Gray Media Inc (GTN.A) 2004 Q3 法說會逐字稿

Good afternoon and welcome to the third-quarter earnings call for November 4, 2004. Your host for today's call is Bob Prather, Mr. Prather, please go ahead, sir.

Thank you very much. I want to welcome everyone to the Gray Television earnings conference call. I apologize, I'm on a cellphone. I'm traveling from out-of-town and in the car for a couple of hours so I apologize. If anybody can't hear me I will turn to speak up.

We are very pleased with our third quarter and 9 month results. We had record revenues, record operating profits for the 3 months and the 9 months and we think that once again our operating results are right at the very top of our industry for this quarter, for this year, and really for the last 3 years we think our numbers overall operating results have been the best of anybody in industry. So we're very pleased with that.

Our only regret is that the political season couldn't have lasted another 30 days or so. We had record political revenues of over $41 million, which I think here again is a tribute to our number 1 stations. We estimate we got over 60 percent of the political revenues spent in all of the markets where we have political money coming in, so very pleased.

Also it's always better to be lucky than smart. We had some great opportunities in some battleground states, 3 stations in Wisconsin, Michigan, Ohio, West Virginia, Florida, Colorado, Nevada; we really had some real strong political spending in those states that really obviously we were lucky to be there. But we had great stations that we think we maximized the political revenue we could have gotten in those markets.

I'll go over some of the highlights of the quarter and then Jim Ryan will go over the financial details. But we renewed our ABC affiliations for our 7 ABC stations. We signed basically 10-year agreements that will be paying us comps for several years in all of the stations. We have just completed negotiations for a renewal of all 16 of our CBS affiliates agreements for 10 years. Here again we will continue to see some compensation from CBS. We think both of these are real pluses for us because all of our models and all of our budgeting in the past has basically been for zero comps after 2005. So we feel very good about our long-term relationships with CBS and with ABC.

We completed our asset purchase agreement for KKCO, the NBC affiliate in Grand Junction, Colorado. We filed the FCC and hope to close in early January. This station fits our criteria to a T. Number one station, NBC, very fast-growing market. Mason County where Grand Junction is located is in the top 10 percent of growth counties in the United States, and really a booming dynamic market with an excellent management team and we are buying this at less than 10 times cash flow and really think we got a real good gem here. And also it’s got a nice college there, Mason College that hosts the junior college baseball World Series every year for the last 30 years. So it is our kind of market and we feel were good about it.

We now have 2 of the 3 television markets in the state of Colorado and have the number 1 station in 2 of the 3. So very happy with that.

Also, I know a couple of people asked last time about stock buybacks. We have been buying stock. We bought a 1,500,000 plus shares at an average price of $12.49 a share and we will continue to buy that as it makes sense. We got our Board authorized additional buybacks which we will be announcing.

Our Charlottesville station has been on the air since August 20 both at CBS and at ABC signal. We plan to go on live with our first newscast, a CBS newscast next week. We feel very, very good about this market. We think we've got a great upsides year. Here again, it's a great college town that really meets all our rides.

Recently announced that in partnership with those communications we signed a 10-year contract with the University of Kentucky for all their sports television rights starting in 2005 for all 4 of our Kentucky TV stations. Here again, we think this is a great asset for our station and also continues our dominance in our markets overall for the State of Kentucky.

We have launched UPN affiliates in Lexington, Knoxville and Augusta using part of our digital spectrum along with local cable carry deals in those 3 towns. We think we've got a great upside with these. Also, we are in the process negotiating a final agreement to do a similar deal with our Lincoln, Nebraska CBS and we're looking for other opportunities on the UPN front. So we -- where we make sense where we can use our digital spectrum and be able to hook in with local cable operators.

We have large video streaming in all of our TV station websites. Just in less than 2 months since we signed this up, we've already got a couple hundred thousand dollars of ad revenue annualized coming in. We think this could be a huge growth opportunity over the next years ahead and we're going really spend a lot of time taking our news product and basically branding it with video stream and clips of 90 second and even 5 minute type clips on the website that we plan to sell sponsorships for. So we think this is a great growth opportunity for us.

