Gray Media Inc (GTN.A) 2002 Q2 法說會逐字稿

Please stand by. Your meeting is about to begin. Your host for today will be Mr. Bob Prader; Mr. Prader, please go ahead. Please be advised this call is being recorded.

Thank you very much, operator. I want to welcome everyone to the Gray Television second quarter conference call and earnings call. I guess you all noticed, Gray Television -- I'll explain first, we have changed the name of the company from Gray Communications, Inc. to Gray Television really for two reasons. One, with our Benedict transaction, approximately 90% of our cash flow will be coming from TV properties. Our Wall Street friends all felt like this was a more accurate description of the company. Most of our competitors in the television business have the name television in their name. So we felt this was a appropriate time to change that. Second, we plan to change our symbol on New York stock exchange and change our Gray Communications Class B to Gray Television common. Our class A would be Gray Television class a. And we hope to do that as soon as the stock holders approve that, hopefully in September.

Third, we still like the newspaper business. We have four great daily newspapers. We have a great management team. We want to continue in the newspaper business. We'd like to grow in the newspaper business. I think I've answered the questions of the press abut newspapers. Frankly, they're very hard to find and very hard to buy. We've looked at several over the last several years. We made a couple of offers and always got outbid. We are not going to pay crazy prices. If we can buy one we think we can buy at a reasonable price. We have a lot of confidence in our management team that they can improve the papers like they've done with all our papers. Our papers are having a great six months, which Jim will tell you in a few minutes. But we're very proud of our newspaper group, and want to continue to grow with the newspaper business.

Our earnings, we feel very good with our cash flow in three months to six months. We think we probably got as good of results as anybody in the broadcast business. I think this is really attributed to three on key factors. I think our station managers have all done a great job of controlling expenses. Really starting back in 2000, which was a boom year. We started then realizing we needed to do a better job of controlling our expenses. Because of things like loosing COP, HDTV expense coming in. Our operating expense is running at a rate less than we had in 1998. We are very proud of this. We think our managers have done a great job running our stations more efficiently and we still put a great market on the air. And we're still number one in most of the markets we're in.

Second it's a tribute to the strength of our stations in these local markets. During last year, which was a horrible year, we had the best numbers of any TV group in the business. I think here again, the loyalty of our advertisers and our viewers pays off in tough times when you're number one in the news leaders like we are in the towns we're in. I think our strategy of having stations will pay off in bad times and in good times. Obviously, the third factor impacting cash flow this year, although it really hasn't kicked in for us much yet, which is political, which it should be a real good year. We think we'll have a good year as we had in 2000, politically, maybe better. We look forward to the rest of the year being a good political year.

Obviously two big events are going on for us right now at Gray Television. One, the key one, is our Benedict acquisition. I will tell you it's on track. Everything looks good. We have cleared the FCC with no review, which we're proud of. We feel like the FCC feels like we've got excellent numbers, excellent financials. And we were able to clear the FCC with no review. We've cleared the first 30-day hurdle of the FCC process. There was no protest among the stations we were buying for Benedict or the stations Benedict is selling to its former shareholders. There were no protests, so we hope to get a ruling with the FCC in two weeks.

Third, the bankruptcy proceedings at Benedict are moving ahead. I think they're setting a final hearing, hopefully to give approval to the bankruptcy plan in September. So we think everything is on track for us to close October 1. Benedict's numbers, by the way, they are right on budget; they had an excellent first six months. Both our pacings for third and fourth quarter look even better than we thought. We're both looking to have a really good year. And once again, I want to reiterate that Benedict had a capital structure problem, not an operating problem. The 15 stations we're buying are the 15 best stations they had. We're keeping their management team intact. Both their senior management and their operating station manager. And we feel very good about Benedict and about being able to integrate the Benedict team into our organization on an orderly basis during next year.

But the more we see Benedict, the better we like it, frankly. Both the people we're dealing with and the properties we're getting. So I think we're very happy with our Benedict transaction. Frankly, we'd love to go tomorrow and sell stock and get this market done. The market hasn't been great as you all know. We are hoping that the next six weeks the market will improve and give us a chance to do an offering.

