Gray Media Inc (GTN.A) 2005 Q3 法說會逐字稿

Good afternoon. Welcome to the Gray Television third quarter earnings release conference call on November 7, 2005. Your host for today's conference is Mr. Bob Prather. Mr. Prather, please go ahead.

Thank you very much. I want to thank everybody for joining us today. I always like to start out with a quote, and my quote for right now in the TV business is an ancient Chinese quote, 'May you live in interesting times,' which is what I think we are living through. I think the TV industry on one hand has more negative press about the future of broadcast television, than I've ever seen in all the years I've been around TV.

On the other hand I think we are on the threshold of a whole new growth in broadcast television once we go full digital. I think it's going to open up, first of all it's going to be a better product, it's going to be a new product, better for the viewer, better for the advertisers, and we are going to have hopefully three or four different channels, to figure out a way to make money out of, and we are in the process of doing that right now.

As you know one of our goals has been to get these UPN and Fox Digital channels up and running. We have currently got six on the air, all of them doing real great on UPN. We have a Fox going on Digital in Meridian, Mississippi in another month, got another Fox hopefully by the first of the year in Texas. We'll have hopefully 22 of these digital channels by this time next year on the air.

So far we've been cash flow profitable usually within a couple of months, sometimes three months, but pretty quickly cash flow positive. We think we are going to have a three or four-year head start on a lot of people in learning how to multi-task in a lot of our markets, and we think this is a great opportunity for us in the TV business, and we are very happy with this initiative.

I will let Jim go through the numbers. We are never happy when we are down but we also are realistic. We had the most political revenue of any group in the country last year as a percentage of revenue. I think it was over 14%. That just makes it a tougher hill to climb, but I'm very proud of the fact that our local is up 7% so far this year, and looks like it could be a little higher than that by the end of the year.

Our National is where the real soft market has been. The interesting thing to me about National is, there's obviously a tremendous pressure on advertisers and ad agencies to try something different, let's go do something new, let's go to the Internet, let's go to experiential marketing. Let's go to product placement.

Everyday you read an article about somebody doing that and then virtually every other day you read an article about how none of these things have worked very well. BMW, who started branded entertainment with BMW Films announced they're pulling out of that, and doing no more of those, because they were too expensive and didn't sell cars. The coat people are already saying product placement doesn't seem to be working near as good as advertising works.

The Internet is a powerful medium, but I think it's a very, very rare occasion when you have a huge hit on the Internet. And I think many of the Internet initiatives fall way short of what the advertiser is expecting. So I think we have to go through this period for a while in National. I will tell you our National looks better for fourth quarter, and our National rep firms all say across the board that their National is looking better so I feel very good about what is going on with National.

We are going to strongly emphasize, we think next year is going to be a great political year. There's 15 battleground states listed in the Wall Street Journal today. We are in eight of them. So we think we are going to have a very strong political year, I think the Democrats are smelling victory out there in a lot of cases, and I think both the Democrats and Republicans are going to pour more money than you've ever seen in these House, Senate and Governor races hoping to either to get back control of the House, Senate, or both, or some more Governorships, and I think there's a possibility that could happen. It's good for us because we will take both the Republican and Democrat money and we hope they spend a lot of it.

We've announced an acquisition of a Huntington station from Emmis, we think this is a fantastic deal for us. If you go back and look at our history we basically said, we are going to be opportunistic and we are going to have a strict criteria, and we have stuck to that from the Day One when we bought control of Gray.

We bought strong stations in good markets and hopefully tried to make them better with good a management, good reputation in the community. Our Huntington station will be the #1 station we have in virtually every criteria, revenue, cash flow, political revenue, margin, growth, it's just a tremendous station with a tremendous management team, so we are very happy with that deal.

Also our history has been when we make acquisitions and our debt goes up, we commit to pay it down, and if you look we usually make a decent-size acquisition about every three years, and then we spend the next three years getting our ratios back down even better than they were before, and that's what we intend to do here. We plan to probably pay at least 90% of our free cash flow on debt reduction over the next 18 months to 2 years, and we think this is just a great opportunity we couldn't pass up, and we look forward to adding it to our group of stations.

