Gray Media Inc (GTN.A) 2004 Q1 法說會逐字稿

Good afternoon and welcome to the first quarter earnings call for May 6th, 2004. Your host for today will be Bob Prather, President of Gray Television. Mr. Prather, please go ahead, sir.

Thank you very much. I want to welcome everyone to our first quarter earnings call.

We're very pleased with our first quarter. Most of you have obviously seen the earnings release.

We had a 37% increase in EBITDA with an 18% increase in broadcast revenue which we're very, very proud of. We think our numbers are the best in are industry right now and I think that's the result of a very successful integration of our Benedict acquisition and very strong focus on local news leadership and local sales leadership both.

Here again I think the fact that 22 of our stations are number one in their market and all the rest are number two except for one we feel very, very strongly that our local emphasis on local news is going to continue to be the strength of this business and continue to drive us and also in local revenue which is roughly 70% of our revenue at the current time.

Jim Ryan is going to go into a lot of detail on this. He will tell you our political is very good, better than we anticipated. And it looks like it's going to continue to be strong.

We're very pleased that we were able to obtain a CBS affiliation for a new station in Charlottesville, Virginia, which we're currently in the FCC awaiting final approval of the license transfer. We hope to have that station on the air by August 15th but we're very, very happy with Charlottesville. It fits our criteria to a T.

It's a very fast growing market, great demographics, University of Virginia is located there. It's just a perfect fit for us and it's only an hour away from our Harrisonburg station which we'll be able to share some expenses and be able to do some things together there that will keep our operating costs down. But we're very, very pleased with Charlottesville and hopefully we'll, should be on the air by August 15th.

We feel like the rest of the year is looking real good. Our advertising increases are pretty much across the board. That's the good news.

I think every market we're in right now is having a real good year except for probably Wichita, Kansas, and that's because of the uncertainty in the economy out there with Boeing, they've got about 10% unemployment. Boeing announced that they've got their big plant up for sale there.

There's some good optimism out there that somebody will come in and buy it and will continue to operate it which I think it will. It's one of the premier airplane manufacturing plants in the world so hopefully it will continue in operation and I don't think, I think Boeing's asking $2.5 billion for it so it's a pretty big price for somebody to step up and pay.

We're very happy with the outlook for the rest of the year and I feel very good that we're going to wind up with a record year this year in revenues and in EBITDA.

So at this point I'd like to turn it over to Jim Ryan who's our Chief Financial Officer and let Jim go through some more detailed numbers then we'll open it up for questions. Jim?

Thanks, Bob and good afternoon everybody. As Bob said we're very, very pleased with the results for the first quarter.

Broadcast revenue was up 18% and we were delighted not only with the political growth but with the core local and national growth as well in the first quarter. Local was up about 13% excluding political and national was up a very strong 9%, and it's been a very long time since we've seen growth rates like that, and we were very, very pleased.

Plus, as Bob mentioned, political was very strong in Q1, much stronger than we had anticipate. We've seen a lot of early and consistent presidential spending in Florida, Michigan, Wisconsin, and the, actually Parkersburg, West Virginia, which sits right on the Ohio border, has been catching a lot of relatively for its size station catching a lot of early political as well.

Political being about 3.5 million for the quarter versus 740,000 last year and probably a better benchmark is the 900,000 from 2002, so obviously the presidential campaign started immediately after Super Tuesday it looks like, and looks like based on some headlines I've seen in the last couple of days, spending doesn't look like it's going to slow up anytime in the immediate future, so we're pleased to see how that's progressing and unfolding for the rest of the year.

Publishing did very well, too, in first quarter it was up a very solid 5% in revenue, and the retail ad sales were up about 7% and classified was a very healthy plus 6 as well so we're delighted that quarter in quarter out publishing is growing and contributing to the company.

Operating expense were within expectation for the quarter. It's a little higher than on an quarter-over-quarter basis the percentage, but for the full year, actually we expect operating expenses to trail back off a little bit according to plan, and for the total year, before depreciation and amortization be up around 3% in total and broadcast up a little bit more, closer to 4%, mostly reflecting commissions and national rep sale fees on political money.

