off to a good start. I think everybody will agree we're glad 2001 is behind us and we feel very confident about 2002 being a very good year, both because of just what we feel to be good growth and we've had good expense control but also we think it's going to be a strong political year and that the second half of the year could be exceptionally strong.

As many of you know, we announced during the quarter that we've signed a letter of intent to acquire Broadcasting. We're actively finishing our due diligence right now and are planning to sign a contract May the 22nd, which is next week, and at that point we will file the FCC and also the shareholders will file a bankruptcy plan with the bankruptcy courts, so we feel like we're confident we'll get this deal hopefully closed, depending on government approval, sometime in the fall.

We're very anxious to move forward. We think it's a great deal for us. It fits our criteria, the stations do. The management we feel very, very good about and we're looking forward to getting this deal going. We think it will greatly improve Gray both from a size standpoint, which is not necessarily always a good reason to do something but we do think the other criteria, that it has very similar markets, very similar operating style and strong emphasis on news and local market leadership are things we think are important in the broadcasting business.

Our newspapers are doing very well. They continue to be very, very steady growers, actually had a better year last year than our TV properties and they're on track to have a very strong year this year again and that we feel very good about our newspaper business and the future ahead.

We closed on our Series C preferred stock during the quarter also, which we brought in basically 30-plus million of new money and we converted our old Series A and B preferred into one class so we now have one Series C class of preferred stock, so we're very happy about that also.

And we feel very good about the rest of the year. Our HDTV conversion is on track. We did get extensions on eight of our stations but we think we'll have all our stations on the air with HD by the fall except for two, which we had channel changes on and it will be a little later on those, but we're on track with HDTV and we fee like we'll be well within any of the guidelines that the FCC has established as far as giving people. I think 70 percent of the stations in the country got a six-month extension but I think it's going to be harder to get one if you try to go past six months, so we want to definitely be within those guidelines the FCC has set.

I think at this point I'm going to turn it over to Jim Ryan, who's our Chief Financial Officer, and let Jim talk to you more specifically about the numbers and then we'll open it up for questions. So, Jim?

Thanks, Bob. Good afternoon, everybody.

Like Bob said, the year got off to a very good start. We had very good growth over last year. We achieved our revenue budgets for the quarter. We beat our expense budgets for the quarter and we exceeded the media cash flow budget so we're very pleased with that. And as Bob said overall media cash flow is up about 16 percent year over year. That's up about 1.8 million and to kind of put things in context a little bit the media cash flow of roughly 13.3 million for the first quarter of 2002 is basically back at equivalent numbers for 2000, which was a very strong year for us. So not only are we seeing good growth over last year, 2001, but we're on track for what could shape up to be a very, very strong year for us.

Total revenue was up about 2 percent. Broadcasting was up 2 percent. We had about 760 million of political in the first quarter versus about 31,000 in last year. A good sign for the political was that that 760 that we did receive in the first quarter was about double what we had budgeted for so we certainly hope the politicians keep spending at that rate all year long.

We were very pleased to see, as we expected, reasonable growth, solid growth in our basic, local and national, excluding our political revenues. Our local was up about 2.3 percent. Our national was up on a percentage basis a little bit stronger, just shy of 4 percent, but of course our national business was down a little farther last year as well, but we're pleased to see good, solid growth there. That's what we had expected. We continue to think the year in basic, local and national will build and so far we haven't been disappointed.

Our pacing for second quarter in our broadcast revenues is running on a combined local/national basis, excluding political, is running at about 4 percent, right about where we thought it should be for the second quarter, so again we're pleased at the tracking. And our political in the second quarter is running about where we expected and so far it would shape up to be about the same amount of dollars that we ended up recording in first quarter.

All of our stations are in very good sound position, still dominant in their local leadership position. We continue to see very good, steady progress from our Knoxville station. We're pleased to see that. And as we mentioned in our call from last quarter Knoxville actually grew year over year last year and they're continuing to grow this year so we're pleased to see that growth.

As Bob mentioned, publishing did well. It's up about 4 percent in revenues year over year. We had retail advertising revenue increases of about 7 percent. Our circulation was up over 7 percent as well. The circulation is coming from price increases and we're pleased to be able to see those increases be able to be absorbed by the market.

