Gray Media Inc (GTN.A) 2002 Q4 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the Gray Television fourth quarter earnings results for February 27, 2003. You host for today will be Mr. Bob Prather. Please go ahead.

Thank you very much. I want to welcome everyone to our fourth quarter earnings conference call. We're very happy to report, I think we had an excellent year. I think it was the best history in the history of Gray, from the standpoint of not only the results, but also what we accomplished. Most of you that follow us know that we got the acquisition of Stations Holding or the old Benedek Broadcasting closed in October. We feel like this is one of those rare deals where we actually like it better being inside, and we did from the outside looking in. I think we got a great group of markets and stations and employees and managers, and we're very happy with the whole Benedek acquisition.

We also closed the Reno KOLO acquisition in December, and here again we think we have a diamond in the rough. We're very happy with this acquisition. It's off an running. We like the town, we like the station, we have a new manager there who is one of our old managers who we promoted from one of our smaller stations, so we feel very good about Reno.

We also, as you know, refinanced all our debt last year as part of this deal. We've got our eight-year [inaudible] B Notes and a ten-year 9 1/4 subordinated debentures. Those were very well-received in the marketplace. We feel very good, we closed our equity offering and got the [green shoe] and actually raised $284m as opposed to the $250m we were looking at. Interestingly enough, we went back and looked at what we estimated in August of '02 to the rating agencies and to the investment bankers, and we're way ahead in virtually every category. Our debt's actually a little lower $658.2m versus $662.1m that we projected. Our stockholders' equity is higher than we projected. Our operating cash flow, we projected $102.2m, and it's actually $112.7m. Our senior leverage, we projected $3.7m, it came in at $3.2m. Our total leverage we projected $6.4m, we're at $5.7m, and our total debt to total capitalization, we projected at 57%, we're actually at 58.6%.

We feel very, very good about how our balance sheet looks right now and how we look going forward.

Some other real good news we've got, we settled our tax case. The main part of it, the $12.1m tax assessment against us was settled a couple weeks ago with us paying no tax whatsoever, no penalty or no interest. There's still an open issue on the basis, but we're working through that, and I think we'll settle that favorably in the near future. But we feel good about our case in this particular vein.

We just announced we made a deal with EchoStar, the Dish Network, to put our local station on the dish, and all our stations over a period of time. We're getting paid on a monthly basis per subscriber. We really like this deal. We're negotiating with Direct TV to do a similar deal with them. We just did a deal with King World for Wheel and Jeopardy and have a nice savings going forward on our King World product. We already have the lowest programming cost in the business.

We've named six regional Vice Presidents, a combination GMs, we have our company divided into six regions now where we have a general manager in charge of that region that also has three or four stations in most cases reporting to them. We have closed the Chicago headquarters of Benedek as of the end of January. We think we'll have considerable savings from that this year. We promoted Tracy Flores- Conners (ph), as general manager down in Panama City. She was our General Sales Manager. We moved Terri Cole (ph), our manager there to Reno, as I mentioned early. We feel very good about Tracy and the job she'll be able to do for us in Panama City.

Like I say, we feel very good. I think the only cloud on the horizon for all of us right now is obviously this Iraq war and what's going to happen there, although if history repeats itself, I think we had a -- 1991 was not a dramatic effect on us as far as the Gulf War back then. I think right now this limbo state is hurting the economy more than anything. If the war gets going and gets over quickly, which we all hope it will, I think it will not have a very dramatic effect on us, but I do think it's affecting people's psychology right now. We haven't seen really a slowdown, but we are hearing people talk and they are not willing to commit very far into the future because of the uncertainty of the economy.

I'll let Jim tell you more about the first quarter later on, but we feel good about how we're going to look this year, and we think we'll have a real good year, no matter what happens, we feel like we're going to have a good year this year.

We've done a lot. We've integrated the Benedek and Reno stations completely. They're totally up and running on all our financial systems. I think the integration has gone much smoother and faster than I ever would have anticipated, and like I said, I think we have a great group of managers and employees in those stations, and they fit our criteria to a tee, and we feel very good about the fit between the organizations.