As I mentioned earlier, our third quarter operating results were the best in our history. We feel really good about -- Jim put out guidance for the rest of the year. We feel good about having a record year this year. The only other comment I will make -- everybody says what have you done for me lately? 2005, we are looking forward to again having a good year. Our goal is to have a zero expense increase on our budget for a budget line for expense side and we hope to replace as much of the political revenue as we can.

Having such a record year in political is going to make it a hard act to follow. Our budget had been 25 million originally and we have upped it to 30 and wind up with 1.5 million is really almost more than we could believe but we are glad to get it and we will be glad to -- we'll put it to good use. Next year I think we're going to have another great year. It may not be quite as good as this one, but I guarantee we will get close.

At this point I would like to turn it over to Jim Ryan, our Chief Financial Officer and let Jim go into more detail on the numbers.

Thanks Bob. Good afternoon everybody. I'll keep my comments fairly brief so we can move on to questions. But again, we're delighted with the results for the quarter, and feeling very good about how the year is going to finish out as well.

Real quick to a couple quick comments on the quarterly results. Obviously, political is a big story. 12 million for the quarter, which is almost double what it was in '02. Total revenue up 18 percent, broadcast revenue up 22 percent, but the good thing that we take looking forward into '05 is that the local revenue held up well growing 5 percent year-over-year. That is excluding political and in a quarter which had an awful lot of political in it, we're very pleased to see a growth rate like that.

The growth rate is local in conjunction with the political let us put our broadcast cash flow up 43 percent over last year which we think is just fantastic growth. Also, in the quarter, we ended up with about almost $3.1 million of net revenues due to the Olympics. We were delighted about that. Some of our stations held back some last-minute inventory in the Olympics to have available for politicians and it turned out to be an excellent bet because it there were several political buys at the last minute for Olympics.

For the 9 months, again, very pleased with the growth. Broadcast revenues up 17 percent. First 9 months of the year, our local revenues excluding political were up a very, very healthy 9 percent. We are very pleased to see that growth. Nine months to date, we had nearly 21 million of political, which is slightly more than double the rate of 2002. And as Bob said, political just ended up being a phenomenal year for us all the way around. And our broadcast cash flow was up a very, very solid 33 percent over 2003.

As Bob indicated, total political for the year will be 41.5 give or take a little. So obviously you can see from the guidance we're expecting about 20.5 million in the fourth quarter. That really translates to $19 million in the month of October because we only had 2 political selling days in the month of November, and those 2 days were worth about $1.5 million for us.

Pacings, looking ahead for fourth quarter, sales pacing after you get through the political bubble in October is actually looking pretty the good. Obviously given 19 million of political revenues in October, you would expect basic, local and national to be down year-over-year simply because we used the inventory to sell it to the political advertisers. But the current pace as of last Friday for our local business for November was plus 11 which is very healthy, and obviously some pent-up demand on the local side as people sat on the sidelines during October because of the political. And current pace for December locally is also a very healthy plus 6 percent, so we are encouraged by the way the baseline local business is finishing up the year as well.

A couple of quick comments on the balance sheet. Debt was still at 655.9 million. Our trailing 12-month operating cash flow or adjusted operating cash flow was 128.9. We had $57 million of cash at the end of the quarter, so leverage ratio net of cash on hand puts us down at 465 which compares to just over 6 times levered using the same metrics at 1231, so we are delighted at how leverage is coming down.

As Bob mentioned, through last Friday, about 1.5 million shares have been repurchased, yet still a very healthy cash balance as of today. Cash on hand is roughly still, roughly 58 million.

We have published the guidance for fourth quarter. We feel very comfortable that we certainly will be within the range. We have often said that we always try to be a little bit -- hopefully would be a little bit higher than the high side that we publish. I think it is fair to stay in this fourth quarter that while we expect we would certainly hope to be towards the high end of the range, that unless December really ends up being a super strong month, we feel that the high side of the guidance is truly the high side. But we are delighted in being able to put out guidance like that, certainly a very, very strong finish to the year.

Bob, at this point I will turn it back over to you.

Thanks Jim. Moderator, at this time I would like to open it up for questions.

Thank you ladies and gentlemen. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Victor Miller.