It also fits in very well geographically with our Kentucky station and our other West Virginia station, and it's a great station from the standpoint of Political because it's in three states, in West Virginia, Ohio and Kentucky. So we are looking forward to getting that deal closed. Hopefully it will close by the end of the year.

You know, our spin-off is going forward. We haven't -- it's in registration right now, so the lawyers say I'm not able to make any comment about that, but we hope to also get that closed and spun out by the end of the year for the Gray shareholders.

So at this time I would like to turn it over to Jim and let him talk a little more about details and then we will open it up for questions.

Jim.

Thanks, Bob. Good afternoon, everybody. I will keep my comments relatively brief, because I think actually the release probably has already answered most of your questions. Also our 10(Q) for the quarter should be filed later this afternoon as well, with even more detail.

As Bob indicated, really the continuing story just as in second quarter going through third and in the fourth quarter, will be the difference in Political this year to last year. In the third quarter we had just shy of 450,000 versus 12 million of Political last year. Also I would like to point out that last year in the third quarter, we had about 3.1 million of Olympic revenue, which we didn't have the benefit of this year as well.

As Bob said, we are generally pleased that Local grew 7% year-over-year. If you peel back the UPNs and the Grand Junction acquisition we made in January, really the core stations are the same stations that we've had year-over-year. Their Local grew at 5%.

As Bob indicated National was a little soft, declining about 4% in the quarter. And our same stations were down about 5%. Auto had held in pretty strong for us during the first six months. It was down slightly, down 3% for the quarter. Still about 27.5% of the business. And on a nine-month basis, it's still in positive territory.

Our broadcast operating expenses were up about 4%. But again if you peel back the investment in the UPN stations, and the acquisitions, as well as the full year effect of the Charlottesville station, which we launched third quarter last year, really the same station expenses only grew about 1% quarter-over-quarter. And second quarter we told everybody we thought same station expenses for the entire year would be flat to down slightly, and we are pleased to tell you at this point we think it will actually will be down about 2% on a same station basis for a full year.

Turning to the nine-month year-to-date numbers again, Political is the big story. 1.4 million this year versus 20.9 million last year. Again, no Super Bowl in the first nine months, as well as no Olympics. But the Local revenue growth was up about 6%, with the same stations year-over-year growing at about 4, National was softer, declining about 3% with same station growth about, or same stations actually feeling that impact a little bit more.

Auto on a nine-month basis is still up about 3% for the whole year, and our operating expenses for broadcast were up 5% for the nine months, but again if you peel it back on a same station basis, those expenses were only up about 2% for the nine months, and again we expect it to be on a full year basis down 2%.

Turning to Pacings (ph), for fourth quarter the total quarter is looking fairly good at the moment. We are up about, this is as of last Friday, we were up about 8% for the quarter, 87% of budget was in the house. Local was up about 10%, and National up about 5% on the quarter. October obviously was very strong in Local and National, as all the Political displacement from last year fell away. November is positive. And December is -- National looks to be still a little soft, Local was holding in there. It's a little too early to tell exactly how December is going to come out, but for the entire quarter we are very pleased with the overall trend.

And for the quarter again we think the overall Local will be up about 10% excluding Political. National probably up around 4. On a same station basis, we think our Local for the quarter would be up about 7%. And the National up lower-single digits, probably around 3%.

As of September 30, '05, there was 633 million of debt outstanding. Our trailing operating cash flow number was 114.1 million. We had 4.1 million of cash on the balance sheet. So our leverage ratio was at 5.51, which is about where we expected it to be at this point, in the off-year of the Political cycle.

We put out our guidance for Television for the fourth quarter. We certainly hope as usual that at the end of the day, our guidance will turn out to be a little on the conservative side. A lot will really depend on how strong the last couple of weeks of December finish up. And it's quite honestly a little too early to tell, but all-in-all we are expecting a reasonably good quarter, again considering the massive shift in Political year-over- year. But as Bob said Political for '06 will be starting very shortly and we are very well-positioned to have a very strong year politically in 2006.

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

Thanks, Jim. Operator, if you would open up the lines we will take questions now.

