Gray Media Inc (GTN.A) 2005 Q1 法說會逐字稿

Good afternoon and welcome to the first-quarter earnings conference call for May 5, 2005. Your host for today will be Bob Prather. Mr. Prather, please go ahead.

Welcome everybody to our first-quarter conference call. As all of you know that have been following our progress we came up with an incredible record year in 2004 and the first quarter is not near as good as the first quarter last year although overall I feel pretty good about it. I'm not happy with the quarter in general though because I think our national business continues to be spotty all over, down in some places but just national really seems to be a problem nationwide. I'm not sure what's going on in the industry with national.

Our local business continues to be strong as you've seen from our release. About 5% ex-political which I'm very proud of. We had a comparison; in addition to political, we had 3.2 of political last your in the first quarter. We had 293,000 this year. We also had 650,000 plus in one day in the Super Bowl last year with CBS which we didn't have this year. So first-quarter was going to be tough no matter what. And yet I still think our numbers are right at the top of our peer group. I think we are very pleased that we are right at the very top of our peer group.

And here again, I think it goes back to the strength of our market share in our local markets which continued to perform in excellent fashion. We've now got 24 stations out of 31, number one in the market. All our others are number two. Several of our number two stations are really knocking on the door to be number one hopefully over the next year. So we are very proud of our continued coverage of our local news. And this is where the strength of our business is.

One thing we've done during the quarter which I'm very proud of, we've got four UPNs up and running now in our digital spectrum in Lexington, Knoxville, Augusta and we went on the air in Tallahassee April 1. And I'm proud to report that the first month we were cash flow positive in the very month. We've got six more of these in the pipeline, Lincoln should go on the air I think in June and we've got five other markets that are in various stages that will hopefully be on by the end of the year this year.

We think these are great opportunities for us to utilize our digital spectrum, to learn how to in effect operate duopolies to do it on a very, very low cost basis. Our only expense is basically a couple hundred thousand dollars plus of equipment that we can use for other things. It's not just exclusive for the UPN but it's a tremendous opportunity for us to do a lot more sports coverage in our college towns; a lot more news coverage; a lot more local programming on these UPNs and we're very, very proud of the effort there. I think we've got a big future ahead of us growing these markets in the years ahead.

Our Charlottesville station is doing great. As you know, we've got the CBS and the ABC and the Fox affiliation there. This is a fast-growing market. We think it's got a huge upside and we are very, very happy with the progress we're making in Charlottesville.

During the first quarter, we bought back $11.3 million of par value of our bonds. We thought it was a good buy to pick them up. They are hard to buy normally. We were able to buy some 109 plus range plus so we were getting about less than 2% on our cash and we're saving 9.25 on these interest on these bonds. We thought it was a good investment plus we lowered our debt by $11.3 million. So we felt like that was a good use of our money.

We continue to generate a lot of free cash flow. It should be in the dollars here range hopefully this year again. If we do better maybe more but we feel very good about our generation of free cash flow.

One of the things that I'm very proud of, last year 14% of our revenue was political which is a testimony here again to the strength of our local stations. It was the highest percentage of any broadcaster in the country of political revenue. That just makes it tougher this year but we're determined and we're going to have a good year.

Our expenses are in line, we're actually under budget so far with our comparing same stations. Our expenses show up a little bit because of the UPNs, the Charlottesville -- none of that was there last year. But on a same state, I think we're up about 500,000 for the first quarter of which most of that is payroll. As the year goes on, we will actually be under budget for expenses I think because during the last half of the year, we will have very few commissions related to political.

As I said based on our budget, we're actually under budget for expenses for the first three months of the year. So I'm very proud that we're holding our expenses in line. We're looking forward to a good year overall. It's obviously not going to match our record year last year but we think we'll be right at the top of our industry in our performance this year.

At this point, I'd like to turn it over to Jim Ryan and let Jim go into more detail on the numbers and then we will open it up for questions. Jim?

Thanks, Bob. Good afternoon everybody. As Bob said, obviously the off year of the political cycle is a big factor in Q1 and it will be a consistent theme all year long. Bob also mentioned the 650,000 plus of Super Bowl last year that didn't repeat this year. Taking that into context, I think in general again we were relatively pleased with where the quarter came out.

As Bob mentioned, we're very pleased that the local revenue ex-political grew 5%. We as just about everybody else in the peer group or everyone else in the peer group have already commented that national was a little on the soft side although that looks like it may be firming up a little bit in second quarter and I'll talk more about that in a moment.