So like I said, we think from a a on a run of companies, we're in the best shape we've ever been and we think we're in line to continue to operate very profitably. We set a goal of zero expense increase again this year, and our budgets came in actually a little bit under last year, so we feel good that we're really controlling our expenses going forward. We had a zero percent increase last year, and we achieved that except for bonuses paid out at the end of the year, based strictly on operating performance, which our general managers and our stations hit and achieved based on going way over budget. So our budget expenses were a little less than 2001, and like I said, we've got a budget for 2003 that expenses coming in a little less than 2002, so we feel very good about the job our managers have done in controlling expenses. We'll stay vigilant in this area because of the uncertainty in the economy.

At this point I'd like to turn it over to Jim Ryan, who’s our CFO, and let him go into detail about the numbers and then we'll open it up for questions.

Thanks, Bob. I'm going to focus my comments on really the pro forma results for the quarter and for the year given the magnitude of the transactions, that's really what I think everybody is interested in and certainly what makes the most sense. Obviously the pro formas reflect all the acquisitions back to the beginning of 2002, and/or 2001, as the case may be.

As Bob had said, we had a terrific year. We're very pleased with it. Our operating cash flow ended up being $112.7m. We were a little ahead of the updated guidance we had put out last November. Bob indicated the leverage ratio net of cash was already down to 5.73 times. Total revenues pro forma were $306m, which were ahead of guidance. So we're very pleased with the way the year ended up.

Clearly, in the fourth quarter, and also for the whole year, the big story was in the political revenues. Political pro forma for fourth quarter was about $15m for us, which is about $14.5m more than what was in 2001. Obviously that helped drive the gains in our broadcast revenues for the quarter, as well as the broadcast operating cash flows.

Publishing had very good growth for the quarter as well, being up about 13%, again another solid growth quarter for publishing.

For the whole year, political again was much larger than we had anticipated, about $25m, pushing the broadcast revenues. The local revenues for the total year on a pro forma basis were up a very healthy 5%, and national was up 3% as well. Everybody should keep in mind that we do almost a 70/30 split between our local and national business at our television stations. So we're very pleased to see a solid growth number on the local side.

And, again, publishing, while relative small to the overall company at this point, still had very, very good performance, up 30% in cash flows for the year. –

I'll comment briefly on pacings for first quarter because I'm sure that's a question that is on a lot of people's minds, and also then get into the guidance a little bit.

I think, in a nutshell, the first quarter we'd sum up both pacing and guidance is that we're basically right on top of the internal budgets we had set out back at the end of November. We're very pleased with the way it's been tracking. In television, in pacing, January was very strong, up double digit. February was flat to down slightly, but we actually had expected that, because we were going against $2.2m of Olympic revenues from last February, and our March is right now, as of our pacing from last Friday, which is when we do them, was up a very solid 4% local, and national combined. We think that's a reasonably healthy rate. And, again, for the quarter in our pacings, we're tracking well, right where we want it to be, and the initial signs for April are very healthy as well, actually some double-digit current pace, and I'm sure that will trail off as April gets closer, but some very healthy signs on April.

Our guidance for Q1, 2003, I think is maybe a tad on the conservative side, which is where we try to err, but I think all in all, when put in context with 2002, and remembering it's the off-year of the political cycle, which had $900,000 of political in Q1 '02, and the $2.2m of Olympic revenues, I think all in all the guidance for Q1 is very good. We're pleased with the way Q1 ‘03 shaping up, and at the end of the day, we'll come very close in '03 to the results of '02, and if the March ends of strong, who knows, we might even have a chance to match our '02 numbers. Again, filling in the Olympic revenue and almost $1m of political, I think that's a very strong performance for the company that we're expecting in the first quarter.

And, again, just to reiterate, that the first quarter expectation is basically right on top of the budget numbers that we set out last November, so we feel we're off to a very good start.