[OPERATOR INSTRUCTIONS] Your first question comes from Bishop Cheen. Please go ahead.

Hi, Robert. Just a couple of questions. Jim, maybe I misunderstood this. I know do you a great job on expense, but nine months expenses up 2%, but when we add in that fourth quarter, we expect them to be down 2%?

On a full year basis, yes, because you've got a lot of National sales rep commission on last year's Political that falls off, plus you have a significant amount of our own internal incentive compensation that falls off year-over-year, too. It's not a record-setting year, so incentive comp isn't going to be anywhere near what it was last year.

Right. So but still all-in-all, apples-to-apples it's going to be pretty extraordinary Q4 for expense reduction.

Yes.

Okay. And then also moving from expenses to the top line, Bob, can you give us a little update on how your new business initiatives are developing, and include the Internet as well? And if you can quantify what you expect that would be great.

Well, as I said, Bishop, we are real happy with the 6 UPNs we have on-the-air right now. Four that have been on more than three months are all profitable. The other two have been on literally no more than 30 days or so, are both looking like they will be profitable pretty quick, and we think we are just learning how to sell those. We are learning how to promote them. I think we have a huge future ahead of those, voicing (ph) those.

One thing we realized in some of these states where we have really, really dominant Big 3 franchises in these battleground states, we are going to have some extra minutes in these UPNs and Foxes hoping to sell some political ads. We were going to plan to repurpose our news in virtually all these markets at a different time, so we can go out to these counties and say, hey, we still have our news on the UPN and Fox, and we think we can pick up some more Political that we've had to pass by in the past, because we just didn't have any more minutes available.

The Internet we continue to feel is very strong. Our video streaming is doing great we just signed a deal to renew it for three years, because we are so happy with it. Our phone initiative is just starting, we will have a local cellphone where you can go on our – local cell phone in all our markets and pick up our website, so far the ad sales on that are way ahead of what we projected.

So I think this is an area that's going to continue to be very important to us, because I keep telling our managers every day, we have to be the #1 source for news in all these towns we're in, not just local TV news, we want to be on the Internet, we want to be on the cellphone, we wherever they want to get it we want to have it available to them, and it's going to continue to be, Internet is going to continue to grow, it looks like it's high-double digits, or in 20% plus, and we want to get our share of that plus zone. And we plan to, so.

And the amount of dollars you think that you would actually, if you could separate incrementally, the Internet gave us x-amount of dollars this year?

Bishop --

Bishop, I think we have 2 million plus something last year of revenue, our budget this year is for close to 7 million. I think we will get pretty close to budget, based on what I've seen.

Okay. Thanks, Bob, thank you, Jim.

Thanks, Bishop.

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

Good afternoon. A couple of things. First of all on the National side of the slate, could you talk about what categories you do see improving, and do you really believe that this is an improvement in the National business, or just a recognition that so much of it was crowded out from last year?

Secondly, can you talk a little bit about the retransmission consent? Obviously Sinclair on its call last week said their run rate was about 25 million which I think caught people's attention. Just wondered what inroads you are making there.

And then Jim on the UPN expenses for the year, for the six new stations, can you give us a sense of the scale in terms of money, the investment there? And then also the impact specifically on third quarter. Thanks.

Victor, would you explain, I'm not sure I understood what you meant by Sinclair had a 25 million run rate.

They were talking about a run rate of $25 million in retransmission consent payments last week on their call. I was wondering how you see the potential for retransmission consent payments?

I still haven't been very optimistic on that. And I'd be curious to know exactly what that means. I can tell you we are bargaining hard to try to get extra channels and get other things. We are trying to get paid for our HD signal in some markets but at the end of the day, Victor, you and I have talked about this before, we are a business and we are also a community service. And I just don't think we can be in a position to be taking our product off the air where the only goal at the end of the day is to get more money. I think we have to be very careful with our position in these towns, where people feel like our station is part of the fabric of the town, and I don't want anybody to ever say that we put something like that ahead of a long-term view of serving the community.

But we have all our managers working pretty hard on it. they know pretty much how we feel about how we want to negotiate. I don't see us getting any cash payments anywhere, but I'm not going to say never. But if we do, fine. But we are not budgeting that into any of our growth numbers going forward in this next three-year period.