We issued extensive guidance for second quarter. We are delighted with the way we see those numbers shaping up as well.

And to give you a feel for pacing because I know the question will come up, pacing for second quarter as of last Friday, and these numbers exclude political, for the quarter we were up 6% in total, running at about 86% of plan. So we're very pleased.

Our local for the quarter was pacing up a very strong 10%, and we were delighted to see local being as strong as it is and continuing. And the current forecast, which probably will end up being a little conservative on the political, is for about $4 million.

Obviously if the candidates continue to spend into June, at the rates they've been spending that we've seen in April, that number, that 4 million number has got some room to move up, and we'll be very happy to take their money.

Turning to the balance sheet for a minute, total debt was at 655 million. We had cash on hand of 24.7 million. Our leverage ratio on a net cash basis was a very comfortable 5.6, down substantially from a little bit over six times we were at the end of the year. It's coming down very rapidly just as we had expected and we're very pleased.

Our trailing cash flow number, and again, the cash flow number, operating cash flow number, is a non-GAAP term and you can go to the Web site to get the full reconciliations of media cash flow and operating cash flow to all the GAAP numbers. But on a trailing 12-month basis at the end of the quarter, we were at 112.5 versus the end of 2003 at 106.2, and actually the 112.5 I'd point out the full year 2002 pro forma number for all the acquisitions in 2002, the operating cash flow number turned out to be 112.7, so we're already basically right on top of, on a trailing 12-month basis, right on top of our record-setting year in 2002, which, as Bob pointed out, we are on to setting new records for the company as 2004 unfolds.

Cap Ex for the quarter was a total of 8.2 million in cash which about 5.2 for digital. Keep in mind again that digital, a lot of that is actually paying for installations from last year on that 12-month delay that we have.

We expect total digital this year to be somewhere between 8 and 9 million and so we're about done with that. We have two more stations to bring on line before the end of the year, and a little bit more of cash to pay cash payments next year but not significant.

Cash taxes for the quarter was only about $260,000. And one thing I will mention it will flow through in second quarter, which is very favorable to us, is we talked about in the fourth quarter call we did settle our litigation with the IRS.

The good news, among the good news in settling that litigation is it freed up a refund that we were owed from 1996, and we just got that refund check in last week, and it was 1.5 million plus so we're delighted to get that cash in as well.

Our 401(k) expense for the quarter was about 420,000. And film payments and film amortization are essentially the same number at the payments were 2.7 million and amortization was 2.8 million.

Going back to media cash flow for a minute, again, we're delighted to see the results for the quarter. Total media cash flow quarter-over-quarter was up about 30%. Broadcasting was up a very strong 34, and publishing was up a very solid eight, so again it's been a very strong quarter and outlook for second quarter is very positive as well.

As we've talked a couple of times in our calls before, we're extremely well positioned to generate significant amounts of cash as the year goes on, and as we talked about last call, our current expectation is that the free cash flow would be north of $1 a share by the time the year is out.

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

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

Thank you. We will now begin the question-and-answer session. To place yourself into the question queue please press star one on your touch-tone phone. If you're using a speaker phone please pick up your handset and then press star one. If your question has already been asked, you may press star two to withdraw it. Please go ahead if you have any questions. Your first question comes from Bishop Cheen. Please go ahead.

Hey, Robert and Jim.

Bishop, I'm glad to see you're back in the front of the line.

The older you get the faster you get. Talk to us if you would about pacings for Q2 about any change in the quality of the advertising, whether you're seeing longer contracts, shorter time spent, anything that would suggest or not suggest that the TV ad economy is indeed turning and sustainable.

Bishop, I'll let Jim go into a little detail but I will tell you the only thing that I see in our business that, and, here again, I'll give a caveat to say our local business is everything we look at more importantly, but national seems to be, you know, spotty and slowing down for us in some areas, and local seems to be very, very strong. Like I said, pretty much across the board. But national does seem to be slowing and spotty. We can't figure out from one day to the next where it's going to show up or disappear but I'll let Jim give you a little more detail on that.