Third thing. They say a big issue facing us is HDTV. You know, we're in -- we've got four stations up and running. We've got the rest of our stations, all but two, in various stages of construction right now. There are two that are waiting really FCC approval of a channel change, which is really something out of our hands. But the new channel has been approved verbally, it's just a matter of getting that done and getting the construction permit. But we feel very good about our HDTV transition in the stations we're in. Our election station is ready to go on air any time, which is our biggest property. And here again, I think we're all a little disappointed that HD hasn't moved a little faster. There's not enough sets in the market, there's not enough programming going on. I think Congress is finally, along with the FCC, taking some measures to speed this transition up. I think in the long run, we'll all going to be better off if they do. It's clearly a superior product. And once people see the product and get used to it, they're going to like it, and they're going to demand it. So we're hoping that there's more sets out there, more publicity. We're trying in our own markets to emphasize to people HD and show them what it's like. But there's still a lack of programming and a lack of sets. And these are two elements that something has got to happen on before HD is going to be a viable medium going forward. But we feel like we've done a real good job of managing our balance sheet. We've done a good job of managing our expenses. And we've had relatively decent growth, even in a still pretty tight advertising market. As I said, we looked at everybody else's numbers that reported in the TV business so far, and we were right at the top of the list, which we're very proud of.

At this time, I'd like to turn it over to Jim Ryan, who is our Chief Financial Officer, and let Jim run through the numbers briefly. And then we'll throw it open to questions.

Thanks, Bob. And good morning to everybody. I think the taxes and release lays out the details of both the three months and six months pretty well. So I, at this point, will only touch on some highlights.

And again, we've had a very good quarter, and the first half of the year has tracked better than what we had been anticipating. We're slightly exceeding our revenue targets through six months. We're slightly under our expense targets for six months. So we're about 5% of our -- we're about 5% ahead on six months on our OCF target for the year, so we feel very good about that. And as Bob mentioned, second half of the year is looking are very strong as well. And I'll touch on the pacings in just a minute.

On a three-month results, revenue was up 7%. Broadcast was up 7. Our political has been tracking a little bit stronger than we had anticipated automatic the overall -- although the overall dollars are still not terribly large. We had about 1.4 million of political in the quarter, and obviously last year was the off year. Political both in the second quarter and first half of the year has been running to date about twice as much as we had initially budgeted. But we also, in budgeting political, tend to be pretty conservative in the first part of the year. So that we don't have any unhappy surprises. But we think it's tracking very strong, boding very well for third and fourth quarter. Several states seem to be very strong in political this year, especially among them for us, currently in the first six months of the year, Wisconsin has been very strong. So the on year of the political cycle is off to a very good start for us as well. And we're pleased about that.

Basic local and national television revenues, excluding political, also did very well in the quarter. Our local was up almost 5% year over year. Our national, while it's a much smaller component of our television time sales, was up nearly 8%, so we were pleased to see the national coming back.

Our publishing for the quarter really had a very strong, very good quarter. We're very pleased with it. Its retail revenues in the aggregate were up 12%. Circulation was up nearly 8% driven purely by pricing increases that were put in place earlier in year and that have been holding. And we're even seeing some encouraging signs of life in our classified. That was up almost 4% in the second quarter. And as we're talked many times in the past, the big driver on our publishing results has been the continuing expansion of our retail business for our two suburban papers, the Gwynette Daily Post, and our paper in Rockdale as well.

As Bob mentioned, we have been working hard on our expenses. In the second quarter, they were up slightly in year over year. I'll get to the six months in a minute. They were actually down a little. All in all, we had a very strong quarter. Broadcast, media cash flow was up 14%. Our publishing was up just a tremendous 36%. The overall increase was 15%. And we're very pleased with results of the quarter. And again, it was slightly above our expectations.