I will let Jim answer the second part about. Oh, the other thing the National, Vic, I will tell you this, all our managers pretty much across the board feel like National feels better just based on their dealings with the agencies and everything in October, November. December, still a little unsure but as I mentioned both of our major rep firms have said across the board, their National business is looking roughly they think probably up 10% for the fourth quarter, is what I've been told.

Okay.

Without Political. Jim, you want to answer the other part of it?

Yes, dial (ph) went up a little bit on the category, Victor. We don't specifically break our categories down between Local and National, but as I said on a nine-month basis, Auto was still up about 3%. Restaurants are up 8%. Furniture and electronics, up about 4. And Entertainment, Financial Service businesses, both of those are up lower single digits as well.

I think as we commented last time we are seeing year-over-year softness in telecommunications, primarily as a result of mergers, and some softness in what we call Medical/Dental, basically Healthcare, which would be primarily local hospitals or hospital groups, and we have continually said for a long time that the discount department store category had been soft, and we are not really seeing a change in that.

Specifically to the UPN expenses, for the full year of '05 -- now, some of these would be in for a full 12 months in '05. Some of them as Bob said, two of them have literally just started. But we have about a full year basis of operating expense, about 1.8 million of expense running through '05. And probably about fourth quarter alone, between 550,000 and 600,000 for the quarter.

I need, if you give me a second I can give you a third quarter. As Bob said these are, except for the two that have literally just started out of the box, you need a couple of months to get -- build up, the ones that have been on the air for a while are profitable, and obviously we expect even more growth out of them next year.

Thanks.

Thanks, Victor.

Your next question comes from [Aaron Watts]. Please go ahead.

Good afternoon, guys.

Hello.

A couple of quick questions for you. One, I know you had said you plan on using a majority of your free cash flow to reduce your debt load. And in the prior quarter you had bought back a lot of your bonds. Is that something next year as you roll into your call date on those bonds at the end of the year that you are potentially still looking to do, in addition to paying down just your revolver?

I will be very truthful with you. That was a little bit of luck -- for some -- I will tell you what happened when General Motors hit the wall last year, a lot of bond people panicked. And we have never seen any of our bonds and all of a sudden we got calls for a period of about two or three weeks there where people were just dumping bonds, and we took advantage of it.

I would say our goal probably this coming year since our call date is December of next year, most likely we will plan to just pay down our bank debt, either our revolver or our term loan A, or whatever. We will probably plan to pay down bank debt most of next year and then decide, we obviously plan the to call the bonds in December, most likely, but we are going to keep a close eye on these rates.

And we get a lot of investment bankers telling us we ought to go now, but we haven't been compelled, we thought to do that, yet because it's still a fairly long pay back of the premium. We probably have to pay 108, 109 (multiple speakers) right now, and so we are going to keep a close eye on it, but most likely we will just be paying down revolver and term loan debts.

That's helpful. Second question, I was just curious, in regards to ABC selling their shows, sort of the day after on a show by show basis to people for portable viewing, curious to your thought on that?

I think it's going to be good for us. I think they ought to share some of it with us, but I think it's going to be good for the business. Some of these shows like 'Desperate Housewives' and 'Lost,' that have a real buzz about them, I don't think it hurts for people to be walking around their home or office or in their car, wherever they are, pointing out to friends hey 'Look at this,' because it builds up more interest in watching the show when it's on the air the next week.

We can't hold back technology. Technology is a genie that is out of the bottle, and it's not going to go back in the bottle, it's going to get more and more sophisticated, more and more portable, more and more wireless. We are a content provider, and at the end of the day we have to make sure our content is what people want to view, no matter how they want to get it.

And it's very important for all our managers and everybody in our Company to realize that we can't think like it was 30 years ago, when there were basically three networks and everything was on at the exact same time, and the reruns came on in the summer. Those days are long gone, and will never be back.

So we have to adapt and make sure that we take advantage, that's one reason we are doing a lot of video streaming on our websites. We are repurposing our news on our UPN stations, all things that probably ten years ago people would have said you would have been crazy to do, but I think that's what you are going to see more of in the future, and I think we have to be ready for it.