And as Bob mentioned, we're seeing a good start to the year at all of our papers and we're seeing continuing in the suburban Atlanta paper markets, our little niche markets, continuing to see good retail expansion in the counties we're serving.

Our expenses for the quarter were well under control. Overall expenses were down about 4 percent or about 1.1 million. Broadcast expenses were down about 5 percent. Publishing was down a little bit less than that, about 3 percent.

You'll notice expense savings really tend to reflect two things. First of all, it reflects the ongoing staffing efficiencies that we've been trying to achieve over a long period of time and as things slowed up last year we took some additional steps to become more efficient and we're seeing a full-year benefit of that in first quarter. Our overall headcount year over year is down about 7 percent across the entire company.

The other thing that I think influenced positively our expenses year over year was some changes we made to our health and welfare plan effective at the beginning of this year. We had to do some additional cost sharing with our employees and we're seeing some of the benefits of those plan changes we made.

Our expectations going forward in the year is that our expenses will maintain well controlled. If we have a very strong year I would expect overall expenses to be about equal with last year's with a strong revenue year. So we'll be in very good shape for 2002 to be a good bounce back year from 2001.

Talking about the balance sheet briefly, at March 31 we had about 391 million of debt. You'll remember that we effected the exchange of our old subordinated notes in January and that's behind us -- or I should say we effected the extinguishments of the old notes in January.

Trailing operating cash flow at the end of the quarter was about 51.2 million, so our total debt to cash flow is about 7.65 times. But also just after the quarter in April, as Bob mentioned, we issued our Series C preferred stock. It generated about 30.5 million of fresh cash for the company. If you were to pro forma for that we paid down 12.5 million or thereabouts then of revolvers. Currently our revolver is at a full 50 million of availability and the rest of the cash we have currently invested in a short-term basis.

But if you were to pro forma the debt reductions we'd be about 7.39 and obviously much better on a debt to cash flow ratio if you took credit for the 18 million of additional cash that we've put on the balance sheet for a little while.

The other major thing in the quarter that I think is pretty well disclosed in the earnings release and well disclosed in the Q is we did implement like everybody else in the world the new accounting rules for intangible assets and goodwill. We did take practically a 30.5 million after-tax charge to reflect the implementation of that change in accounting principle and that's done and I don't see any, at least in the immediate future, or in the future I don't see the need to take any additional charges. So we've implemented the new FAS 142 and we're ready to move forward.

At this point, Bob, I'll turn it back over to you.

Jim, thanks very much.

Joe, at this time we'll open it up for calls from listeners.

We will now begin the question and answer session. To place yourself into the question queue please press star-1 on your touch-tone phone. If you are using a speaker phone please pick up your handset and then press star-1. To withdraw your request press star-2. Please go ahead if you have any questions.

Your first question comes from Bishop . Please state your company.

It's Wachovia Securities.

Good afternoon, Robert and Jim.

Hey, Bishop, how are you?

I'm good. How are you? You've had a busy month, my friend.

Well, we've been trying to stay busy lately, stay out of trouble.

Yeah. It's better to be busier than not.

A couple three questions: The 7.39 pro forma, that's on a net debt basis, on an LTM basis, correct, Jim?

The 7.39 would get us back to the debt pay down we made after the issuance and the Series C preferred.

But what about the 21.2?

I wasn't even giving myself full credit for that, so it's better. If you took the whole 391 of debt at the end of the quarter and subtracted off roughly 30.5 and take it against the 51.2 we're basically just north of 7.

Yeah, no that works out great.

And on that preferred I noticed it has a relatively low strike price.

Well, Bishop, it started out not that way. When we originally got the verbal commitments from the people that were buying the preferred it was about a 40 percent premium and it just, thanks to our friends in the legal world, it just took longer to get closed and by the time it got closed that's -- fortunately for them and I guess fortunately for us too in the long run the price had risen considerably and so --

It's all in the money now.

Yeah, the premium wasn't near what it started out but they made a commitment and a show of good faith and we felt like we're people of our word so that was a deal we made and we live with it.

Yeah, well, it's good for them.