Thanks for making the effort Bob. 16 percent of your revenue looks like it's going to come from political and the Olympics this year which is a monumental hurdle for next year. Could you just lay out for us some of the cases that you're making for being able to mitigate some of that loss in '05? Also Jim could you talk about -- you talked about the November local and December local post-election. There is a sense that the national business may not be as healthy post-election. Could you give us a sense of what you're seeing there?

Victor, one thing that I think we're looking at right now, we're just getting our initial budgets submissions in. I think political was so good October, September, October and obviously a couple days of November that we have actually pushed a fair amount of local out of the market that we would not ordinarily have done and we have already talked to a couple of our managers and they are both saying that they think their local -- they're going to look for a fairly stronger local growth next year than they had originally anticipated just because we pushed so much local out of the market these last couple of months.

I think part of it will be made up there. I think we have got a big hill to climb, but here again it goes back to strength in our local markets. I think we are in some great markets. I think in most cases strengthened our position in most of these markets; our market share, our ratings are all most all our ratings on our newscasts are at record levels and have been and I think like I say, we're going to challenge our managers to really make sure that we -- . Also we are going to keep these prices at a level as high as we can going into next year. If we have a good December, we will definitely be able to do that.

If December happens to weaken, it's harder to carry them over but we have been able to raise prices considerably. So we think we're going to be able to carry over a good chunk of those price increases over into the next year. I'll let Jim has answer the question you asked him.

You're right. National for November and December we're seeing it currently looking about flat. So again, of our broadcast time sales nearly 70 percent comes in on the local side so seeing healthy local increases makes us feel pretty good about how the rest of the year is going to follow-up. But you are right, national is about flat so far for finishing off the year.

Thank you.

Thanks Victor.

Bishop Cheen.

I can't believe somebody beat you to the punch.

Robert, I want you to keep both hands on the wheel there.

I've got one on for sure now.

All right. Hi Jim. Just a couple housekeeping questions. The CapEx for Q3 and for 4Q, we didn't see it in the release.

CapEx Q3 total about 10 of the 10, 1.6 was working on the digital a little bit. I don't actually have quarter 4 so let me answer the question differently or a different direction. Total year CapEx is obviously as the political got bigger and bigger, we have moved our numbers up a little bit too as the year has gone on. Probably 30 to maybe 30 -- I would say 32 for a full year of which about 12.5 is digital related. Certainly we would not expect CapEx to be quite as large nearly as large next year without having the political.

One thing I will point out in that CapEx number, there is about 5 to 5.5 million of CapEx associated with all of our buildout costs for the Charlottesville station which kind of creates a very unique event for us this year and drove up that number. So keep in mind we within the scope of a handful of months we built out the infrastructure to support both a CBS and an ABC channel operation in Charlottesville. So, bargain basement price to get into a great market going forward and normally you would see that as an acquisition number and because we have built from scratch, we've got to count it as CapEx.

Jim, that is very helpful. Are we pretty much allied between cash and book CapEx now?

Yes. (multiple speakers) both at this point.

And then just following up on Victor's question on national and really on local, we are hearing various stories on how good, bad or indifferent the auto category is. Tell me about yours?

Through 9 months, it has been -- it's good. Auto, is true, year-to-date is up through 9 months, up 8 percent for us. Keep in mind there was a lot of inventory used in August and September for the politicians so we think that is very healthy and still hovering in roughly the 25, 26 percent of total business and it has been right in around in that general percentage of our total business for several years. So it is healthy, and it has not changed a lot.

I certainly would expect that the fourth quarter numbers are going to get skewed simply because of the sheer amount of inventory that went to political in October.

Bishop, also this is a great example too of going back to our local emphasis. I think the local auto dealers have been in a lot better shape and a lot stronger than the national guys, and I think here again, it goes back to our local strength. Our local dealers have been pretty well full steam ahead all this year and we have had real good results in just about every market from them.

That is helpful too. Last question. On cash outlays, I think the only thing we really have aside from Charlottesville which is more of a buildout, the Grand Junction acquisition is sort of a Q1-ish, Q2-ish closing?

Q1, yes. That is 13.5 million so it -- we will just literally write a check for that.

Right. Right out of cash. Other than stock buybacks, there is no -- are there any significant cash outlays scheduled?

