Gray Media Inc (GTN.A) 2005 Q2 法說會逐字稿

Please be advised this conference is being recorded. Good afternoon. Welcome to the Gray Television second quarter earnings conference call for August 8, 2005. Your host for today will be Bob Prather. Mr. Prather, please go ahead, sir.

Thank you very much. I want to welcome everyone to our second quarter earnings call. We also have with us today Jim Ryan, our Chief Financial Officer. In addition, Tom Stultz who will be the new Chief Executive Officer of Triple Crown Media, the spinoff of our newspaper and paging group and also Fred Erickson who is the Chief Financial Officer of Triple Crown. They will be available for questions once we open it up for questions.

There's an old Chinese proverb saying may you live in interesting times, and I think that's what we're in. I think the TV business is going through some very interesting times right now. Some good, some bad. I think on the bad side we're all wondering what's going on with national advertising. Nobody seems to have a real handle on what's going on with national. I think there's a lot of experimentation, a lot of question of where add dollars ought to be spent. Luckily we're very strong locally and we want to continue our local strength and we hope to increase our local strength but I think national will continue to be spotty for a while but we're going to make sure we're doing the right job with local news and local programming. We'll still get our share of the national, hopefully more than our share in most cases because of the strength we have in most of the markets we are in, but we had a very interesting quarter. Our local was up 7% ex political, which we're very proud of. I think it's one of the best growths of anybody out there. Our national is down a little bit but we were expecting it to be flat or up just a tad anyway, so we're a little behind budget but it's mainly all national. Like I said, local is pretty well on track from what our budget was -- budgets were from the end of last year.

We've been very busy during the quarter really trying to make sure we're on the forefront of utilizing our digital spectrum and also our internet. We have four digital UPNs on the air now, all cash flow positive. Omaha and Lincoln are going on in the next month or so. And then we've got about five or six more in various stages of negotiation with cable operators so we hope to have 11 or maybe 12 UPNs on our digital spectrum within the next 12 months. We also just signed a deal and will be going on the air soon with a FOX digital in down in Meridian, Mississippi which we're very -- thinks going to be a real good deal for us. We're negotiating with FOX in several other markets so we hope to have some digital FOX going in several of the markets also. Probably at least four more of our markets. We've agreed to acquire UPN affiliate in the Valdosta, Moultrie, Georgia area, this is south Georgia down near the Florida line, where our Tallahassee TV station also has strength. We think this is going to be a real positive for us with CBS in Tallahassee. We have the UPN affiliation in Tallahassee also. So we think we can really benefit from this.

We've also signed a deal with a company called LSN to provide local mobile phone service, local news, weather, sports in all our markets. We'll have this up and running beginning already right now we'll hopefully have all our stations on in the next three to four months where you can go on and get basically our websites with Doppler radar, local sports, local news, all those kind of things, plus there will be national news available also but we think this is going to be a huge growth possibility for us. We're going to plan to sell advertising. We've already got one sponsor in one of our smaller markets that's virtually going to pay for a good bit of the company expense on this thing so we feel real good about having our phones -- cell phone available in all our markets.

We also, we just refinanced our bank debt again. We've got -- saving about 1.8 million a year, both Moody's and Standard & Poor's gave us a recent rating upgrade which we're very pleased with. And we bought back a little over 21.5 million of our 9.25 bonds which also saves us about 750,000 a year in interest so we've been trying to make sure we take advantage of these continuing low rates even though rates are moving up but also our continuing financial strength which we're proud of. We currently have no borrowings on our revolver and we think we're going to have plenty of free cash flow for the rest of the year. At this point I'd like to turn it over to Jim Ryan, who is our Chief Financial Officer. Jim can go into a little more detail on the numbers, then we'll open it up for questions.

Thanks, Bob. Good afternoon, everybody. I think the, as Bob said, we were very pleased with the results of the local and the TV side. Growing 7% in the quarter. Obviously, the continuing story this year on a comparative basis is the political, and that's a standard two-year cycle, and we're in the off-year cycle this year. We had very large amounts of political last year and as expected very little this year. As Bob already mentioned the national was a little soft in the quarter but actually ours came in flat to last year. And I think actually it was better than some people had been commenting on in the last few weeks.

