Gray Media Inc (GTN.A) 2004 Q4 法說會逐字稿

Good day and welcome to the Gray Television fourth quarter earnings conference for March 10, 2005. Your host for today's conference is Bob Prather. Mr. Prather, please go ahead, sir.

Thank you very much. Welcome, everybody, to our year-end conference call. We're very happy to report that we had an all-time record year for Gray Television in revenue, profits and cash flow. And once again, I think overall, we had the best operating results of any public broadcasting group. We had the best revenue growth, the best cash flow growth, the best free cash flow growth, the best operating margins, lowest corporate overhead. We were able to reduce our debt to cash flow ratio down to 4.20 to 1. We're pleased with a great year, thanks to having the CBS and the Super Bowl and having the Olympics on NBC and an incredible political year, where we got 41.7 in political dollars, more than almost doubled anything we had in the past. We were lucky to be in some real good states, battleground states that had some real battles. Here again, probably better be lucky than smart because we were in the right states at the right time.

We did complete the buildout and began broadcasting on a new station in Charlottesville. We obtained a CBS affiliation and an ABC affiliation for a low-power are of Charlottesville also. And they're both up and running with local news and we're very pleased with that. We did complete our acquisition of KKCO in Grand Junction, the number-one rated NBC and a very fast growing market. We obtained four affiliation agreements for UPN on our digital spectrum in Lexington, Knoxville, Augusta, and getting ready to go on the air in Lincoln, Nebraska. We're very, very happy with this.

We had an all-time high of 24 stations ranked number one in their markets. We completed the initial phase of all our HDTV buildout, as required by the FCC and in the process this year of upgrading some of our systems to full power that are in the top 100 markets. We acquired desktop alert and videostreaming for all our markets on the Internet at very favorable prices. Our Internet-related revenue of 2004 is over $7 million, which we're very proud of. We had a share repurchase plan where we repurchased almost 2 million shares of Gray common last year. And we've refinanced our 8-year bank notes and saved over 2 million a year in interest. Also, I'm very, very proud of the fact that KAKE in Wichita moved up to number 2 in the market there. And WBOTV in Knoxville, BOT continues to have very strong gains in the ratings. It's a strong number two in that market now.

We did negotiate new 10- year affiliation agreements with CBS and ABC for all our stations. And we renegotiated a new King World contract for 18 stations for "Oprah," "Wheel" and "Jeopardy," and a couple of "Inside Editions" and " Dr. Phil" that will take our syndication agreement with King World out through 2011 at very favorable rates. Once again, I think It was a very, very busy year and a good year. Obviously not going to see that kind of year this year because of all the things we had going last year, although we do think we'll have a good year this year. We've got a zero budget increase for our budgets. We're actually below budget for expenses for the first quarter. And we think on the revenue side, we'll pick up our shortfall the rest of the year. The pacing is looking better and we expect we're going to wind up with a real good year, especially in local ad growth. At this time, I'd like to turn it over to Jim Ryan, who is our Chief Financial Officer, and let Jim go into more detail in numbers. And then we'll open it up for questions. Jim?

Thanks, Bob. Good morning, everybody. As Bob said, it was a terrific year, shattered all previous records. I'll make a couple of brief comments about the quarter, then the whole year and talk a little bit about the balance sheet.

Again, the quarter was very strong, revenue growth up 25 percent in total. Obviously that was driven by the broadcast revenue growth with just record-shattering amounts of political in those key battleground states. But also, we were very pleased in the quarter with the fundamental growth in local. It was still up 2 percent, even after we accommodated that vast amount of political revenue. So we're very pleased with that. And that local growth was even stronger on a whole year basis. I'll get to that in a minute.

Very pleased with our media cash flow growth, of course the non-GAAP term reconciliations will get posted to our website later today, as we usually do. But the broadcast media cash flow on the strong revenue performance was up 50 percent year-over-year. Our operating expenses were up in the quarter and for the year, but there are several main drivers in those numbers. First of all, with the all-time record results for the year, incentive compensation was up accordingly. We also had national rep fees on the plate. We're national sales representative on that 40.7 or 41.7 million of political, which drove our costs up year-over-year. We had ongoing costs for first year implementation of Rule 404, which I'm sure you've heard many people mention. Plus we've got, you know, costs, operating costs, in Charlottesville in fourth quarter that didn't exist a year before, plus, as Bob said, some operating costs to those 3 UPNs we launched during the year as well. We're pleased that the UPNs, by the end of the year, were contributing to cash flow. We actually think they're off to a terrific start.