A couple of other comments, on items that people may want to know about. As Bob said before, our debt at the end of the year and as set out in the press release was $658m. Cash on hand was just shy of $13m. Total assets for the company were just shy of a $1.3b. Actual shares outstanding at the end of the year were approximately 50.3m. I know a couple of people are wondering about CAPEX. Our as-reported CAPEX was about $15m for the year, about $9.7 of that was related to digital. That's on a GAAP basis. The cash numbers, on a pro forma basis ended up being about $16.5m, with about $14-14.5 in the DTV.

Looking ahead to '03, just as we said in the conference call last November for third quarter last year, our expectations on CAPEX for 2003 are still all in cash, in that $15-16m range, with roughly $12m of that number being for cash for Digital. So we're, again, still tracking the way we thought we were back last fall.

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

Thanks a lot, Jim. Operator at this point we would like to open it up for questions from the listeners.

We will now begin the question-and-answer session, to ask a question please press star-1 on your phone. If you're using a speakerphone, pick up the handset and then press star-1.

Your first question comes from Bishop Sheen (ph).

Hey, Jim and Bob, how are you?

Not a bad quarter. Things seem to be coming up as predicted, and as articulated. A couple questions. I think you quantified, the '02 Olympic number is two something?

$2.2m.

So if you're going to be, based on your guidance, relative flat against the year, how much of a hurdle is that $2.2m? Was it disruptive last year? Or is it just the best that can be expected on a core basis is kind of flat in this current quarter?

The bonus question is, based on your pacings of January of double digits, February down slightly to flat, and March was I think you said, “good,” I was sort of expecting a little bit better than flat.

Jim, I'll let you take that.

Let me speak to the pacing number first. For the whole quarter, local and national , excluding political, we think it would be plus 3-4%, which is about what we have expected. As I said, it would put us basically on top of our initial budgets for the year if it all tracks out.

Bishop, there is the $2.2m of Olympic money last first quarter. There's another $900,000 of political money. Now, we can add, subtract, whatever, but I think all in the mix, if we come basically back to the high side of our guidance for TV for first quarter on revenue, it's about $52.5m, and there isn't that much difference between $52.5m and the $53.2m we actually pro forma'd last first quarter. So to come back flat and basically fill in $3m+ of OTO type, or at least revenue unique to Q1 last year that we didn't have the same shot at this year, I think it means that things are doing pretty well.

And I should mention, too, that somebody's going to ask about how much did the Super Bowl provide us for in January this year, and that was only about $225,000 for the five stations, because our ABCs tend to be among the smallest in the group, so there wasn't a really big kick out of the Super Bowl. I think, all in all, we're doing pretty well.

Fair enough. Just one other housekeeping question. In '03 based on your budget for CAPEX, is that the time frame where we start to get back into a more synchronization between the reported CAPEX and the cash schedule of CAPEX?

There's still going to be some timing differences in '03, and a little bit in '04. As we've said before, the '03 cash number is $15-16m, with about $12m for digital, and the '04 digital run out on a cash basis side still looks like it's about 10-ish. So, you know, they're still tracking about where we thought they would be.

Okay. Thank you, Jim and Robert.

Thanks, Bishop.

Your next question coming from Jim Boyle (ph). Please go ahead.

Good afternoon.

Hey, Jim.

How are the annual contracts this year compared to '02 in terms of amount, advertising rates, or maybe even just did they get placed quickly? Or we were they also more patient, given the war situation?

We're seeing different parts of the country different things. I think everybody has gotten a little more cautious recently. I think most of the annual stuff was placed at good rates. Some of them have what they call a seven-day clause in them, where they've got the right to not advertise for seven days after a war starts, but I think everybody is more cautious now than they were two or three months ago.

But like I said, so far, I'm knocking on wood, our business overall is good in just about all our markets. It's just there's a feeling of unease I think among everybody, including myself sitting here, I think we're all just a little nervous about, when something is going to happen and what effect it will have. I don't think the effect will be great if it gets moving, but I do think the longer it drags, uncertainty always hurts any economy. And, it's real easy to say no or not make a decision and say let's wait and see what will happen. If you've got businesses from big to small making that decision all over the country, there's a lot of stuff not getting done right now.