Is there a lock up on that stock? I mean, it would just make sense in the model to just convert it all it would seem at this point since it's so far into the money.

Jim, do you want to --

There is no lock up on that. As a matter of fact, there's the standard registration rights that we're following up on for it.

Okay. So we'll wait for the FCC docs. You know, I guess whatever more you're going to file we'll see in those docs. If you have filed something more than the press release I'm not aware of it, but I'll have to reach your Q. Maybe there are some more details in there.

And then lastly could you give us, as only you do so well, kind of a color on what's hot, what's not in your markets, what markets seem to be really functioning on all 12 cylinders and what still needs work?

Bishop, you know fortunately I'd say all of our markets we feel good about right now. I would say Knoxville is doing very good. Eau Claire, Wisconsin is off to a very, very strong year. Panama City is off to a strong year. We really across the board feel pretty good.

I would say one of the markets that is a little bit concerning more from a -- I don't think it has anything to do with our station; we're doing okay there, but August, Georgia just seems to have been in the economic doldrums for a couple years and the other stations in the market are feeling it too I know because we've talked with them.

They just need to have --

You know, I think overall we feel very good. Lexington we feel good about. That's one of the things I like about the mix we've got. We've got some very strong demographic growing communities out there that fortunately because of being college towns and state capitals and things like that they don't feel this crunch quite as much as some other areas of the country have.

You just need to have your old friend Tiger Woods come back to Augusta more.

Well, we'd like for him to show up there a couple times a month and be able to cover it.

Well, it sounds like it was a good quarter.

And I'm sorry, the last question: We're moving then hopefully from a letter of intent to a definitive agreement, and if things move along the way you've hinted at that would be by as early as next week?

Yeah, we're on track to sign a definitive agreement May the 22nd, yes.

Okay. Very good. Thanks, you guys.

Bishop, we appreciate your support.

Sure thing.

Your next question comes from Chris Harris. Please state your company.

Bank of America. Good afternoon.

Hey. How are you, Chris?

I'm just curious if you could update us on the situation?

I can, as a matter of fact. I have a letter in my hand that I got this morning that the trial has been set for January 27th, 2003 on the lawsuit between and the State, which we're not a party to, but obviously it would affect us at some point down the road. But we're just sitting on the sideline. We're happy with our investment, think the stations are doing real well and we feel like we've got a great investment there that's a long-term hold and we hope that they'll get their legal problems resolved at some point in the future and at that point we'd like to sit down and talk with the people.

Have there been any developments with that really I guess in the last few months that might be under our market's eyes?

No. As I said, the only thing is just this recent actually setting of a trial date regarding their lawsuit with the estate.

Great. That's good actually. Would you mind kind of updating us on -- I know that your bank facilities first leverage test, maintenance test kicks in at the end of the third quarter, if I remember correct. Just based on how the first quarter went are you still comfortable with meeting that?

Oh yeah, no question there. We'll well be within covenants. And we would have been within covenant even if we hadn't done the preferred but you take that extra money from the preferred in the equation and there are no issues there.

Just one more last quick question on the capital break. Can you remind us how much you plan to spend for the rest of the year on cap-ex in general but particularly digital upgrades and where I think you'd given a number of 23 million you need to spend over the next two years, how at this point you expect to spread that out?

I think on a cash basis that 23 million is roughly half in '02 and half in '03 and it may even in a couple of isolated instances where, as Bob mentioned, there's a couple of stations that because of channel changes that were required and then that got slowed up at the FCC. We might be even either real late this year or early next year as far as installation that some of that could even shift out to 2004. But I would basically plan on about half of it this year and half of it next year.

Great. Thank you.

Your next question comes from Greg . Please state your company.

Yeah, actually this is from Morgan Stanley for Greg. Congratulations, gentlemen, on a fine quarter.

Thanks very much.

I just had a question on the acquisition, if you could provide any color on any more details about how you would finance that acquisition and if you have any targets for your leverage post that acquisition if it goes through?

Yeah, we're planning to finance it through a combination of some new equity, probably some more high-yield bonds and some more term loan B bank debt. And we definitely plan for our leverage to be down at the end of the closing and we would like to be under six when we close the deal.