For the whole year, again, political is the main headline story, driving our overall revenue growth up 17 percent and driving the broadcast revenue up 21 percent. But I think again, as we've talked about in the last-- first three quarters worth of calls, our overall local growth, excluding political, was still up 7 percent in 2004 on a full year basis. And we're very, very pleased to see that strong growth there all year long. And then again we've won the geographic lottery as Bob said, in being in key battleground states.

Turning to the balance sheet for a second, as Bob alluded to in his opening remarks, our leverage ratio is is historic low. It actually, net of cash, is 4.3. Debt was at 655.9 million. Cash on the balance sheet at 12/31, with 50.6. As you can see in our earnings release, because we put it in and put the reconciliation table in, our what we call adjusted media cash flow, which in the old days before some regulations, we used to call this plain old operating cash flow, with an all-time record of 140.5 million for the full year. Shares outstanding at the end of the year, actual shares outstanding were 48.9 million. We had repurchased, as Bob mentioned, under the repurchase program, about 1.7 million of the GTN and had picked up about 65,000 shares of the GTNA during the course of the year. CapEx for the full year ended up being $36.3 million. And we had said before , given the strong performance of the year, we would be increasing CapEx. Of that 36.3, 11.8 represented the BTV buildout costs for the year.

A couple of other kind of balance sheet-related items -- cash taxes for the year ended up being about 600,000, but you should keep in mind that we did get a 1.4 million refund on federal taxes during the year, as well. So net of the federal refund, it was 600,000, and again the refund was 1.4 million. 401(k) contributions in company stock for the year were about 2.6 million. And program payments, as well as program amortization, came in at 11.1 million.

We did issue guidance for first quarter. I think we're not alone in saying that the first quarter is, on a relative basis, a little slower this year than it was last year. But I think if you look at the guidance and keep in mind that the political is not there this year. We have maybe 200,000 going against 3.5 million from last year, plus the impact of the not having the Super Bowl this year versus last year, and a national sales marketplace that's a little on the soft side. All in all, our revenue estimates for Q1, we're not terribly unhappy with, all things considered. As Bob mentioned, for the full year, we think expenses will be very tightly controlled and really no growth there. There may be in our guidance, or maybe above our guidance, a little bit of uplift and upside on KKCO. We're hoping that maybe there is, before the end of the quarter, there's a little bit of pleasant surprises there. And we're delighted that we closed the transaction at the end of January. So we've only had the station for about a month, but we think its' s a great station and we're happy to have it. At this point, Bob, I'll turn it back to you.

Thanks, Jim. Operator, at this time I would like to open it up to questions from out listeners.

Your first question comes from Bishop Cheen, please go ahead.

Good morning, Bob. Good morning, Jim.

How are you?

I'm good. Let me ask one vision question and a couple of housekeeping things. On the vision thing, you've done a great job all year. If you just back out 100 percent of your political, and I know it can't affect it, but you look at your core, unadjusted core up 6 percent, that's probably among the highest in the TV group. But it slowed in Q4. Did it slow because political was just crowding out the inventory? Did you see a a perceptible change? If I look at your guidance going forward, it implies your cores going to be down a small amount, a couple of percentage points in Q1. Then I'll follow up with two quickie housekeeping questions.

First of all, Bishop, you know the fourth quarter, I would say was 99 percent due to just crowding out from political. It was so heavy in October and those first few days in November, that we didn't see any weakness, you know, just other than people just sitting on the sidelines. The regular advertisers didn't want to pay those rates. I don't think there's any real slowdown. I think January and February started out slower than we thought, obviously. Our managers always have a tendency, I think, to over-budget early in the year. I think in 12 years, I'm not sure, we've made a budget in January and February since I've been here. We're always a little bit over-budgeted. As we mentioned, we're going to keep the expense expense real tight. I think we're going to wind up with a good year, with real good, solid solid local growth especially.

Okay. But, I mean, last year was great for local growth.

I think we'll be as good or better.

Wow. Okay. Two housekeeping things, Jim -- CapEx guidance for Q1 and CapEx kind of rounded number for all of '05?