Couple things to point out. Keep in mind as we discussed in our last call that we are receiving more cash under our network affiliation agreements than what GAAP allows us to report as revenue. And so for the quarter we actually got cash of about 2.1 million, which is 650,000 more than what the GAAP reported number is. For the six months year to date again we're very pleased with the local growth up 6% in television, about a third of that is coming from all the new initiatives that Bob was mentioning, the UPNs, the full year effect of Charlottesville that we started from scratch last year, plus the acquisition of Grand Junction back in January. But a full two-thirds is coming from the core stations and we're very pleased to see that core station growth over the whole first half of the year.

A couple things to remember, again, network cash payments for the six is months was about 4.2 million and that's 1.1 million more than GAAP allows us to report. Also in thinking about the comparisons to last year remember there was about 650,000 of Super Bowl money, first quarter last year, this is the six-month numbers in '04, that we didn't have anything this year, and again, political is going to be a continuing obvious comparison all year long.

The balance sheet leverage -- we are at about 4.89 net of cash. Debt was 635.5 million. We had 6.2 million of cash at the end of the quarter, and our trailing operating cash flow is -- approximated 128.7 million so leverage was at 4.89. We will be posting, as usual, our non-GAAP reconciliations for the terms media cash flow and adjusted media cash flow. They should be posted a little later today and we expect to be filing our 10-Q either a little later today or first thing in the morning, so there will be more information available as well.

Guidance for third quarter, we put out again we see continuing reasonably strong growth in our local TV. We'll have a tough comparison against last year's political. National we think will be a little on the soft side but that seems to be in line with commentary from everybody else in the business as well. As we've said in the second quarter call, on an expense basis, through the full year '05, we think our core station expenses are going to be flat or down compared to last year and so -- and we're tracking very well to be there at the end of the year. At this point, Bob, I'll turn it back to you.

Thanks a lot, Jim. Wanted to -- I want to reiterate what Jim said. We feel very good that our expenses will be flat or down for our same-station operations for the year. We're under our budget right now in expenses and feel real good about controlling those the rest of the year. Also I will mention just briefly, as you know we announced last week that we had -- our Board had agreed to spin off our newspaper and wireless group into a new company called Triple Crown Media. In turn we plan to merge that in with Bull Run corporation under the leadership of Tom Stultz who has run both companies very successfully. We hope to get this deal done some time later in the year, but we think being a pure play TV is going to be very helpful for us in the television business going forward, and we think Triple Crown Media will have an opportunity to grow both in the newspaper side of the business and in the sports marketing side of the business. So at this point, moderator, I'd like to open it up for calls. And we will take calls.

[OPERATOR INSTRUCTIONS] Our first question is from Bishop Cheen.

Hey, Robert and Jim, how are you?

You won the fastest finger award again.

Just had a couple of questions, and I'm sure you'll add all the color in. One, tell us about the all important auto sector and secondly telecom and any other categories that you can. Two, tell me again when you would think the spin off will become effective, and then the third, bonus question, so many other companies are talking about buying in their stock, and you're buying in their bonds. Tell us your thinking.

Hello? I'm sorry, Bishop, I didn't hear you.

So many other companies have been buying in their stock and you're buying in your bonds.

Well, we've been doing both, but we had an opportunity, the bond market got a little sloppy back when the GMAC thing hit, and we hadn't seen many bonds in the past, and we thought it was a good opportunity to buy some bonds and save some interest and we can't call them until December of next year but we thought it was just a good use of our money at the time. We will continue buying stock over the next few months also.

And on the timing on Crown Media?

We hope to file our S-4 sometime end of this week, early next week, and depending on how long it takes to get through the SEC sometime hopefully late October, early November to get everything done.

Okay. And then last, the categories -- auto, telecom, anything else?

Bishop, for the six months auto, actually it's been holding in there for us. We're up about 4% year-over-year for a six-month. We were flat in second quarter in auto, but my sense again is that's probably better than a lot of comments you've been hearing lately. And we think the auto holding up is still reflective of the strong local newses and with those market leading stations, if there's dollars out there that's where they're going to put it first. We're in a good position to catch a lot of what's out there.

Telecom spending, is that down for you?

Telecom is down. It was also down first part of the year, if I recall, so that's kind of been consistent at this point. The trend is a little bit mixed on a six-month basis. Telecom is down, entertainment is up, financial service is up a little, medical down, restaurants up, furniture and appliances continuing to be up on a six-month basis, department stores down but they've been down consistently for a while, so no real surprise there, and supermarket business is a little bit softer as well. In the quarter, like I said, auto was flat, communications is down, financials up, restaurants up, furniture and appliance is up, actually for the quarter, supermarkets was up slightly even though they were down for six months, so it's picking up a little there. So the quarter more or less mirrors the bigger trends on the six-month.