Also unlike a lot of other people in the business in first quarter, actually our auto business seemed to hold up very well and tracked plus 7% for year-over-year. We were pleased with that. And obviously our nonbroadcast business revenues grew as well; the newspapers actually had very strong growth in retail and classified at plus 10%. I think that says there is some firmness in the broader economy.

Bob has already commented on the expenses and I think the commentary in the release talks about it as well that yes, on a total basis, we're up a little bit year-over-year but if you look on a what I would describe as a core same station basis, the growth rate was only up as Bob said, about $500,000 year-over-year which puts it about 1.5% which is kind of de minimus.

I'll talk briefly about second-quarter pacing because I know everybody will be asking about that. These pacing numbers are as of last Friday and always our pacing members are ex-political and these are gross numbers. But for the whole quarter, we were currently tracking at about plus three, local was tracking at plus four and national was about flat, which certainly would be an improvement from down mid single digits in the first quarter.

Breaking it down local by month, up three in April; up six in May; and up three in June although it is still a little early on June. In general, we're pleased with where we see local going in the second quarter and have a little bit of optimism that the national may be firming up a little bit as well in the second quarter.

Talking about the balance sheet and some of the metrics a little bit. That was at 655 and I want to just slightly correct Bob. The bond repurchases we made were actually in April of this year so they will show up and second quarter. We did repurchase some stock though in (technical difficulty) quarter. We purchased about 360, 370,000 shares for about $5.2 million. And then in April we purchased about 11.3 million worth of our bonds back.

At the end of our quarter our debt was at 655; cash was 36.7 million; so leverage on a net basis based on -- was at about 455 which we're very pleased with. That's a very, very comfortable range.

CapEx for the quarter was 6.6 million, 1.5 about of that is DVT related. As we've said before we were going to do some upgrades on DVT the rest of this and next year upgrade some power levels. Regular CapEx was 5.1 million.

Cash taxes for the quarter was about 300,000. Program payments and amortization were both at 2.8 million. The guidance that we've issued again, I think we're reasonably comfortable with and taking into context the very strong political from last year, I think we are reasonably pleased with where we see second quarter shaping up. I think one of the key things again is the middle single digit growth that we're expecting in our local business during the course of second quarter, I think we're very pleased with.

The trailing operating cash flow number, trailing 12 months in that the non-GAAP reconciliations have been posted to our website so everyone is free to go out and look at that, is 135.8 million. So again, we are coming off the records of 2004 but in very good shape early part of 2005. One of the things I would point out if you look at those nine GAAP regs, something you need to think about in your -- however you track us -- these are a little different this year and we talked about it on our last call, last call, a little bit is that as you know we renewed our CBS and ABC affiliation agreement basically effective as of January 1 this year.

Under the accounting rules we had to take the cash payments we're going to receive over the life of those contracts and straight line them over the whole life of the contract. And as we talked about last call, we are actually going to get cash payments in faster than what the accounting rules let us recognize. And as we said, the cash payments -- we'll have some this year and for the next couple of years and it will eventually trail off. So in the non-GAAP reconciliation to our cash flow number, we've done the addition and subtraction there so those are two new lines this quarter. And that is why they are there.

It certainly is a favorable impact for us during 2005 on the cash we're receiving versus the amount that we actually get to report in the P&L under GAAP rules. So I hope everybody will take a look at that and make sure they give us fair credit for that in our cash flow and in our free cash flow generation.

Bob, I'll turn it back over to you.

Thanks Jim. Operator, at this time let's open it up for questions, please.

(OPERATOR INSTRUCTIONS) Sean Butson.

Good morning guys. Sorry, good afternoon. Just a couple things. I suppose first off in the first quarter the expenses associated with some of these new stations and channels I calculated somewhere I don't know -- a little bit more than $0.5 million. Based on the second-quarter guidance though it looks like some of those non same station costs, if you will, are going to be a little bit more than that. So just am I getting that right?

And then secondly, is there any insight you can give us on the national business why it is so volatile? It looks like it was weaker in the first quarter than it was in the fourth and weaker in the forth than the third, but now coming back to flat. So any info you can give us on that would be great. Thanks.

Jim, do what you answer the expense and I will answer the national thing.

Sean, you are correct in that -- again I will describe it as kind of same station basis, core expense is up little bit more in the second than the first but again it is nothing huge, just kind of ebb and flow a little bit. As Bob already said by fourth quarter that same station number -- we, actually Bob had said on the call last quarter that we were -- the goal was to be flat and by fourth quarter it looks like we are actually going to be down on a "same station basis".