Again, not to cast dispertions have you had any change in your rep or any fundamental change in the way you sell national?

No, [Catch] Continental has got, I think, oh, 18 of our stations, something like that and they've done a great job for us. The only change we actually changed to them in three or four markets which has been very positive it looks like, so, but the quality as far as, I think people are definitely looking a little farther longer term than they were after September 11th.

For awhile there you couldn't get anybody to commit to anything over 30 days, it seemed like, but I think you're seeing more people interested in locking in longer term deals but it's still not like what a it was a few years ago. But like U said the local scene, it seems to be pretty much across the board strength. Jim, you want to add anything?

Bishop, just to give you a feel on the local for the quarter kind of by month I think it's pretty strong, and actually a little bit is following a trend that we saw all last year, and you're going to ask me why it is, and to be honest I have absolutely no idea, but local April is currently plus 11, local in May is plus five, and local in June is plus 7, and I have no idea why May, the middle month of the quarter, is only up plus 5 when everything else is up double digit, but all four quarters of last year we saw that same trend, so it's still up a very, very healthy 10% overall, and, again, that pace excludes any of the political dollars coming in.

We're delighted on what we're seeing on the local front and national for the quarter is probably going to come in closer to flat year-over-year, but after an extremely strong 9% pace in first quarter on a six-month average basis that's still pretty good growth for national.

Okay. Thank you for the color, guys.

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

Good afternoon. Back to back. Has there been any change in your competitive situation in your two largest markets where Gray's a typically third place or so and what upside is there in Knoxville and Wichita potentially in '04?

Jim, Knoxville is having a real good year this year after a not so good year last year mainly because of the market, not because of the station. The station continues to creep up in the ratings, continuous strong number two overall now. I think we're close to number two in news there and hopefully will be by the end of the year and I think the market, though, last year was one of those market where national was just off all over the market, really bad.

Wichita, as I mentioned, is the one market where the economy is probably affecting our numbers there. But we are, we discovered our new manager out there who's been there about a year, discovered that there were 40,000 cable subscribers in our market area that we weren't on the cable on, and they were on systems out of Kansas City. We've gone in and we're gradually, I think we've got 12,500 of them shifted over to us. We hope to have the balance done over the next three or four months.

Some of them we had to go in and do a "must-carry", get the FCC to order them to. That was 40,000, I think there was 15% of the [dowries] in the market was in those areas where we had zero ratings so we think our, we're going to, our competitive position in Wichita is going to jump up substantially once we're able to get all those cable subscribers back onto our system.

We also put in a fiber link out there with our two satellite operations and out in the western part of Kansas, and we've got a joint deal between our Topeka station and Wichita with Cox on a weather news channel that we're sharing with Cox Communications. So I always say those two markets being our two biggest markets have got, both have our biggest upside from a standpoint if we can get some things done right, which I believe we will, we've got a huge upside because they are two of our biggest markets.

Could you guesstimate or quantify what you think some of that upside could be?

Jim, I would say that we think that, you know, one rating point in the news, for example, in Knoxville and Wichita can be a million dollars a year revenue for us, additional revenue for example, so if we can add some, and we, in both of those markets we, we don't have even our fair share of the revenue of the market. We're probably, we're under-indexed in the market in addition to being, you know, not the number one station, so, and it's a good example of why you like number one stations like we've got have a strong dominance.

Gannett does a real good job in Knoxville with their station there and Media General's got a strong competitor out in Wichita so we've got tough competition, we've just got to do our job and hope the guys in front of us stumble along the way somewhere.

True. Quick question. Jim, you mentioned political in Q1 for '02. Could you give us the last presidential cycle what was Q1 in '00?

Jim, to be honest, I don't have pro forma Q1 '00, we never went back that far and put everything together. So to be honest, I don't have that number.

Do you have as reported?

Let me dig it out while we keep going and I'll have it momentarily for you.

Thank you.

Thanks, Jim.