No, the only thing normal would be semiannual interest on our subnotes in December. That is just shy of 13 million but that is a standard payment.

Right. Okay. Thank you gentlemen.

Good afternoon guys. Great political. I look forward to even better numbers in 2008.

We will go after them again. 2006, -- '08 yes, we think we're going to be good in '06 too, because we've got 26 governors running again and probably be a broader distribution among more of our stations and won't be as much battleground states stuff. But we think there will be some big governor races and senator races in '06.

That's good to hear. The 2 questions I had were I guess first off the broadcast revenue guidance that you gave was certainly very strong, but the range was a bit wider than historically. And now that political is all been booked is there some reason that you're not really sure about the $5 million swing? And then secondly, you mentioned that you're still want to be receiving network comps from the affiliations that you resigned. Should we interpret that to mean that it might stay flat with the '04 level for the next 5 years?

No. It will go down a little bit, Sean. It will gradually ratchet down over a 5-year period. We will continue to get comp from ABC and from CBS during the 5-year period. But the other question I think is Mr. Ryan likes to be conservative, and he likes to put a little cushion in just to be safe in case December for some reason turns out not to be as strong as we think although I think it will be. I think especially with Bush getting reelected, I think the economy is going to be real strong over the next couple of months. And I think there would have been a lot of uncertainty if we had a new president. And I think now with the fact that Bush is staying in there, I think the economy is going to be very strong over the next couple of months.

Okay, thanks.

Drew Marcus.

Good afternoon guys. I have 2 questions. I guess just asking the (indiscernible) question in a different way. We had modeled that comp being cut in half next year, so presumably it won't go down that much?

No.

And then second, on CapEx, it looks like excluding the two unusual items this year will come in in the kind of the 12 to 15 million range. Is that a good number for "05?

I think so. We may try to hold a little less than that but I would say that is a reasonable number.

Great, thanks a lot.

Jim Boyle.

Good afternoon. Have you started negotiating annual contracts and if you have, can you give us a feel for how prices are -- same or worse?

Jim, I have not talked to any individual managers about specific contracts. They have been so busy on political I don't think they've had a time to breath on anything else. I will be talking to some over the next weeks or so, and we will be getting an idea on some of our budget talks, but I really don't have an answer for that right now.

Jim, you mentioned this year's summer Olympics revenue. How much was the last fixed (ph) level?

I think it was about half that, wasn't it Jim?

Off the top of my head, I think that is about right. To be honest, I don't have that immediately handy, but that sounds about right.

Okay and finally, Bob, can you update us if there has been any change on the Tarzian situation?

The only thing that has happened, Jim, Tarzian filed some summary judgment motions in their lawsuit and they were dismissed by the court, so we are currently in the beginning stages of discovery. Just some deposition and things like that, but their summary judgment motions were dismissed. So the next round will be discovery over the next few months and then at that point we may put in summary judgment motions. I don't know yet. But anyway.

Thank you.

Brett Falcoff (ph).

It's Brian Warner (ph). Good afternoon. Could you give us a sense of now that your balance sheet has made an awful lot of progress since you're Benedict acquisition, how much of a priority is a share repurchase versus trying to buy individual stations or groups at the multiples you've historically enjoyed buying them at?

That is a good question. I think it's a two-part answer. One, I think as long as we can buy shares that we think are undervalued and are priced too low and that where we are a paying a multiple of 9 or 10 times cash flow in paying for our own stock it is hard to resist that. I would say also, I will use my favorite term about acquisitions we like to be opportunistic and if the right deal, just like Grand Junction -- if a favorable acquisition comes along at a favorable price, we certainly want to be in repositioned to look hard at it. I would answer that two ways.

Thank you.

Laraine Mancini.

A couple questions, you spoke about auto, can you give a little detail on what telecom and retail looks like in 4Q? And are you seeing any extra advertising from the Cingular, AT&T merger? Also if you can talk about program amortization, and payments, your expectation for 2005 and actually what it was in 3Q?

Jim, do you want to get that?