Okay, great. Thank you very much.

Okay.

Your next question comes from Ross . Please go ahead. Please state your company.

How are you, gentlemen? Ross , Brothers.

Jim, a quick question: Could you give us a feel for how the stations did for the first quarter as well?

In very general terms I'd say that they had an excellent quarter. They showed good growth in revenues. Their cash flows are up. On an absolute percent point basis they probably can claim a bigger percentage increase in media cash flow than we can. So they had a -- I would characterize it as a very, very good quarter and it looks like their second quarter is again tracking at their expectations, which would be for a good quarter.

And is there any plans to sell any other stations, I guess besides I think you were planning to sell I guess was it the Wheeling station or was that going to be sold before you bought the balance?

That's already been sold and closed and there are a few other stations, which were designated at the time of our agreement that they have the right to sell and are in various stages of negotiations to sell some of those stations.

Just two other questions: Jim, what do you carry the asset on your balance sheet for?

Our actual purchase cost. It's treated as a cost investment by us and it's roughly all in about 13 million.

And are you getting any sort of dividends or any sort of cash return on that whatsoever?

Not at the present time, no. And probably don't expect to see anything in the way of dividends, that they have historically not been a dividend paying company.

And the final question: With the new preferred could you give us a fully diluted number of shares if you include, say, the conversion of all the preferred?

It would be about 2,780,000 additional shares if the whole 40 million converted at the convert price.

I'm sorry, two million --

Two million seven hundred eighty thousand shares.

Added to the 15.6?

Correct.

Okay. And the new stock that you are thinking of issuing as part of the acquisition, are you thinking more of a convertible preferred or straight common?

Straight common.

I guess it's too early to say if it's going to be A or B stock.

It would be B stock.

Okay, thank you.

Thank you.

Your next question comes from Harvey Sandler. Please state your company.

Sandler Capital Management.

Great quarter.

Thank you, Harvey.

The question has to do with stations. Could you just put a little color on what you see them doing over the next, let's see, a year after you close, what kind of multiples do you think you'll bring down the purchase price to, let's say at the end of '03 and what is it that you could do to make them better than they are? What kinds of changes?

First, Harvey, I think that based on their projections and I think, as Jim mentioned, they're on track to hit their projections this year I think we hope to have the multiple down by the end of '03; ideally if they keep going like they're going down below 8 probably.

I think that they've been very well managed. Frankly, we like Jim Yeager and his management team. We always, everybody likes to think they can do things a little better but we don't want to fix something that's not broke, so we plan to learn from them and hopefully they'll learn from us. One of the things we want to do is take the best of both companies from an operating standpoint and make sure we go forward learning from each other in effect.

They operate very similar to us from a local standpoint. I mean, most of them are strong news leaders. I think if we end up with 28 of 30 stations I think 22 of them are going to be number one in their market, which we are very proud of, and they've got strong news franchises in just about every town they're in and strong local community ties and that's the same way we like to operate stations.

But we've had a history of being able to operate things better after we've bought them, and we in most cases have bought good stations to begin with so we hope to continue that trend.

Good. Thank you.

Thank you, Harvey.

Your next question comes from Morris McKenzie. Please state your company.

Wachovia Securities.

Good afternoon.

Hello.

Could you discuss your expectations for the publishing segment in Q2?

And secondly have you noticed any lag in publishing ad recovery vis-...-vis the broadcasting recovery?

Jim, do you want to take that?

We've got strong expectations for publishing in Q2. It was off to a very good start in Q1 and it's continuing. I really haven't seen any kind of lag and maybe it's more of our mix of properties and market locations but publishing all through last year on a relative basis was a stronger performer and it's been doing very solidly so far this year so I think at least with respect to our key paper markets we've kind of seen them as a leader rather than a follower.

Thank you very much and congratulations.

Thank you.

You're welcome.

Your next question comes from Andy . Please state your company.

Deutsche Bank.

Actually, all my questions have been answered but good luck to the management team with the final completion of the transaction.

Thank you, Andy. Appreciate it.

Take care.

Your next question comes from Bishop . Please go ahead.