Your next question comes from Victor Miller. Please go ahead.

Good afternoon.

Victor, how are you?

I'm well, thank you. You gave original guidance plus 10 for TV, plus 1 for publishing and, I'm sorry, a plus 3 to 5 for publishing plus 12 to 14 came in better than that. Second quarter you've got TV and publishing decelerating versus first quarter. Is there any reason or is that just a sign that the numbers you've given you have extreme confidence in those?

Secondly, it looks like the core business, when you set aside political, was up almost 13% if my math is right. Could you tell us what powered that kind of number in first quarter? Thanks.

Victor, as I mentioned, it pretty much across the board strength in local more than anything. I think we just, we're in some very good markets that, you know, didn't really suffer as much even in the, after 2001 as some other markets and I just think here again it goes back to our focus on finding markets where we think we've got good growth and good demographics, and I think people are feeling better about economy right now. We've just had across the board increase in ad spending in virtually all our markets which we're very, very happy with.

I think that the second quarter, Jim Ryan is conservative and I like that because we like to beat what we tell people but we're realistic also, and I think first quarter being so strong we didn't think we could actually hit that again second quarter, but I think second quarter is going to be real good for us, and, you know, some things hit right, it could be even better, but I think the main thing we want to make sure we deliver what we promise.

Thank you.

Thanks, Victor.

Your next call comes from Shawn Butson. Please go ahead.

Thanks. Nice quarter, guys, and congratulations on the IRS refund. It sounds like they're speeding it up. Only took eight years to get the money.

They learn to use other people's money like everybody else does, I guess.

I guess. I was looking back at, you talked about national, how it's pacing flat and I was looking back to last year, and correct me if I'm wrong but national was up pretty big sequentially from first to second quarter of '03. Was there something going on there that has just, that happened last year that's making the national comps so much tougher in the second quarter versus the first?

Jim, I don't, Shawn, that's a tough one.

Shawn, there might be a little bit of --

to follow --

of --

The national trends over all so I don't remember us having that big a spike in second quarter last year on national.

We, there might have been a little rebound second quarter last year after we kind of got over the initial phase of war jitters.

Okay.

Which could be a little bit of it. You know, it's one of those kind of fuzzy things that's a little hard to put a definite, point a definite finger to.

Okay. And then on the political front, you know, there's some news out there that Kerry had started a big ad blitz just a couple of days ago that was going to run all the way through May. Are you starting to see more and more money from him versus Bush or is it still--

Oh, yeah, Shawn, we've gotten, I think just, this isn't our total but I know just in four or five of our key markets I've talked to in the last two or three days I think we've got over, I think over $600,000 of Kerry money coming in in the next two or three weeks. He's definitely cranking up.

What's happened is Bush has slowed down and when Kerry came back in, all of a sudden Bush is back in, so we hope those two are going to keep slugging it out right up to the last day. It looks like they're both raising money like there's no tomorrow, so they'll spend if they raise it, that's the good news.

Absolutely.

We definitely are seeing a Kerry surge right now.

Thanks, guys. Nice job.

Thank you.

Your next question comes from Drew Marcus. Please go ahead.

Good afternoon, guys.

Hey, Drew. How are you?

Good. How are you?

I'm doing great.

Couple of questions. First, in the first quarter you did benefit from the Super Bowl.

Yeah.

Which obviously the second quarter won't. So if could you quantify at all that benefit. Second, if you could remind of us of where your covenants are and how they step down as we go through year?

Jim, you want to take those?

Yeah, Drew. The Super Bowl was worth probably about 650,000 for what we got out of that afternoon, so there's a little bit there. As far as covenants go, there's ample amounts of headroom there. We're, total leverage is currently at 675 covenants, we stepped down to 6.25, and then we're stepping down to 575 end of this year.

But you're below that already.

Oh, yeah, we're well below that.

Where's year-end '05, I guess?

Year-end '05 is, well, first of all, year-end '04 is well into the 4's somewhere. Year end '05 is, depending on strength of this year in the political and off-year cycle a little bit, you're -- How about the covenant itself? Oh, I'm sorry the covenant? It's at, total leverage at the end of '05 is still 575

575 into this year, 575 to end of next year?