Let me start with program payment amortization. They are nearly identical numbers in Q3. Payments were approximately 8.2 -- I'm sorry that's year-to-date. Q3, 2.8 for both numbers. It rounds to the same number. Full year '04 we're looking at a payment of around 11.5 and an amortization number of around 11.4. Payments and amortization next year would be about the same number, and it really doesn't change much in '05 to '04. We might be up -- we would probably be plus or minus a couple hundred thousand one way or the other off a the 11.5 million this year.

And the telecom and retail?

Yes. Through 9 months, telecom is actually up nearly 20 percent. We've had strong telecom all year long. Retail, we actually break that out in a couple of ways. Furniture, appliance, electronics, up healthy double digits, 14 percent 9 months year-to-date; the only weakness in any of our categories is in the department discounts, they are down about 3 percent and they have been consistently down all year long.

That was down last year too.

I don't have any specific data on the Cingular revamp. I quite frankly haven't heard a whole lot. We haven't really heard our management local management comment on that so far.

All right. Thank you.

Harvey Sandler (ph).

I think my question has been answered. It had to do with the mechanism by which a political is bought and does it to push out business which otherwise would have given you revenue growth anyway?

I think it does, Harvey, and also I think this year was a little bit -- and I assume it is going to continue going forward although there is some talk -- these 527s aren't bound by the normal rules that politicians are bound by. You don't have to charge them the lowest unit rate and then we are trying to get a handle on how much 527 money we got but we really got a chunk of it in Wisconsin, Florida, places like that that they basically just paid whatever price would put out there. I think we probably took some of that business just because -- and pushed out some local we might not have done otherwise, just because they basically said just tell us what we have to pay. It really got -- especially that last week or so, I know at one of our Wisconsin stations on a Friday before the election, they called up and said we've got $150,000 to spend. We've got to get it on, we don’t care what you charge us.

Another question is, corporate and administrative line was up about $1 million. Jim, what was that in the quarter?

A lot of that reflects professionals.

Good old Sarbanes, Harvey.

Our efforts to comply with Sarbanes-Oxley rule 404. Of course this year is a -- takes an awful lot of work to get your compliance. The good news is that a lot of the professionals and given we are so small staffed to begin with, we've had to outsource -- to get some help just to get everything we need done. The good news is, we won't need to be paying those people next year to do the work that they did this year. It does get better after this year.

Jim Goss.

I had a question about ABC. Since they have gotten a couple hits in case they have finally begun to turn the ship around, might this be one of the mitigating growth factors that you might be able to develop. And what sort of margin improvement potential do you think you might be able to get from the station, from your ABC affiliates with regard to an improvement at the network level?

Separately, as you move into UPN, and possibly even WB and the smaller markets and the way you're doing it, have you any sense of what reception you might get for the types of networks that tend to be better received in the major urban centers?

Good questions. First of all, I think on a UPN, we're going to actively pursue a lot of collegiate sports opportunities with that UPN signal; we are probably going to repurpose some of our news and maybe skew toward our younger audience so we think there's some big upsides on the UPN side of the thing. On ABC, we are just tickled to death that ABC seems to be showing some life with some new shows and we think that fortunately we got several of our ABC stations are dominant number one stations in their market and got excellent margins. We have got one ABC station in Wichita that we think could be a huge upside for us there, and we think a good margin improvement there too. Is that you've got a problem there though that the economy in Wichita has been pretty weak because the aircraft industry. And that is the one caveat about Wichita, but we think we have got a real strong opportunity to move up in Wichita.

Okay. One last thing. With the elections concluded, any impact on the regulatory issues? As that might affect your?

That is a good question. We're assuming that there is probably going to be a new chairman of the commission, maybe Martin, Kevin Martin (ph) who we think is going to be very favorable to the industry. I think we are in a lot better shape than with Bush going back in than it would have been with a Democratic administration.

Okay, thanks.

John Cornish (ph).

I've got to series of small ones. I will just take them one by one. How many shares outstanding are there right now?

Jim, can you give him that?

Yes. Hang on a second. I am looking it up. 48.9 million.

As of now?

Yes.

And you still have that preferred balance on the liability side? Right?

(multiple speakers)

How much is that?

We actually bought a little of that back in the third quarter as well. There's 39 million and change out there.

And that is accruing a dividend?

That's a cash pay.