And did you book more annuals than prior year?

I don't think so. I think it was pretty normal, I think, overall.

And this more psychology and emotion and concern that seems to have popped up, has that been causing any effect on either downward pressure on ad rates, or slower inventory sellout?

No, it has not. No.

Okay. Finally, you doubled in size, so the integration of such a sizable acquisition is always a challenge. Can you quantify some of the progress that you've made to date, or tell us about any of problems or challenges that you've had to date?

Well, I'll give Jim Ryan and all the people a pat on the back. This has gone smoother than I would have ever anticipated. The day we closed the deal, all the Benedek stations were up and running on our computer systems, they were able to go online real-time. The next day after the closing. We had already trained all their people, their business managers on our financial systems. I think they like our systems very much. I think they're more user-friendly, and are more modern software than they had been working with. So we hit the ground running from that and had very little problems.

And the integration of the operating side of the business has got extremely well. As I mentioned, we have six regional managers now, who overlook other properties. I would say it's gone extremely well. We've, as I mentioned, we closed the Chicago office. I think we'll have several million dollars of savings there going forward, and it's been about as smooth as you could absolutely ask for in a transition, and gone much faster than I ever anticipated.

You mentioned Chicago is closed, and I don't see his name in the press release. What has happened with Jim Yeager (ph).

He is still with us, and will be with us full time through the end of April. Jim wanted to slow down. He will be available for advice and consultation through the end of October, and at that point, Jim will be retiring.

Okay. Thank you.

Thank you.

Your next question comes from Drew Marcus (ph). Please go ahead.

Good afternoon. Can we talk categories a little bit? Where you're seeing strengths and weakness?

Jim, do you want to go into that?

I think, Drew, in general I don't think that -- we see actually the level of business across the board, when you put it all together, is still healthy. There's nothing specific that's worrying us right now on a category basis. If you ask market to market, it's a little -- you get differing answers even on the same category or -- so it will ebb and flow a little bit market to market, but when you pull it back together, really the sense we have on the business flow, first quarter this year, is that we're across the broad front, still doing well and no noticeable changes there, so far.

And, also, new subject, acquisitions, are you considering any?

Not really, Drew. We always like to keep our eyes open, but we haven't really gotten anything that we're seriously looking at right now. But we like to see what's going on in the marketplace. But we're happy to operate what we've got and pay down debt, and if a deal came along that looked too good to turn down, we would look at it. But right now, nothing definite that we're looking at.

Final comment. Kevin Martin, the new swing vote at the FCC said publicly today he was in favor of the broadcast newspaper rules disappearing. Any comment on that?

Well, that's problem a big step, because I think there's been a lot of anxiety after he made that vote on the telecom deal that he might try to go again Powell on other things, so I'm sure Powell is relieved, and I'm sure sometime will happen there. Here again, Drew, I'm not sure with the Iraq thing being on the front burner, whether that will get done quite as fast, just because it's going to get pushed back to the back burner, not necessarily by those guys, but Congress may still put pressure on them to back off a while and let things cool down. But it will get done this year, I think. How it will fallout in the end, I don't think anybody knows, but I think there will be significant deregulation that I think will be good for virtually everyone in the industry before the year is out.

Thanks a lot.

Thanks, Drew.

You now have a question from Keith Fawcett (ph).

Thanks a lot for the disclosures in your statements. The pro formas are really helpful. You basically said you budgeted and hoped to be coming in on the cost side flat or even below flat for the year, but at least within broadcasting, the first quarter your costs sort of look like they're up 2%. This is probably nitpicky --

We've got a good answer for that. It's basically some of the costs related to Chicago, and some year-end bonuses, really, that related more to 2002 that we paid out that probably we didn't get all the numbers done until we had closed the books. So we went ahead and put it in the first quarter.

Okay.

But we're on track with our regular operating expenses to be -- we're flat or under budget right now.