Let me start with all of '05 first for CapEx. Obviously, we'll scale it way back from the '04 levels. Ballpark terms right now, probably around 22, of which we probably get -- we're now -- I'm not sure if we'll use all of the 22, but I've got a placekeeper of a couple of million for supporting additional UPN second station launches. Each one of those that we do it takes a relatively small amount, a few couple of hundred, 300,000 of capital. But if we are fortunate and can launch another five, six, or seven of those, that's 2 million of it. The rest of it, there is probably eight to nine of continuing, I would describe at this point digital enhancement type stuff, and the balance of, call it, 12 or 13 is just basic maintenance type stuff.

Okay. And then --

Q1 would be, rough terms, you know, maybe three-ish. I don't think we'll get to four. So I don't think we'll do quite do 25 percent in the first quarter. It tends to get off to a slow start. So, you know, maybe three-ish.

Close enough for government work.

Bishop, also, if you take last year and take Charlottesville with the 6 million and the digital, we were about 13 last year too, in regular. So the regular Cap Ex we try to keep in that range and, like I said, we spent a little more last year because we had such a great year and we thought that was the best place to put the money.

What about stock buybacks?

We're continuing to do that. We're not in the market right at the present. But we've been consistently buying back over the last eight or nine months, and I'm sure we'll continue when we feel like prices are right.

Okay. Thank you, Robert. Thank you, Jim.

Thanks a lot, Bishop.

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

Good morning.

Hey, Victor.

Two things, first of all, just going through the sequence of the year, political is about 60 percent more in second quarter than first, third quarter is 250 percent more, fourth quarter is almost 500 percent more than first quarter. Obviously the core business, when you sift through it, sounds like even in first quarter you think the core business might be down a couple of percent. Can you just go-- you had mentioned you felt like things were getting a little bit better, you felt like you could replace some of the revenue that was lost. I know there's a lot of crowding out, but could you make your case, please, for 2005 and how you might try to restrain the negative growth as much as you can? Secondly, you'd mentioned that you want flat suspension growth flat expense growth for the year. First quarter looks as though expenses are guided up a few percentage points. Can you talk about what's causing that and do you expect expenses to decline in the other quarters? Thanks.

I'll let Jim give you the expense side of things, Bishop -- excuse me, Victor. Jim, do you want to explain what's going on first quarter?

First quarter, Victor, you've got just-- part of that is just natural reasonable amount of payroll increases just kind of trigger in the first part of year. Keep a couple of things in mind, also in the first part of year we've got a full quarter of Charlottesville operations and nothing there last year. We also have full quarter, although it's not huge, it's full quarter operations of the three second-channel UPNs as well running through that number. And we -- KKCO is not a-- it was not big enough, quite frankly, for us to pro forma. But we have full quarter, or two months worth there with nothing in the prior. So that means we're up roughly three-ish. That explains part of that, or actually a good part of that.

The other factor is , as we go through the year, we will have substantial savings that, you know, there is no rep fee. I mean, the political won't be there, so we won't be paying national rep fees. That's probably worth 1.8 million to us over the course of the year. And, as you pointed out, that will be backloaded poprortionately to third and fourth quarter where the political fell last year..

We as, you know, quite frankly, '04 was a record-shattering year and the incentive compensation for a lot of people reflected that. '05 is not going to be quite the same type of year. It will be a good year, but, you know, I'd love -- it won't be record-shattering, I don't think, so the incentive compensation will back way off as well. And that would be a natural event that would flow through in our fourth quarter of this year on a comparative basis.

Plus, you'd see it a little bit hopefully in second an more so in third and fourth. I think our overall SOX implementation. You know, now we've been through the SOX implementation, the ongoing cost of maintaining 404 compliance is certainly less than what it costs to gear up in the first year. So I'd expect to see some savings there as the year flowed as well.

Victor, back to the revenue side of things, I think here again, we're -- we feel pretty good about having a good year, revenue-wise. We put a lot of effort into our budgeting process. Our managers are coming in with real strong, especially local, growth this year. We've usually hit it pretty good in the past, so I don't have any reason not to think we can do it again this year, unless something just drastically happens in the economy to change things. The economy seems to be good right now. Our major categories, automotive and some the big categories seem to be holding fine this year and looking like they're going to be good. So, we think we're in for an overall pretty good growth, especially on the local level. National, is a lot harder to predict and a lot harder to get our hands around, but locally we think we'll have a good year.

Thank you.

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

Good morning.

Hey, Jim.

When you mentioned auto, could you give us more color on that, plus your other two top categories, how they performed in Q4 and how their pacing in Q1, as well as what's their percentage of overall revenue?