All right. Great. Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our next question is from Victor Miller. Please go ahead.

Hello, Jim.

Hey.

Question for you. In terms of the merger with Bull Run, did you ever consider an outright sale of these assets? It just seems that the $40 million you're getting back from the combined company was certainly a lot less even on any after-tax cash -- any after-tax basis you could ever conceive of for what the proceeds would be for Gray. And what's the advantage of merging with a company with 3% margins and a $0.50 stock price as opposed to doing and just focusing on what's best for the Gray Television shareholders only, and then a question on in your guidance for third quarter, what are you expecting in terms of your underlying core national and local growth that kind of drives your guidance aside from Olympics and political? Thanks.

Victor this is Bob. First of all, the 40 million dividend we'll get back we'll pay down our bank debt with but we looked at selling the papers in the past and frankly the tax burden would have just been outrageous and we think that by doing this we're giving a tax-free dividend to our shareholders who are going to have two pieces of paper that we think that one and one is going to be better than two at this point, because we think having shown Triple Crown has got a good chance to grow. The second question is why we're merging with Bull Run Host is, Tom Stultz' proven ability to run both companies. Frankly, we wouldn't be doing it if we didn't have him available to do it. He's ran our papers for eight years, did a great job. He thinks there's a lot of growth prospects for Host. At Host there's been turn-around, it's turned around now doing extremely well and we think it's got a big upside to it. So that's why we're putting the two together, because we've got a management team in place and a public infrastructure in place already at Host that we -- if we would have done it without putting it with Host we would have had to spend $3.5 million or so to have a public infrastructure in place and a management team so those are the main reasons we're doing it that way but we think both stocks will hopefully perform real good in the future. The last question was--?

The implied growth rate of local and national in your guidance for third quarter.

Jim, you want to take that one?

Setting, of course, Olympics and political aside.

Victor, I think in core local growth, we're looking at -- or I should say local growth excluding political and the Olympic -- the $3 million of last year's Olympics that we -- obviously won't be there this year, we're looking at growth rates of 5 to 6% up, probably in the guidance range it hedges more to 4 to 6 trying to leave a little leeway. National, we're seeing probably 3 to 4% down, and actually let me correct. The local growth in total probably closer to 6 to 7. Same-station growth -- and, again, this is excluding the political -- probably more in the 5 to 6% range.

Thank you very much.

Thanks, Victor.

Bye-bye.

Our next question is from Sean Butson. Please go ahead.

Thanks. Good afternoon, Bob and Jim.

Hey, Sean. How you doing?

All right. The question I had was regarding the spin-off. We booked some valuation work here. I was coming up with somewhere between 9 and 10 times EBITDA as a valuation on the assets that are being spun out. I just want to see if I'm in the ballpark there. Two other things regarding the deal. There was a mention of a tax sharing agreement. Are there going to -- I understand that there is a tax-free split off it, I was just curious what the tax sharing was back and forth between the two companies? Lastly, if you could just remind me, does MAC control Bull Run, so the vote is really pretty much already done in terms of voting in favor of the deal?

MAC does control Bull Run, and -- but we hope the deal will be approved by the Bull Run shareholders. Your first part of the question, Sean?

Well, just about the valuation in terms of an implied valuation on the newspaper and paging.

Well, as I understand, it's about -- I think that's right, the bankers Houlihan Lokey did the valuation and also Bank of America was involved on the Gray side and I think that's real close to the valuation.

Okay. And then on the taxes, are there any material taxes--?

All that is if related to corporate taxes, if for some reason there's any kind of corporate tax issue for back years, actually has nothing to do with personal taxes as far as the shareholders are concerned. There's a typical deal in the spin-off where you agree that back taxes will be -- how they will be taken care of by the individual companies.

Okay. And then just secondly, are there -- regarding the Emmis stations, are they -- any of them something you are looking at or have any interest in or no?

We've looked at the overall, just couple of the stations within the group. There's one or two that appeal to us, so we're looking hard at probably one station more than anything right now. They claim they're willing to split it up, but whether they are or not, nobody knows, but that's kind of -- we have no interest in the whole group, but there is one or two stations that fit our profile real good so we're looking at that.

Okay. Thanks.

Thanks a lot, Sean.

Thank you. Our next question is from Laraine Mancini. Please go ahead.