Oh, it is cash pay? So what is that like 3.5 million a year? Must be.

It's 3.5 a year and 8 percent cash pay. The Company does have the right to picket but we have always been in a position to pay the cash.

I want to ask you a couple of questions about Knoxville if you can't answer it online, we can talk off-line. Knoxville, what do the news ratings look like versus a year ago? And please don't say great or good. Is it up or down? Secondly, what does the revenue growth of that station look like relative to your overall Company? It must be a lot less I assume because it had virtually no political but give us an idea whether it's keeping pace with the core Gray this year? That's it.

Jim?

I don't have the ratings for that particular station in front of me.

We'll get them for you, John.

The news ratings though are up and we've good progress there. I cannot specifically quote you by item, but we have moved from a very distant number 3 in news to -- Bob, correct me if you think I'm wrong, but I think we could describe ourselves as a number 2.

We're tied for number 2 in news and a strong number 2 overall, John.

The last thing I wanted to as you, Bob, do you keep Doug McCockindale's (ph) phone number on your fast dial?

I do, yes. He's a good friend.

Thanks so much. Good quarter.

Victor Miller.

Victor, you're going to be the bookend today, huh?

The question on regulatory, one of the things that I think the commission did a poor job on in its original attempt on triopoly and duopoly was really acknowledging that there is a different marketplace for a middle market and small market television stations. Now that the third Circuit Court basically said the FCC is going to have a second chance to get it right, what is the middle and small market broadcasters doing to try to get their views, the more accurate view of what it is like to be in a middle, small TV station into the notice of inquiry that the commission is putting out to try to fine-tune its duopoly and triopoly rules?

That's a good question. First of all, you and I have had this discussion before. I think we as an industry and I include the networks in there need to get together and get a united front. I think as long as the NAV is fractured and as long as the Congress does not get one voice from the industry, we're going to have a hard time getting any kind of regulated deregulation that is going to be good for all of us. I have been advocating for a long time that the NAV sit down with the networks and say what do we have to do to make peace and get to guys back into the fold with us? Because I think otherwise we are never going to get the kind of deregulation we want because we just don't have enough of a united front.

I do think that there is a concerted effort right now by several groups in the small, medium markets, more people that are more duopoly-oriented than we are really pushing hard, but we want to support whatever we can to help get some deregulation on the duopoly front. Because I think it would be good for all of us. Especially as you mentioned the kind of markets we are in. As I think we talked about before, we are actually seeing stations and markets and several of our markets -- network affiliates dropping their local news, which is good for us, but I don't know if it is good for the world in the long run.

I don't think anything is going to happen on a deregulation fronts until -- I don't even think it's going to be talked about until next spring. At that point they will probably get a new chairman; the Democrats will probably want to put some new people on there. So I think the thing we have to do in this industry is get the networks and the affiliates back together somehow and get on the same page. Otherwise I don't think we are ever going to get anything that is going to be good for us as small market television operators.

Thanks.

Just to follow-up on John's question about Knoxville. John was right, it has very little political if any so to speak, so it's really a straight up comparison, but its total revenues this year are up in double digit territory, John. It is growing very, very nicely on a revenue basis, even without a boost from political.

John, I've been telling you for years Knoxville and Wichita are our 2 big upsides and we are growing in the right direction in both of them. There are 2 of our -- Knoxville is our biggest market; DMA, 59 and Wichita's DMA is 65 and we've got huge upsides in both of those markets. And we are definitely seeing excellent progress. By the way our Wichita station won 2 Midwest Emmy awards for their newscast. First time in history that a station that size has won 2 and they were up against Chicago stations, all of the big cities throughout the Midwest. So we feel very, very good about both those markets. As I mentioned, the only caveat on Wichita is just the economy out there has been so rough because of the emphasis on aircraft and Boeing and that kind of thing. But we feel good about both those markets.

Moderator. Any other questions?

There are no further questions at this time.

I want to thank everybody for being with us today. I want to thank you for your support. As I always say, Jim and I are easy to find. If you have any other questions, don't hesitate to call either one of us and we look forward to visiting everyone at the end of the year for our fourth quarter call. So thank you everybody.

This concludes today's conference call. Thank you for your participation and please disconnect your lines.