Auto stays around 25, 26 percent, Jim. It's been pretty much the same percentage now for several years. Of course, like I said, it's hard to judge anything by fourth quarter, because the political was such a huge factor in it. First quarter, for example, January, February on our category reports, it was about the same percentage it has been being. Our other big categories , fast food seems to be fine. Medical seems to be good. Financial, furniture and appliance has been real strong.

The only thing we've seen kind of trending down . has been for several years, is the old-fashioned department stores, which seem to be hurting anyway. And I think this May/Federated merger is going to hurt everybody. I think they spend, the newspapers especially, I think they spend over 800 million a year, between them. A big chunk of that is newspapers, and how much they'll cut back by putting these two together, I don't know. I think department stores are going to continue to decline as an advertising source in the years ahead.

And now when you say the same percentage in Q1, so would that mean that auto is declining in Q1?

No, no. I meant --

In the Earl early part of Q1 anyways, auto with auto was holding-- holding consistent with not -- with not in negative territory -- not up by a lot, but certainly not in negative territory yet. We're hopeful that that -- certainly think that probably would hold true for the quarter.

And Jim, it's early but how much of Q2 budget is booked so far and how does that compare to prior year?

It's -- Q2 is off to a -- it's not a lot yet, I guess is the simple answer. If the fundamental question is, how is our visibility on the first part of Q2, I think it would be fair to say it's a little difficult to get our hands around it right now. The bookings to date are a little bit under early bookings for Q2 last year. But, you know, I'm hearing some managers talk about some of the budgets that they normally would have expected to see in Q1, that the buyers are saying "Well, the budget has not been reduced for the year. We deliberately held some back in Q1, but we'll, you know, be placing those dollars later in the year. I think -- I think Q2 certainly has room to come back or, you know, ramp up. It's just too early to tell, is the simple answer.

Is part of that behind last year's pace the difference in political this year versus last year?

It could be in part. Obviously, people were in in key markets, like in some of our key markets where we got a lot of -- early political was pretty consistent all year long. People may have been placing early, trying to to -- when they saw that trend starting to happen, they may have started early last year to try to lock some things in. Obviously, there isn't the same motivation for this year.

And finally, you mentioned over $7 million in Internet in '04. What's your expectations in '05? Can you substantially increase that, or is that starting to get tough to grow?

Our stated goal within the company is to do our best to double that.

Thank you.

Thanks, Jim.

Thank you. Your next question comes from Jim Goss. Please go ahead.

Thank you. One follow-up to Victor's expense-related question. Are you -- are you comparing the flat, quote, expense, comparisons to some higher pro forma levels, reflecting a couple of the acquisitions or move-ins basically? And does the fourth quarter expense level, in particular, look to be down, based on what you were saying, Jim?

The expense comments we're making for '05 are not based on pro formas for startups of Charlottesville or performance for KKCO acquisition. And yes, we would expect fourth quarter to, you know, be -- I mean --

In order to get to the zero you would have to have --

Fourth quarter would show, again you've got a whole lot less in national sales rep commissions. And I certainly wouldn't expect incentive compensation in '05 to be at the similar levels as it was in '04. I think everybody would love to have that problem, that '05 sets an all-time record all over again, and, you know, we've going to a reason to have compensation levels at that setting,. So the middle quarters might be a little higher than last year but not as much higher than than the first quarter and the last quarter would probably be down. That would be the trend? Yes.

Okay. And then on the revenue side, could you tell me what affiliate comp was in the fourth quarter and what you expect it to be in the first quarter? I guess that fall-off you were talking about happening right now?

Yeah. Give me half a second to give you Q4. Network comp Q4 was about 2.6. And the network comp Q1 on a GAAP basis, and you have to give me half a second to try to explain this to you, but on a GAAP basis is probably, when we report it, probably around-- between 1 and 1.5. Now, what happened, and I think there's some other broadcast companies out there that you've already seen it in some of the peers, but under accounting principles, when those new contracts got signed, we had to take the total amount of comp that we would get over the whole life of the agreement, and the accounting gurus told us we had to straight-line those over the life. If it was a 10-year deal, I'm taking 1/10 of the total.

As we said before, the actual cash is on a more accelerated basis to us. While GAAP would say between 1 million and 1.5 million, my actual cash number will be higher than that consistently throughout '04. And we will show, when we compute our media cash flow numbers and our operating cash flow numbers during '05, you'll see us do an adjustment for that to take an appropriate credit for that cash coming in sooner rather than later.

Finally, what you have all just said and the numbers out given out imply that your programming and other lines were up considerably from last year, although it's still a small number. Is something happening in that particular line item?