Turning to the six months again, the story is very similar. Our revenue is tracking a little bit of -- ahead of where we had expected it to be. The broadcast revenues were up almost 6%. Political for the first six months came in at about 2.2 million. And as I mentioned before, it's been running stronger than we had anticipated for the first since six months, and we think that's a good sign for the rest of the year.

Again, our local business is coming back nicely from last year. On a six-month basis, it was up a little over 3.5%. And our national business is up nearly 6%. Everyone should keep in mind, again, that on our broadcast time sales, the split between local and national, we're very proud of the fact that really we sell about twice as much local as we do national. We've always had a strong focus on our local. And as we had expected, as we said at the outset of the year, we had expected single-digit growth this year in that business, and it's tracking right where we had expected for the year, so we're pleased to see that.

Publishing again had a very strong first half of the year. Its revenues were up about 6.5%. Our retail, again driven by the strength of the suburban Atlanta papers was up nearly 10%. Circulation, based on the price increases early in the year, was up over 7%. And our classifieds on a six-mont basis again are showing some encouraging signs and are actually in positive territory with a little growth.

Our expenses for the six months are running about 1% under last year. So with the revenues up, expenses under very good control, again, we had a very strong media cash flow performance for the six months. Broadcasting was up 14%. Publishing up 35. All in, our media cash flow was up about 16%.

Let me comment briefly on our pacings that we're seeing so far for third quarter. And this is as of August 1st. We are very, very pleased with what we're seeing, excluding political dollars. Our basic local and national business, currently, as of August 1st, which is the last report I have seen, we were running double digit percentage increase orders on books. Our local was up at a run rate of about plus 14. Our national for the whole quarter was at a run rate of about plus 12. Now, I would expect that those run rates will taper off a little bit as the quarter moves on, especially in September as the political dollars start flowing in. But quite frankly, it's been a very, very long time since I've seen pacings in double-digit territory.

And another very encouraging sign is that based on orders on books, as of August 1, we already had about 88% of our basic local and national budget for the quarter all ready ordered in house. So again, already looks like a good quarter shaping up. And we're pleased to see the strength in pacings. All of those comments exclude the political, and again, our political, so far, has been running about where we expected it. Quite honestly, I think there's the potential that it's going to build the traditional political season really doesn't kick in until after Labor Day. And based on the results in the first half of the year, I think we could have a very strong political showing in September and October.

Couple of quick comments on our balance sheet. Total debt was at $379 million. That's come down about $12 million from where we were at the end of the first quarter. When we issued our Series C convertible preferred in April, which we talked about before, we took about half the cash proceeds, paid off our outstanding amounts on a revolver, which brought our debt down. We currently have a cash balance as of June 30th about 15.5 million. Our trailing operating cash flow on a 12-month basis is at 53.3 million. So debt-to-operating cash flow was at 7.1 as of June 30. And to put that in perspective, as we said all along, we thought we would be rapidly delivering as the year went on. Our leverage ratio at the end of Q1 was about 7.65. So again, the year is tracking just as we anticipated and we're very pleased with that.

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

Thank a lot, Jim. Operator, at this time, we'd like to open it up for questions.

We will now begin the question-and-answer session. To place yourself into the question queue, please press star 1 on your phone. Please go ahead if you have any questions today. Our first question comes from Bishop Sheen; please go ahead.

Good morning Bob and Jim.

Hey, Bishop. You're always the first.

The older you get, the faster the fingers. What can I say? Everything sounds good. It's a mixed bag out there. And it's certainly refreshing to hear; it sounds like business is same old same. Couple of questions, Bob. I apologize. I tend to drive you nuts every time. Going through the books on Cap Ex and the forward network compensation, the ever-shrinking network compensation. [ SIMULTANEOUS SPEAKERS ]

I'll comment after.