Yeah.

Thanks a lot.

Thanks Drew.

Your next question comes from Larry Shumacher. Please go ahead.

Hi, guys. Nice quarter. How does your second quarter guidance stack up against other broadcasters? And second question, what does '05 look like without the election, the Olympics and "Friends"?

That's a good question.

Thanks, guys.

The first one, I'm not sure, Jim keeps better track on the other guys. I'm not sure if anybody's given as detailed a guidance as we've given. I know a couple of people have kind of given some broad-based guidance ideas. I'll let Jim answer that.

The 205 question, I think if you go back and look at what we did in 2003 ex 2002 we still had a very good year, we were down a little bit but I think we had the best numbers of anybody in the business. And we plan to have very, very, we'll be very focused on watching our expenses going into 2005 and hopefully maximizing our revenue. You know, the good news is, in a political year, because of the strength of our stations we normally get over 50% of the political and most of the markets we're in.

The bad news is, we've displaced some regular advertisers, so, you know, I think we're able to regain a bigger percentage of that lot of times and on a local basis, so we think 2005 is going to be, you know, a good year. It won't come up to 2004 unless some miracles happen but I think it will be overall a very strong year and we feel like we're in real good position in a lot of these markets and if we continue improving in our two biggest markets where we do have upside it could wind up being even better. Jim, you want to answer the other question?

On second quarter?

Yeah, the other guidance from other broadcasters.

My general sense is that we're still in the upper ends of that. I haven't done an exhaustive comparison and everybody puts out, those that do put out guidance tend to, everybody puts it out a little bit differently. I think certainly we go to, we lay it out and put it in the chart and give you the percentages so it's pretty easy to know what we're thinking.

But I think our broadcast it at least a plus 10 is towards the upper ends, and, you know, there could very well be in our numbers, depending on how June political plays out, if it continues to be strong or if both sides up the anti a little bit we very well may have room for some pleasant news in June for everybody. But again, as Bob had said we hate to overpromise and under-deliver, so I think we're very, very confident in what we've published, and still have some room for upside.

I think the numbers generally are, up towards the upper end of the peer group, at least based on some of the things I've seen. And as a quick, looking back, the as-reported number for Q1 2000 for political was about 525,000.

Does that answer your questions?

Yes, terrific. I was just listening.

Okay.

Thanks a lot.

Once again if there are any more questions please press star one. Your next question comes from Bishop Cheen. Please go ahead.

Jim, just a follow-up. When you gave us the political numbers, are those already net or are they in gross?

No, when I was mentioning the political numbers those are net.

Okay. Then I thought you said, and I guess I misunderstood you, you were at the beginning of the call, you were talking about 3.5 political, I thought that was Q1 versus and then we had 740K and 900K respectively and I thought the 900K was 2000 and 740 was --

No, the 741 is Q1 '03 and the 900,000 and change was Q1 '02.

Okay. And so what you just gave was the --

Actual as-reported historical number, the 525,000 for Q1 2000 and I just don't have pro forma information to reflect the Benedict and Reno acquisitions.

Right. So these are just like a [see] Gray stations. The 525?

Right. But even if you say, well, the company more or less doubled in size, if you wanted to extrapolate and gross that up by factor of two or a little bit more, still says to me that Q1 '04 presidential year is substantially ahead any way you look at it of the last presidential Q1 we had.

Oh, yeah, well, Bob Prather, you and the cable news channels all have the same thing in common. They want this thing to go until the last man is bloody.

That's right.

Thank you.

Thanks Bishop.

There are no further questions at this time.

Okay. Operator, thank very much. I want to thank everybody for joining us today. We appreciate all your support.

As I mention every time, Jim and I are easy to find so if you've got any other questions, don't hesitate to call either one of us. We'll look forward to talking to you in couple months from now on our second quarter call. Thanks everybody. Good-bye.

This concludes today's call. Please disconnect your lines and have a wonderful day.