All right. Great. The guidance for the first quarter I again, this is probably the same answer, the overhead is running about $2m in the first quarter, with Chicago and the bonus payments --

Don't multiply by four and think that's the answer. It will be a lot less than that.

Okay. Just to follow up on Drew's question, Bob, do you want to do any handicapping on the [inaudible]-voice rule?

We're hearing pretty strong ideas on this 10-10 rule where, you know, the NAB seems to have jumped on the bandwagon behind that. I think it would be good for the industry and good for us if they did that, where they let anybody with a more than 10% market share buy somebody with less than 10%. I think that's a good way to do it, if it happens.

There's still a big fight obviously between the networks and a lot of the broadcasters over the [cap] rule, I'm not sure where that would come out. And the TV/newspaper, I think obviously after what Drew just said about Kevin Martin, I think the FCC wants to do that, but I think there may still be some pretty strong opposition in Congress about that, but I think we'll get some deregulation this year, for sure.

Great. Thanks.

Thanks a lot, Keith.

Once again, if there are any questions, please press star-1 on your phone. You have a question from Chris Ensley (ph). Please go ahead.

I have a follow-up for Keith’s on the expense side of the equation. Fourth quarter expenses were probably due to just how strong the top line was and some one-time expenses associated with the merger, but where are the cost savings coming in '03? Particularly could you talk about your programming expenses in '03 would look like relative to '02.

First of all, the expenses in The fourth quarter were strictly related to performance-based bonuses that were paid out at the end of the year that were based on our managers have a formula if they hit or exceed budget, both they and their station get a piece of that. They were way over budget in a lot of cases, so that was all strictly -- our actual operating expenses were down overall for the whole year.

Our expenses come really from a broad base. We challenge our managers every year. Basically this is the second year in a row, where we want zero expense increase, and we let them figure it out, and different managers do it different ways. We get all kinds of interesting ways to be more efficient, which is the way I like to do it, and it's worked real good for us in that way. So right now, like I say, I think we'll be flat or down for this expense for this year overall.

The same would be true with programming expenses?

I'm sorry. Programming, we are 5.4% is our programming costs the lowest of anybody in the industry. As I said, we just did a King World where there was considerable savings on about 15 of our stations for Wheel and Jeopardy product, so our programming expenses should be even a lower percentage of revenues than they were last year.

Chris, on the program expense side, pro forma for 2002, the broadcast rights amortization was about $12.3m, and the actual payments themselves were about $13.1m. So there really isn't much of a difference between the two numbers.

That will be true as well in 2003, and I don't have the actual projected payment number, but the actual amortization number will probably end up being closer to $11m than anything else. So that would give you an indication, too, as to where the payments would come out next year.

Thanks. Actually, I'm just curious, what's the length of the EchoStar agreement, and I'm assuming this is your first one, and when does this come up for renewal again?

The length -- I need to be careful here. We signed a confidentiality agreement with them. I'm not, sure, Jim, can we talked about the length? I know there’s some things we’re not supposed to talk about.

We're not trying to be evasive. How about if we say it's multiyear and we leave it at that?

It's not outrageous. It's a reasonable time for both of us. I would say it's a normal type agreement and time frames.

All right. Thank you.

Okay.

Your next question coming from Jim Boyle. Please go ahead.

Bob, I just wanted to follow up on possibly TV deregulation and how you expected, perhaps, for it to pretty much help everybody in the business. If duopoly driven into small markets, it certainly would help you on the cost efficiency side. It also would probably raise valuations a couple of multiples if you have more in-market buyers, and perhaps even if a newspaper buyer is involved. Which of the two would get you more excited for Gray? The savings side or the valuation side?

We like both. I've told a lot of you this before, if valuation gets high enough, we'll be looking probably for somebody to buy us if we think we can make good deals in a duopoly situation, at good prices, we probably would be a buyer. For us, the attraction for duopoly actually is more related to being able to grow the revenue from being ability to put a lot of our college sports and a lot of our news product on a second channel. There's some obvious savings you can do, but we think there's just a lot of opportunity for programming that we have that's unique in a lot of markets we're in, to be able to utilize that programming more than we can now with our network deal. So we look at it as a real revenue opportunity for us.