I know it's early but obviously discussions with the different networks is going to be something that is on your plate here, in terms what your piece of that pie will be?

Oh, sure. The ABC Affiliates Board has already raised their hand and said, wait a minute, what do we get out of this, and we are -- clearly all these affiliate boards are at a disadvantage, and it's not an even boxing match when you go up against these networks, but by the same token they all realize that, I use the old quote, the only thing worse than having an affiliate is not having one, and also the only thing worse than having a network, is not having one.

I think both sides feel that way. It's a marriage of convenience. It's worked great for a long time, I think it will continue to work good, but at the end of the day the networks are going to take care of their goals first, and then hopefully we can convince them that it is smart to drag us along.

Jim Goss, please go ahead.

Okay. A couple of things. How are you doing?

I'm doing great.

Great. When you look at the UPN affiliates and the Fox ones to that extent, especially with the UPN, the network programming is very little. I know you talked about repurposing the news. Is that going to account for the bulk of the additional programming, or how exactly are you programming (multiple speakers) those affiliates?

Jim, either we are buying second-run type syndication stuff. We are doing a lot of barter. We are looking at late night and possibly doing some shopping channel-type stuff. We are working with a lot of shopping channels from midnight to 4:00 in the morning or something. There are two areas that we think we can bring a lot to the table with these UPNs.

One is in our news which we planned to do that in most of our markets, repurpose it in a different timeframe, and the other is in these collegiate towns we are in is putting more college sports on in a lot of these towns where they have really fanatic sports followings. Give you an example, this is probably a bad example this year, because Tennessee is having a rough year, but they have a huge fan base up there.

One of the things that we are looking at doing next year would be to have a pregame show on our UPN for say 30 minutes or an hour, tell people right at the end of the show, go to CBS or ESPN wherever the game is on, to watch the game, and then come back to our UPN after the show to do a follow up local, where everything is local, you are talking to players, you are talking to coaches, and you bring that local flavor back to it.

Also we think there's some opportunities in some of these markets, where we got strong collegiate, to do some sports that you ordinarily couldn't see on CBS, or NBC or ABC, for example, you could do some women's basketball games. Obviously in Tennessee that would be huge.

You could you could do some college baseball, or even some -- if they have a real good soccer team, volleyball, whatever, if a school has a real good following, and that also ties you closer to the schools. The school appreciates that because they call all these sports Olympic sports, and all these athletic directors have pressure on them to upgrade these Olympic sports. So anything we can do to help, just puts us in good light with these athletic departments of these universities we deal with.

How do the payments work? Are the schools willing to pay you to get some of the programs on the air?

It depends on what it is. A lot of times they are just happy to have it on the air. Sometimes, there's a rights agreement with a rights holder. We have to bargain with them. But here again a lot of these towns, they are just glad to have the particular show on the air. Sometimes we work out a revenue sharing with them if there's not a specific rights agreement.

And then these shows that we are doing ourselves, we are totally responsible for those 100% ourselves, these pregame post-game shows. And there again I think that can be a huge growth area if we do it right because we are in some great -- you know, we are in Knoxville, we are in Tallahassee with Florida State, we're in Lansing with Michigan State, we are in Madison, with Wisconsin, we're in Lincoln with Nebraska, we are in Texas A&M, Bryan-College Station Texas A&M, we got some fanatic followings out there in some of these schools that I think there's an audience for, we just have to make sure we get our piece of it.

You are in a lot of capital cities, too. (multiple speakers) Is there a lot of opportunity for Political?

We are in 7 state capitals right now, 8 once we get the Charleston Huntington deal done.

Is there a lot of Political involved with the (multiple speakers) --?

One thing we are doing there, we are looking at doing more capital news where we can spend more time, for example, in Wisconsin where we are in Madison and we got three other stations in that area, we plan to do more coverage where we would do more capital news, more Legislature, Governor, stuff like that we could run on these UPNs where we have them that here again, we think is something that you ordinarily couldn't do particularly in -- on a Big 3 network, because you just can't preempt them.