I think there's nothing to get -- nothing really exciting in the second quarter going on and by the end of the year, we're down year-over-year which I think actually is doing a very good job of controlling the primary station expenses that way.

Right. That's great news on the same station then. How much should we be adding to the same station expenses for the additional things, the additional stations and channels this year?

On a whole year basis, the UPNs that we have launched already which are now up to four are probably -- you know to 2 to 300 and incremental in the overall equation apiece. Then you've got CAV, we'll have a full 12 months this year versus five months last year and that is maybe another a couple million, 2.5 maybe; 12 months or 11 months was at KKCO and obviously we didn't own that until January. So there is a couple million there.

Offsetting that is we did sell the satellite uplink business at the end of last year so we picked up a couple of million positive that way. At the end of the day, our kind of on a book basis or a reported basis -- our overall expenses in broadcasting may be looking like they are up -- you know, you add and subtract pluses and minuses for all that. Right now I'd say it's looking for the whole year as maybe being up a couple million. And then you figured the core is actually helping offset that a little bit. I'm not sure if -- it's kind of a long winded answer -- sorry for that, I may have lost you in there.

No that's good info.

The basic message is we will be flat or down for the year on the stations we had last year. All the UPNs ought to be cash flow positive for the year. So whatever expenses are added, we are going to add revenue more than that hopefully. And our Grand Junction will be positive and the only thing we will have would be a negative cash flow will be Charlottesville, which you'd expect out of the new station the first year.

That is good news.

On the national, I think national is like a desperate housewife right now. I think they are scrambling to figure out what is going on in the world and it's almost easy to say I'm trying something besides TV right now or radio. I think they are desperate to prove to their clients that they are spending money in the right way and I think they've got no idea how to spend it. I think there's a lot of experimentation going on, a lot of floundering, some successes, probably a lot of failures.

I think it's going to keep going for awhile until they realize that TV is still the best buy for the dollar day in and day out to get mass consumer audiences. I think we just kind of got to hunker down during this time and get into as much local as we can get and take the national when we want and get it. But thank God, we've got 70% of our business is local and I'd like -- as I told people before -- I'd like for it to be 75 or 80, frankly. That is the strength of our business and we're going to just keep pushing on that end of it.

Thanks.

Bishop Cheen.

Good afternoon, Robert and Jim, how are you? You touched on so many things. I want to ask Jim a housekeeping question. But let me just pick up on that ad fragmentation you were just talking about -- big picture. You and I have the same amount of rings around our trunks so we've seen this before. What is your take on how this time this flight away -- in the past the money always seemed to come back after flirtation with other media. What feels different about this one?

I just think there are so many more choices this time, Bishop. Between the Internet, between alternative sources of advertising, that people are out there, product placement, all these things. There is just I think there is many more choices than there were ten years ago, 20 years ago, 30 years ago. That just leads to more fragmentation in the short term. Here again I think in the long term I feel very good that our business is going to continue to be a great business and that national is still going to be a very important part of it.

So you don't see the fragmentation setting in at the same magnitude at the local front?

No, not at all at the local front. We see virtually no evidence of it. Here again, I think it goes back to the strength of our local news and the fact that 45% our revenue comes during our news. Those advertisers know exactly what they're buying right there and they know the audience they're getting and I think we've got to keep folks making sure we deliver the right audience to advertise during our local markets.

Let me ask you, people meters, do you have a dog in that fight?

Not right now. We've only got one metered market, that is Knoxville. All the rest of ours are diaries so we don't have any people meters. I think the jury is out. I think there's a -- Nielsen, you've heard my soapbox before about Nielsen I think it is the most outmoded system of measuring. I always said there's a great question that if the Internet was invented first before TV, everybody would be saying how in the world can you let 4000 people in the whole country determine ad rates. But that's the system we're stuck with until somebody comes up a something better.

And Nielsen is getting more ossified as a monopoly as the years go on and they're getting worse and worse to deal with. Their methodology is getting worse. I don't know the answer. I don't see any change any time soon in that.

Okay. Robert, in your answers and I'm going to pass it to Tom, but if you sometime during this conversation get into telling us about your retransmission contracts and where you are in that -- you don't have to do that right now. Jim, I just wanted to know in your immediate cash flow definition you are not adding back non-cash compensation?

Yes, we are, the 401(k) expense is being added back and that was -- hang on here -- . 401(k) was about a 578,000 add back in Q1.