Question about the auto category. Seems like it perhaps slowed in 2Q. What's it doing in 3Q? Do you think that that's some sort of impact from the manufacturers spending so heavily to drive cars off the lot in June, July, and August, that perhaps they might slow down in the back part of the year?

Jim, you want to take that?

I think right now, at least the early part of Q3 overall, we don't see a big change in the auto. I think how it plays out later, they're certainly trying to push things now. I think you get out much farther in the year, quite frankly it's anybody's guess what happens. But the nearer term, early parts of Q3, I think we're seeing generally the same more or less holding pattern or more or less holding somewhat even to last year right now. Some markets are actually a little bit better depending -- it gets back to which market you want to talk about and where people are really pushing the product.

Great. Thank you.

Thanks, Lorraine.

Thank you. Our next question is from Larry Schumacher. Please go ahead.

Hi, guys. Just a quick question. Is there a way to break out the new stations' growth versus the organic growth?

Not directly from -- I mean, again, the revenue growth in the first six months, or even in second quarter, is roughly one-third attributable to the new station initiatives in the basic local growth -- or the basic growth in local is -- the rest of the stations are picking up but roughly the other two thirds of it. And we did make some commentary in the release on those relative proportions but there's no direct way you're going to be able to get to that from the statement.

Okay. I'll look through the release. Thanks, guys. Good quarter.

Thanks, Larry.

Thank you. Our next question is from Scott Graven. Please go ahead.

Hey, guys. Most of my questions have been answered, but you mentioned buying back stock. Can you just refresh my memory, what's the current authorization, how much stock have you bought back thus far in the first half, and when does that expire? And are you currently in the lockup period for buying back stock?

We are still currently in the lockup period, Scott. Hopefully as soon as we file the S-4 we'll be free to buy stock, which hopefully be end of this week, early next week. Then we've got four million shares total. I think we've bought about 1.9 million. We've got a little over half of our allocation. The Board didn't put any time limit on it. Ideally we would definitely like to be in the market latter part of the year using some of our free cash flow to buy back stock for sure.

Thank you.

Thanks a lot.

Our next question is from Jim Goss. Please go ahead.

Thank you. Several questions. One is regarding Wal-Mart. I know as you talk about retail spending, it seems traditionally Wal-Mart has not been a big player but it seems like it's becoming a bigger factor, and I'm wondering how it is in your markets. Secondly, as you look forward to '06 I'm wondering what sort of plan you have for the operating expense levels at that stage. Next year. I know you're keeping them flat to down this year. Will the primary driver to higher expense levels be the bonus payments and ad sales next year, or do you think you'll have a little more flexibility in overall spending levels next year? And thirdly, I'm wondering what the incremental benefit to revenues might be from the aggressive additions in UPN and FOX and whether whatever addition you have to the revenue line, the bottom line will be flat or up or down a little based on the cost you will need to incur to pursue that aggressive ramp-up.

Jim, the UPNs a little early yet but we think based on what we've seen so far we've really taken off real well with revenue. We've held our expenses. Like I say, we're cash flow positive on all the ones we've got on the air right now. We think over the next year to 18 months we can develop some real good business models with these stations where they're profitable. Hopefully with margins as good or better than what we're getting on our normal stations. We're buying basically doing a lot of Barter programming for the time that's not UPN. We think there's a big up side to those. We think there's a lot of growth in a totally different demographic than what we've been dealing with in the past so we feel real good about that. What was your first question?

Well, the first one, Wal-Mart, traditionally had been--.

I think Wal-Mart hopefully is finishable. Maybe they're wising up. I really haven't heard our managers talking about it. If it's jumping up any of our markets nobody has raised their hand and mentioned it but I do read that Wal-Mart is spending more and it may be coming more on the national side than the local probably. But let's hope they wise up and start spending on TV. Maybe they need to -- I know they're doing a lot of image advertising on the national.

Haven't seen a lot yet.

Local TV on specific what's going on in the stores. But I really haven't heard our managers talking about it. Jim, have you heard any other comments on Wal-Mart?

No, I think -- to be honest, I can't remember the last time anybody mentioned Wal-Mart.

You had one more question, Jim?

The other one related to expense levels, trying to get flat to down this year.

That's a good question. I always -- when we start doing budgets I really base it a lot on what we think -- we've tried to hold I think out of the last four years, or since 2000, we've basically had a flat expense increase every year except one. I think next year we'll look at it hard. Would depend on how good this year winds up and we will decide really at that point we may let expenses go up a little bit next year because we anticipating a real strong political year but we'll keep them well within line, and if we think it's not going to be as good as we thought we'll do a flat expense year again.