Another thing we are doing is out in Waco on our UPN, we are going plan to once we get it on the air do more coverage of Bush when he comes to Crawford to visit, do more interviews, things like that, probably on the UPN station. We are learning.

We are taking baby steps and learning every day, what we can do and what makes sense and what works, and I just think there's a huge growth opportunity for us over the next few years. And once in 2009 we go full digital, we are going to have 22 duopolies out there basically, that have been up and running for three or four years.

Do either of these avenues give you the ability to create content that could be syndicated around the state?

I think so, one of the things we are looking at is a possibility, either on our main stations, UPN, or either on the Internet, we have a couple of local shows that we think we could, we have a real good cooking show with couple of markets we think probably we could package up, and do as a five-minute type segment on our big shows or even possibly a 30-minute on a UPN, and also video streaming on our Internet sites we are looking at. So there's some things like that that we are looking into that might make sense.

But the interesting thing we are in a lot of different markets, Madison, Wisconsin, is about as different from Waco as you can get. And you have Charlottesville, Virginia, which is about as different from Reno, Nevada, as you can get. We have a wide range of audiences out there, so it's not always easy to find something that fits everybody, but we are definitely looking in that area.

Lastly as you approach the spin-off of the publishing group, is there any way to capture what you expect the value of that holding to be, since it will be in a separate stock, carved out from the original?

As I mentioned I can't discuss any details other than to say that the Gray shareholders are going to get 95% of the stock of the new company, and hopefully I just, we think it's got good prospects. But I really have been told by the lawyers when you are in registration you have to be very careful about what you say about companies' prospects, but we feel very good about it.

Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] You have a follow-up question from Bishop Cheen.

Robert, I do have a question, and I also want to say congratulations on the recognition by Forbes Magazine.

Thank you very much. We were proud of that. We were kind of surprised it showed up in the mail, and I guess those are the best kind of surprises to get. You don't get many good ones very often, Victor. But, thank you, Bishop, that was a nice one.

I just lost track with the iterations, do we have a final new credit facility, or are you still in market on that?

I will let Jim answer that.

Bishop, we are still technically in market. It's gone very well as I understand it. We will be proceeding to, over the course of the next relative few days finalize the documentation. And proceed to bring it down and close it up. So it's proceeding at pace, and again we've been very pleased with the support that the market has given, and we will be wrapping that up relatively quickly and closing it.

Well, let me ask it this way. On October 6, Moody's assigns ratings to the facilities as they understood it. Do you think the structure is going to be similar to Moody's, I guess, publicly available review of your credit facility from a month ago?

The basic structure, yes, based on what they ultimately issued their ratings indication, we haven't changed any significant aspects of the basic structure. It's a straightforward senior credit facility.

Okay.

Thanks, Bishop.

Thank you.

There are no further questions at this time.

All right. Operator, listen, I want to thank everybody for joining us today. I always like to say that I try to be an optimist day-in and day-out, and I have got an interesting quote from the Chairman of the American Disaster Preparedness Foundation from last week. It says, Avian Flu, global warning, real estate bubble, world oil supply, after all the headlines, we are getting close to mass hysteria, over theoretical doom, while we are becoming so inured to apocalyptic warnings, that we are turning a deaf ear to them. If we keep ringing the alarm bell like Chicken Little did, when she turned an acorn into a national crisis, when it comes time for a real emergency, people may not pay much attention.

I think that is food for thought for all of us. I think you can add Tivo and the demise of broadcast TV in that list. I feel very good about our prospects for the balance of the year and very, very good about next year. One of the things Jim didn't mention. We had no Super Bowl next year. It was on Fox. Next year it's on ABC, so our ABC stations will have that. And we have the Winter Olympics, which the NBC people feel like is going to be a real good event for them.

We will have that, and like I said we think we are going to have a tremendous political year because of all the buzz going on out there about how close some of these political races could be, and as I mentioned we are in eight of the 15 designated battleground states, so we feel very, very good about our prospects for next year.

Thanks everybody for your support. I always end up by saying, Jim and I are easy to find. Call us any time, and we look forward to talking to you at the end of the year. Thank you everybody.

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