I think the savings side of it's pretty easy. I mean, a lot of people have already proved that formula works. I think the thing you have to be careful of, and we'll be careful of is getting caught of in the word duopoly having some sort a magic touch to it, just like ‘dot-com’ did and thinking you can pay crazy prices to make things work just because of duopoly. I think we have to be careful in not getting caught up in a bidding war atmosphere, and we'll be very careful about that.

We have a lot of well-run stations with a lot of strong franchises, and we don't want to use the old baseball saying and take the eye off the ball for the benefit of trying to pick up incremental revenue or profit that may or may not be there, so we'll be careful how we approach it.

Do you imagine if a newspaper bought a competitive TV station in one of your markets that initially they would be a tougher competitor, or do you think they would initially stumble a little?

I personally don't think there's any synergy between the two at all. We had a TV/newspaper duopoly in Georgia that was there no many years. We made the decision to sell the TV station back in '96 when we agreed to buy the Tallahassee TV station, mainly only because we thought Tallahassee was a bigger growing market, which it has been. Albany has a good market, and it has a fine TV station there, but we can't tell any difference not being the owner of both properties than when we did own both properties. I think newspapers will be buyers of TV stations, just because they've got a lot of money and big egos, and I think they will drive prices up and increase values. I'm not sure there's a real synergy there, though.

Do you think they'll be good operators?

I think some will and some won't. I think there's some that, already -- there's, what, 16 or 18 of them around the country now, I guess, and some of them operate real well, and some aren't necessarily operated that well. I think that will be just strictly on the individual companies. I do think if a newspaper hadn't been in the TV business and they think they have some magic formula, they'll find out that's probably not right.

Thank you.

Thanks a lot.

Once again, if there are any questions, please press star-1 on your Touch-Tone telephone. You have a question from Bishop Sheen. Please go ahead.

You know, I couldn’t resist, because my good friend Jim Boyle opened that Pandora's box. Certainly everyone has been focused on print, but I see that the FCC I think yesterday made it official as far as the cross-ownership potential of capable and television. We're almost 12 months into this since the first statement from the courts and the silence has been deafening. Do you see any change -- pick a term, short term or longer term -- between the desire to cross-pollinate cable television?

Bishop, you work for a bank. I'll show the question back to you. Do you know any banks or financial institutions out there anxious to loan money to cable operators money to buy anything right now?

Long-term --

I think stations like we have are the one thing that cable operators don't have and that's a strong local news and local community presence, so I think if they ever got in financial shape, they would be smart to try to buy local stations. Whether they will or not, I don't know, but I think it's something, if I was in the cable business, I would be looking at down the road, yes.

But you don't see any reason to get excited near term?

They don't have any money and nobody wants to loan them any money.

I would share that opinion.

Okay. But things change.

Yes, they do, if you stick around long enough, they always change. Thank you, Robert.

Okay.

There are no questions at this time.

Okay. Operator, we'll wrap it up now. Everybody, I appreciate all your support. We've got a lot of new shareholders that came on board with our offering back in October, and we want to thank you for your continued support. We feel like we've got a great business going here. We feel like our acquisition has been better than we thought it was going to be, like we said, and we're very happy with our position in the marketplace right now, even in basically what we consider to be pretty tough times. We think we'll be in for a real good year this year, and we're looking forward to having you guys around, and the shareholders for a long time to come.

I always say and will say again, Jim and I are easy to find, we answer our own phones, so you're welcome to come by any time and see us. At this point, thank for you being on the call. Operator, if you would give the information about the replay and all that, I would appreciate it.

If you wish to hear the conference call once again, you can dial 1-877-677-0845, PIN number 1283. One again, the phone number for the playback is 1-877-677-0845, PIN number 1283. And this call will be available until March 6th.

Thank you very much, everybody. Good-bye.

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