Our programming costs?

Programming revenues. It would look like it's -- it's up almost $1 million from a year ago.

Jim, I'm not 100 percent certain if I understand the question.

Maybe -- I'll coach your off line. It's probably more of a detail we need to go into.

Okay.

Okay. Thank you.

Thanks, Jim.

Thank you. Your next question comes from Sean Butson. Please go ahead.

Thanks. Good morning, guys. Couple of things. First off, continuing on the network comp from the last question, what would be, then, the cash amount that you would book in the -- or that you would receiver in the receive in the first quarter, number one? And then number two, I'm sure you've been following the Nexstar retrends dispute with Cox and Cable One and I think -- just remind me when your cable deals expire and if you would consider requiring cash for carriage? And then lastly, I noticed you started lumping the newspaper and paging businesses together, I think for the first time. Are you -- what are your plans for those? Are you considering selling them off or are are you planning on keeping them? Thanks.

Bob, do you want to take two and three first and then I can come back to the network question?

Yeah. We're always looking at ways to maximize the shareholder value. We just thought that the paging made more sense under a publishing media type thing as opposed to being a separate line item. It's a very, very small part of the business now. The newspaper assets continue to perform very well, as far as their cash flow growth. We're happy with them from that standpoint. We're always looking at various things we can do there. The other question, Sean, was?

Just regarding the Nexstar retrends dispute.

Oh, yeah. You know, I say more power to them. I'm not sure we're a big enough company to take on that challenge. All the cable guys are pretty big operators these days. I do think eventually cable si going to have to start paying TV stations to get their local programming, but I'm not sure when it's going to happen. I think most of our agreements are up next year, and we're obviously going to be bargaining as hard as we can to get something out of the cable people. You know, I say more power to Perry Sook and Nexstar I'm not sure it's going to happen in the very, very near future or in this year or next year, though. Jim, do you want to answer the other question regarding network comp?

Yes. Sean, kind of the I think more simple answer is, that over the course of 2005 we'll probably take in about $2 million more in cash than what the financial statement line will actually show. That isn't exactly linear. It would be -- but, you know, -- I mean for -- I guess make it simple, you could divide by 4 and probably come reasonably close in the grand scheme of things.

Okay. Thanks.

Thank you. Your next question comes from Adam Spielman. Please go ahead.

Thanks for taking the question. Just wonder if you could reiterate or provide your thoughts on the digital must carry dispute. I know it's been covered a lot. There was obviously a little bit of news out of the FCC earlier this year. And just interested to getting an update on your thinking there.

First of all, I think any movement there, the networks have got to be leading the charge, first of all. And they haven't seemed to want to do that. I'm not sure there's any station group out there that has enough clout to really make these cable guys come around. I think, here again, it goes back to content. At the end of the day, we've got to make sure we're providing the best local content we can with news, and sports, and weather, and other local shows we produce. We got to have the audience wanting to watch them and demand to see them if they're on cable or anywhere else they're coming in. We're very fortunate to be getting local satellite carriage in all of our markets.

Over the next year or so, hopefully we've got about less than half of them up now, but getting more every month. Here again, I think this is going to be -- people are going to have a second choice of where to go get our local news product at some point in the future in some of the towns we're in. So I think it's just, it's a battle our whole industry -- I mean, I think we clearly need to be getting paid for our product we put out there, and at some point I think we will. But , like I said, I'm not sure we're the guys that can lead the charge to do that.

And then on the satellite carriage issue, it would seem large satellite operators are kind of toning or wrapping out their rollout in some of the smaller markets. Are there still some markets that you expect to pick up?--

Oh, yeah. They're less than half of ours right now, we've got a long way to go to get all ours, although they committed to roll out in all our markets just as soon as they technologically can. They've got - they're opening up markets as fast as they can. But they're limited by how fast they can do it also. But it's something we definitely expect all our markets to have local carries I think by the end of next year is what their commitment is.

Thank you.

Thank you.

Thank you ladies and gentlemen. As a final reminder, if there are any further questions or comments, please press star 1. Mr. Prather, there are no further questions at this time.

I want to thank everyone for joining us today and for your support. I always end up by saying that Jim and I are easy to find and we answer our own phone. So if anybody has got any other questions or comments and would like to call us direct, don't hesitate at any time. We look forward to being with you at the end of our first quarter. Thanks, everybody. Goodbye.

Thank you ladies and gentlemen. This concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.