Yeah, Bishop, as you know, because of our very favorable deal with the primary vendor on our HD equipment, the book Cap Ex does have a big timing difference, that we have to -- from our end, too, we're constantly trying to remember what that timing difference is. But again, with that deal, it was 10% down and then 12 months. The 90% balance, 12 months after installation was completed. So we've got a situation where a lot of our digital Cap Ex, as we've talked about several times in the past, some of it will roll through this year, some of it through next year. And quite frankly, it looks like some of the final cash expenditures will actually roll out into 2004. But we -- for non-dtv in cash, we spent about $2 million in the first half of the year. And the remaining dollars we spent for dtv are about 5.5 million of just the way things flowed. We had some pretty good expenditures first part of the year. But then just on timing, the cash side of the dtv during the late part of the second quarter leveled off a little bit, and we'll be picking some of those expenditures back up in the second half of this year.

Jim, let me just stop you there so I'm on the same page with you. For six months of 2002, regular Cap Ex, $2 million cash, roughly, and then dtv, $5.5, cash?

Yes. Actually, a little over 5.5. It might have been -- as I'm looking at my cheat sheet, it looks a little closer to 6 than 5.5.

Okay. And then anticipation for the last half of the year?

I think our non-dtv expenditures for the second half of the year are going to be pretty moderate. Obviously the big question is dtv. I think -- And there will be some timing here as we move through the second half of the year, based on, you know, -- based on, you know, tower crew availability and delivery of equipment. The same issues everybody in the business is facing. But what I've -- looking at the year in total, I think we will, on a cash payment basis, end up paying about 11 million in cash this year for dtv.

Not just --

All in for the whole year, about 11 million. So we've got roughly -- call it roughly half paid out for this year. And the balance of the 11 million in the second half of the year. Next year, about the same number, about 11 million in cash as things cycle through. And currently, looking out kind of projecting out the full delivery schedule and timing. It looks like about 5 million of cash for 2004. 5.5 million, maybe, in 2004.

All right. And roughly 1 to 2 million of cash for the regular maintenance Cap Ex back half of 2002?

Yeah. I think probably closer to 1 than 2.

Okay. The network compensation -- also I wanted to sneak one in and ask you where we can get the Benedict numbers? Or are they available? Or will you --

There is, through -- through Q1 and also 12/31 there's quite a bit of public information out when we -- when our shelf registration went effective, there's full disclosure on Benedict through 12/31/01 as well as the first quarter. There's also an 8-k that we filed as well with a great deal of Benedict disclosure in it as well.

Got it.

So that's all up to date. So as we move forward between now and October 1, obviously there will be supplements to be filed to our registration statements and we'll fully -- we'll be bringing out second quarter results as well. But again, in a nutshell, their results were very good for the six months. Their media cash flow for the stations we're picking up, on a six-month basis, was up about 30 -- 37% over last year. To translate that into a number, media cash flow for those stations on a six-month basis was about 21.4 million, compared to just a little bit over 19 million last year. So they're having a very good year. And as Bob mentioned the second half of their year, in talking to them as recently as yesterday -- or Wednesday, they're still looking for a good, strong second half of the year, just like we are.

That's great. Do you have a revenue number that goes with that six-month performance for Benedict?

Six-month revenue is about 38.5 million, roughly. And prior year would have been about 30 -- just shy of 35 million.

And then the last --

Wait. Those are slightly ballpark, but I mean, within plus or minus, a little -- you know, 100,000 or a little.

Close enough. When Worldcom's filing 3.3 billion under the cell phone, who can complain? The --

Network comp on a -- we -- obviously it's going to trail down. We have said that, you know, it's going exactly as we had expected it to go. This year, we will do approximately -- well, let me, I guess, put it in perspective a little bit. On a full-year basis of '02, once you put both us and Benedict together, our network comp would be about, on a pro forma basis, would end up being about 3% of our total revenues, and it would stay around 3% of total revenues through the end of 2004. And then it would go down to about 2%. And then with the existing contracts, both us and Benedict, really at the end of 2005, we assume that comp will be done with and it will, you know, will be phasing itself out.

Got it.

So at the end of the day, going forward, it is not a huge amount of total revenue for the combined company. [ SIMULTANEOUS SPEAKERS ]

As I mentioned earlier, we're running the business, looking at expenses, and numbers going forward, as if there was no comp as if we spent the money on HD. And those are two factors driving how we're spending the expense side of balance -- of the income statements. We're very conscious that those figures are there and that we've got to manage our business to make sure that we know that we're going to have less income from comp and going to have more expense from HD.