Hey, I've got a quick follow-up, Bob. Plus, you know, what a great call, man. I feel like I'm in good company. I know you've got a relationship with Mario but Harvey Sandler gets on the call.

Harvey is a good man and I'm glad he's on our team.

Yes, he is. I feel like I just moved uptown.

The Olympic revenue, you've got, what, three NBC affiliates?

That's correct.

And, you know, what did the Olympics did for you? I probably ask this, Bob, just because I want to hear you make your famous comment about the luge again.

I'll let Jim give you the specific numbers, Bishop, but our station, Eau Claire, Wisconsin probably enjoys the winter Olympics, but Greenville, North Carolina and Panama City are still waiting to discover the winter Olympics.

And I guess the good news is it doesn't hurt us when we don't have them and when we do have them I think we do a little better.

But, Jim, do you have the specific numbers?

Bishop, the very honest answer is that it did obviously help a little bit in first quarter at the three NBC we have but quite frankly the relative contribution is so small I really haven't worked up that specific number for this call.

So it was just as Bob thought.

At the end of the day it's not big enough really to talk about.

Which is what you speculated on in the fourth quarter of '01 and in your call on the first quarter and your call on year end.

And now if we had had 12 NBCs out of 13 stations it might have been a little bit different.

I hear you. If I had wheels I'd be a go-kart. Thank you.

You are a go-kart, Bishop.

Yes, indeed.

Once again if there are any questions please press star-1 on your touch-tone phone.

Your next question comes from Brett . Please state your company.

Performance Capital.

Hey, guys. In the past you've talked about I guess the spread between the A and B was narrower but possibly getting rid of the dual stock and just getting one class of stock. And I missed the very beginning of the call, so my question is about given even at these stock levels the asset value is considerably higher than where the stock is trading and I know you did the preferred, it was at a decent premium at the time but it just seems to me I'm wondering the stock is still pretty cheap, why do the preferred or were there any other alternatives out there, just kind of the thinking behind it. Thanks.

Well, first of all we started negotiating on this preferred actually back really before the fall of last year. September 11th hit and it kind of put everything on the skids for a while. Plus we frankly like to have a little cushion under us and are conservative at the end of the day and we just felt like we having that additional capital would make us all feel better. I mean, I don't think anybody knew December, January how things were going to be looking right now. You like to think you do but it was really an insurance policy as far as we were concerned in case this year didn't come out like we thought it was going to after last year when you had a combination of a bad year for virtually everybody in the business and then with a September 11th type event; we just felt like we needed some more equity cushion in the company and that was why once we embarked on it and started getting commitments we just felt like people that committed to us when it wasn't easy that we wanted to go ahead and go through the deal and we're glad we did. We don't feel bad about it at all.

No, I'm not knocking it. It makes sense. I just didn't know the timing of the whole thing.

It literally was we ought to call it the persistence preferred.

Well, it's a nice piece of paper now.

And with the A and B, you know, I know, Jim, you and I have spoken actually when the spread was a lot narrower about doing something but since you're kind of bulking up and, Bob, it seems like you guys are very fair people, we're all on the same page. Any thought about getting rid of the dual stock?

Recently Jim and I met with the general counsel of the New York Stock Exchange and we are exploring ideas on how we can. We realize that there are some liquidity problems in the stock because of the A and B issue and we are actively talking to the New York Stock Exchange right now about how to hopefully solve the problem that will be to the benefit of everybody at the end of the day.

All right, well good quarter. Thanks a lot, guys.

Thank you.

Mr. Prather, there are no further questions at this time.

Okay. I want to thank everybody for being on our call today. As I say, we feel good about how the year is starting off and we feel good about our transaction. As I said, we plan to sign next week and be actively moving forward with all our various governmental approvals, hopefully get closed by September 30th. That's our target date in the contract. So we plan to be working hard for you over the next few months to get all this done and I think when this rolls around we're going to have a bigger, stronger company, a stronger management team and we feel very, very good about the future of our investment for all of us in the company. And I want to thank all of your support. I always end up by saying Jim and I are easy to find; don't hesitate to call if you've got any other questions. Thank you, everybody. Goodbye.

This concludes today's conference call. Please disconnect your lines and we thank you for your participation.