That is already added back?

Correct.

Last but not least your political, is that a 3.2 and the 293,000 (ph) we were talking about quarter to quarter? Is that gross or net dollars?

Political is net.

That is already netted. Thank you, Jim. Thank you, Robert.

Andrew Finkelstein (ph).

It's actually Brad (indiscernible) stepping in for Andrew. Just first, Jim, on the repurchase of the notes, I was wondering as far as your credit facility governs that, how much more you could repurchase in the future?

There is really no restrictions under the credit facility. Simple answer is as long as we are in compliance, unlimited.

As a use for the free cash flow going forward, on the last phone, you guys mentioned that if you couldn't find anything in the next year maybe there would be another special dividend like you did early in this year. What sort of are the priorities between I guess the repayment of debt, buying back shares or dividends and acquisitions?

I think it's something we constantly evaluate. I think it just depends. We like to be very opportunistic and as I mentioned we were able to buy some bonds we thought at a decent price which we hadn't been able to do in the past. And as the year goes on depending on how the year looks, I think we will determine kind of quarter by quarter where the priorities are. We'd like to buy some more stock back and the price has definitely dropped down to a point now where we it would probably be a good time to be buying again. I think it will just depend on the market conditions at the time. I think all of those are on the table.

Thanks a lot guys.

Lorraine Paccini (ph).

Good morning or good afternoon. A couple of quick questions. You talked a bit about your TV expense and explained the number there but it looks like the publishing might be a tiny bit high too. So if you can maybe just talk about what might be going on there? And then also the free cash flow benefit from the network comp, when that would reverse and how many years out?

The publishing question first. There is a little modest uptick there primarily driven by an expansion in our Gwinnett paper. They substantially increased the Sunday edition, latter part of last year and that came with associated costs, but obviously some very nice revenue benefits as well. And actually that expansion product has worked very well for the paper. The increase you're seeing there is primarily driven by that because obviously there wasn't a comp for that in Q1 '04. The network comp, we'll have a few million dollar net benefit to us this year and probably some the next year or so. It will then start reversing versus a pure reported GAAP number. But it's definitely meaningful benefit for us this year.

And one more quick question. You didn't mention telecom, or if you did I missed it. In radio, telecom has been weak. It has been very strong in outdoor. What kinds of trends are you seeing there?

Telecom in Q1, we actually saw some softness there. I think some of the commentary is, if I recall the managers were talking about, was some of the big sell mergers, in particular markets, have sewn up some of the share wars a little bit for the time being.

So it's more smaller budgets as opposed to people pulling out?

A little bit of both. In some cases people pulled out, in other cases budgets were the typical merger scenario. People scale back their budgets for a little while until they regroup.

Thank you.

Victor Miller.

It's actually Chris Ensley (ph) stepping in for Victor. A couple of your larger peers, Viacom and Clear Channel, are going through a deconsolidation phase selling off some noncore businesses. I'm wondering if you're considering that or if you've changed your attitude on your publishing business and how that might fit with your -- the rest of your group? And then a couple of quick follow ups.

We're always evaluating ways to maximize shareholder value. It is something we look at and we've been studying that issue and several issues. It is something we definitely have on our minds. I see the trends out there and I think there's a lot be said for pure play in the TV world. And we are definitely looking at those kind of things.

A couple quick follow-ups are I thought in the press release it said local was up six to eight at yet the numbers you gave three, six and three for April, May and June. I just wanted to clarify that.

That was current pace. The management -- the stations are still reporting that they expect business to pick up. Yes, we expect that by the time we close, we'll be higher middle single digits -- I mean -- up to the guidance -- in the range of the guidance we put out.

An improvement over first quarter?

It will be a little improvement over first quarter because first quarter was up about five and guidance suggests that pure local in second quarter would be a little bit stronger than that by the time it's all done.

Just finally housekeeping. Charlotte, the acquisition and the four UPNs, all-in contribution to revenue and cash flow in the first quarter, was it material?

Not material. Charlottesville has got a negative and in it will have this year which we expected. But all the UPNs are positive cash flow and Grand Junction is positive cash flow.

And the negative on Charlottesville is not large. Grand Junction and the UPNs go a long way to mitigate the first year carriage on Charlottesville.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Jim Boyle.

Good afternoon. Could you quantify if there has been a change in any advertisers booking any earlier or later than normal in Q1 or Q2? And whether ad rates were flat or up in Q1 or Q2 and if their schedules are about the same or if they are getting longer?