Right. Thank you.

Okay.

Our next question comes from Chris Harris. Please go ahead.

Good morning.

Hey, Chris.

Yeah, Bob, can you give us an idea for how much flexibility you have in closing the Benedict transaction, noting how turbulent the capital markets have been and that you raised funds before that October 1st date.

There's some flexibility. Our actual drop-dead date is not until March of next year. I think if we wanted to get more time, we'd obviously have to sit down with the Benedict principals and work out something. Frankly, we want to close as soon as possible because there's a good bit of political revenue coming in in October/November that we'd like to be in with Grey Tel. And start managing. We're looking at other alternatives besides the public market if we need to to help get the deal closed.

Do you have any plans yet to hit the road, you know?

No. We're still looking, obviously we have been trying to get everything ready to go from a standpoint of all the regulatory approval. You know, ideally, we'd like to sell stocks say sometime in September, and if the market it right then, that's when we'd like to be out doing it.

All right. Should we assume a full road show for any bond or stock deal?

From what we have been told, we definitely need a full road show for an equity. I think for bonds we probably would not because we have an issue outstanding that people are very familiar with. So I don't think it would need a full road show for a bond deal. But we certainly would be planning that for an equity offer. I think most people would look at it almost as an IPO, from the standpoint of the companies obviously doubling in size. It would be, you know, a large stock issue for us.

Great. Actually, one last quick question for Jim. Could you remind us how much availability you have on your credit facilities right now?

We have -- on the revolver, we have additional borrowing capacity right now of 37.5 million. 12.5 million is currently being utilized as a standby letter of credit as part of our earnest money obligations under the Benedict transaction. Let me also -- I need to correct. I read the wrong number when I was responding to Bishop's questions about ballpark what Benedict looked like on the first six months of the year. They're -- when I quoted the revenue numbers, I was actually looking at local revenue, not total revenue. Their total net revenue for the first six months was approximately $54.6 million, compared to approximately 52 million last year. So I just want to clarify that the first set of numbers were just local. And again, the second set, the total revenue for six months is about 54.6, versus 52 last year.

Great. Thank you.

Thanks, Chris.

Our next question comes from Harvey Sandler. Please go ahead.

Hello. Hi, how are you?

We're doing great.

My question is, could you tell us how financials would look one year after you close on Benedict; what would be the debt cash flow approximately?

Okay. Jim, you want to go through that?

We think on very conservative assumptions for next year, one year out. We think that the -- and keeping in mind that '03 is a nonpolitical year, we think that total leverage would be a little bit will depend on the final equity number, but if you -- but that being said, we would look to see total leverage in the, approximately the 6 or 6.2 times range, which on an off year, we don't view as being excessive, and probably see senior leverage a year out probably around the 3.5 times range.

Uh-huh.

And then, obviously '04, with the political cycle coming back around, I think you could see leverage potentially -- well, I think you could see leverage in the 4s.

Good luck.

Thanks, Harvey.

Once again, if there are any questions, please press star 1 on your touch tone phone. Please go ahead if you have any questions today. We have no further questions at this time.

Okay. I want to thank everybody for joining us today. We're working hard to get Benedict done. As we've told you, we're working hard also to get our HD done timely, both for us and to meet our applications to our individual markets. You know, we -- here again, we're the leader in these markets and we think we need to be the leader in the HD also. But we feel like the rest of the year is going to be real good for us, both for us and Benedict. And we, frankly, can't wait to get the deal closed and get the Benedict stations in with our group and the Benedict managers or management teams. So I want to thank everybody for joining us. I'll tell you like I always do, Jim and I are easy to find; we answer our own phones so if you have any questions, please call us. Thank you everybody, and we'll talk to you at the end of the third quarter. Good bye.

This concludes today's conference call. Please disconnect your line and have a nice day.