Okay. Thanks very much.

Thanks Jim.

Thank you. Our next question is from Curt Meyer. Please go ahead.

Good afternoon, gentlemen. I'm understanding that, this is in regards to the Bull Run side of the equation, that you're going to be paying off all of the subordinated notes. I'm assuming that's at par. Do you have any sense of when that may take place?

That's most likely going to take place at the closing, which hopefully will be late October, early November. It will take place at that point.

Thank you very much.

Okay.

Thank you. Our next question is from Bishop Cheen. Please go ahead.

Just a follow-up, Jim. There was some question around the bond covenants, which are -- they're bond covenants, written by $400 an hour attorneys to be argued over by $500 an hour attorneys. The mechanism that allows you to spin off the assets, and you do get the cash consideration of 40 million?

Yes, the basic mechanic under the indenture, is it's -- now, I am using layman's words here and I want to be very clear about that so I don't get calls from 400 and $500-an-hour lawyers. So this is a simple layman's term answer. But it is essentially -- the actual contributions of the businesses to the new company is akin to a dividend to our shareholders, and, therefore, there is -- the mechanic is you look at your restricted payment basket.

That's what I was looking for.

Which is huge at this point, and a couple of times -- a couple of times more than the value of the transaction. So we're in good shape. That was one of the very first questions we asked when we started thinking about this.

Right. Okay. So the value for the whole transaction is what again? Roughly. And I realize it changes every day because of stock prices, but the whole transaction is valued at announcement at what?

Well, our businesses we indicated nine to ten. Obviously you've got -- everybody knows the trailing 12-month cash flow on our businesses, and it's, around 14, so you're in the middle 100's range, and the -- what we have under the indenture is the basket currently is closer to 400 million than anything.

Okay. Thank you very much.

Thanks a lot, Bishop.

Thank you. Our final question is from Victor Miller. Please go ahead.

Just a follow-up. How much corporate overhead do you think will be transferred from Gray to Bull Run now that you are taking the papers and the wireless side out of -- what would the run rate in corporate overhead you think will be for next year?

Very little corporate overhead. That's -- there was no -- there's very little corporate overhead related to the papers to begin with. And Tom Stultz is no longer on the payroll. He's paid as a consultant to us. But that will transfer over. But as far as overhead itself, we run things real lean, and I promise you, they will be -- they'll be busy. They just won't be quite as busy as they've had to be in the past with the papers and the paging business. But no actual dollars we don't think we can eliminate in corporate overhead right now because of the spin off.

Although, Victor, we will, as part of the transactions at closing, and it was mentioned in the release, we will -- Gray will be reimbursed by Triple Crown for a portion of the overall deal fees transaction fees that we're currently incurring. We'll get to recoup--.

Right, 75%?

Approximately, yes. We'll be able to recoup that once we close.

By the way the corporate overhead’s a little bit higher in third quarter as well. Is that also--?

In anticipation of the ongoing deal fees as we move forward on the SEC process, there's obviously with a transaction like this there are a lot of lawyers and accountants and a lot of people involved with it. So that's what -- that's just to -- deal fees in the third quarter.

Should we -- just third quarter, though, nothing in fourth?

Obviously -- when we close we're able to recoup it back so I would think your fourth quarter would be a normal number.

When you actually do get it recouped, how do you -- do you actually net that against fourth quarter so that fourth quarter corporate overhead will be very, very low?

It will probably actually end up reclass -- it would reclass out of the corporate line and actually down -- it would probably ultimately run through the discontinued operations line, because at the date of separation, those businesses would end up being reported as discontinued operations. So it will -- my current thinking is that we would reclass it from the corporate line down to the other lines at the date of separation.

Okay does that mean you'd also -- we'll get this off-line. Thanks.

Thanks a lot, Victor.

Bye.

Thank you, sir. There are no further questions.

Okay. Thanks, operator. Listen, I want to thank everybody for being on the call today and for your support. If anybody's got any specific questions regarding the quarter or regarding this deal, please don't hesitate to call Jim or I, or you're welcome to call Tom Stultz or Fred Erickson, but we'll try to answer any questions that the lawyers will let us answer at this point. Thanks again everybody and we'll look forward to talking to you in a couple, three months. Thank you. Good-bye.

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