Jim, do you want to take that?

I haven't heard the managers comment significantly on a shift in booking patterns. I mean the trend has been relatively short in net trends -- and relatively short has actually been a trend for years now. But no significant change between Q1 and Q2 that I was hearing about. I think obviously Q2 rates naturally or we would be pushing for higher than Q1 just a natural cycle of the business in the supply/demand issues that usually come in. Q2 is stronger, so obviously you would expect pushing the rate a little bit going into Q2.

But no, I wouldn't characterize it Jim, as any huge changes. No huge one way or the other change in the basic center, other than again people seem to say that it just feels like things have maybe firmed up a little bit more than what -- certainly firming up a little bit more than what they felt like early part of first quarter.

Do you have any sort of revenue or update on any of your Internet websites or initiatives?

Our Internet revenue first quarter this year was over $1 million for the quarter, about where we expected it to be. Obviously we have expectations that that is going to grow as the year goes on. And that I don't have the comparative number immediately in front of me but that million plus was significantly higher than where we were a year ago.

And where do you think it is going to be in Q2?

Q2, it will be growing off of the million plus in Q2. And as we have said, the target for the year is over five and right now we feel like we're making good progress for our overall target.

Thank you.

(OPERATOR INSTRUCTIONS) Bishop Cheen.

I'm coming back as a bookend. I didn't get you to talk a little bit about to retrans. I know I've hurt your feelings before. And the only thing that I know that has changed is that your good friend Leslie Moonves at CBS has been vocal about wanting cash for retrans and saying he thinks he can get it. So tell us your view and whether that fits into your agenda?

We like Les Moonves and we like the idea of CBS being the leader. I've said from the beginning the only way broadcasters are going to get paid is for the networks to lead the charge. This is the best news I've seen in a while on possibly getting paid by the cable people. I think if CBS and NBC and ABC and Fox take a stance, the duck pins will finally fall. I don't think there is any group on or out there that can do any good in this without those guys leading the charge. So I'm very happy to see that. And very positive that he with CBS on top of the heap right now in the ratings, they've got a lot of clout. I'm just cheering him on 100%.

Now in your situation, you are pretty well linked up with your contracts?

All our contracts mostly are up this year for renewal. We've got a coordinated effort going with all our managers. We've designated a team of three of our key people to collect information from all our managers on what they're looking for in their particular markets. And we're going to try to really go have a coordinated effort with some of the cable groups where we've got pretty good clout to go in and get the best deals we can and get the shortest deals we can. That is pretty much our goal for this year and that's one of our priorities.

We've got two priorities this year, Bishop, that is one of them. Three priorities. The other is making sure we go after cable from a local effort. One of our national rep firms has really done a great job of anti-cable campaign and we're able to go into markets and show people that are buying cable that they are way, way overpaying for what they are getting. In a lot of cases we get them turned around. But it is almost a customer by customer type sell. And it is time-consuming and hard work. But it is something we are really committed to and our rep firm has done a great job of leading this charge.

The third thing that is really important for us is our Internet initiative. We've challenged all of our managers to more than double their Internet profits this year plus we've got a floor that they've got to meet. So some of them have got to do even better than that. And so far Internet revenues are looking very strong and we think this is going to be a big growth area for us this year.

And here again, it's an extension of our news brand that is very important to us in these local markets and it's something we'd be doing if we couldn't make any money at it, but I think we're going to be able to make some good money at it too.

Are you taking any skin away from the newspapers?

I don't know. Newspapers certainly seem to be nervous around the country about losing circulation especially in the big cities and losing classifieds. I'm not sure we've dug into them much in our local markets yet. I think newspapers are concerned about erosion of their base on both circulation side and a lot of surveys coming up right now where younger people are getting their news off the Internet now. TV has already been a number one source so here again, we've got to make sure our websites are married to our TV and that people think of them in the same -- at the same time when they think about news.

That is helpful, Bob. Thanks very much.

There are no further questions at this time.

Thank you operator. I want to thank everyone for joining us today. We will look forward to talking to you again at the end of the second quarter and as I always at the end, Jim and I are easy to find. We answer our own phones so don't hesitate to call any time. Thank you everybody.

Ladies and gentlemen, this does conclude your conference call for today. There will be a play back available for this call in approximately one hour's time. The playback number is 1-888-509-0081 and it will be available until May 19. Once again the number is 1-888-509-0081. Thank you for your participation and please disconnect your lines.