Gray Media Inc (GTN.A) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Gray Television fourth-quarter 2005 earnings release. Just a reminder -- today's conference is being recorded.

At this time, I would like to turn the conference over to the President of Gray Television, Mr. Bob Prather.

Thanks very much, operator. Welcome, everybody, to our year-end 2005 conference call and first-quarter 2006. You know, we reported our earnings this morning for the year end. We are off and running. I think we're going to have a real good year this year.

2005 was an interesting year. I think we started off kind of good news and bad news. The good news was we had the most political dollars, as a percentage of revenue in 2004, of any TV group in the country. So that just means we had a higher hill to climb in 2005, and I think we did a very good job climbing it. I think we wound up right at the top of our industry, as far as our performance goes.

And we also got a lot of good things done during the year. We made two excellent acquisitions with our station in Huntington and Charleston, West Virginia, which actually is our number-one performing station in our group now, dominant NBC station in that market. And we think it also is the number-one political station in the country, as far as number of spots in 2004, and actually covers three states -- West Virginia, Kentucky and Ohio. So we look for continued good things. We have got a great management team there, and we are very, very happy with that acquisition.

We also closed just recently on our station in South Bend, the NBC there, WNDU, that had been owned by Notre Dame University. Here again, strong number-one station, great tradition there. We think there's a lot of upside. We've got a new general manager there. The general manager retired right before we closed the deal. We actually moved our general sales manager from our Huntington station. So we feel very good about the station in South Bend. And here again, we think there's real good growth prospects for that in the years ahead.

During last year, we had an initiative to -- we got 11 UPN's and one Fox Digital on the air. We've got for more Fox Digital's coming this year in the near future, probably a couple in April and a couple later in the year. The CW thing came along as a surprise to everybody. We are in current negotiations with CBS and the Time Warner people on the CW in a good many of our markets. We probably won't get it in all the markets we had UPN's, but we are also talking to the Fox My Network, which has a very good economic model to it.

We know how to run these stations, we know how to make a profit out of them, and we think we will wind up -- here again, we would eventually like to have 16 CW or My Network stations and five Fox Digital stations. As I said, we have been very fortunate to have a game plan that we have been cash flow positive in all these markets in two or three months, usually, at the most. So I think that's going to continue to be a great use of our digital spectrum. And when February of 2009 comes around, we will have had digital second stations on the air for three years, which we think will bode very well for us going forward from there.

Also during the year, we had an initiative to get our websites on local cellphones. We're up and running in most of our markets. We will be up in the next few months with all of our markets. We have been very, very successful selling advertising on the cellphones, better than we even thought it was going to be. Here again, we think that's going to be a good initiative for the future.

We have been actively trying to finish up our full-power digital conversion. We had several stations, mainly in the [Benedict Group], that were on low power that we have had to upgrade the digital for full power, which we are finishing up right now and will be finished by the deadline in June. And also, we have upgraded some of our stations that we went with the UPN and Fox to an automated and digital environment there. So here again, we think we are getting ready for the future and getting ready for going full digital.

I, by the way, think going full digital in 2009 is just going to bring a totally new outlook to the television industry. I think we're going to have a new product. 90% of America still hasn't seen HDTV on a regular basis. It's going to be a new product for advertisers. I think advertisers' products are going to look a lot better in HD, and I think we're going to have three or four channels on a multi-cast basis that it's incumbent upon us to figure out how to make money on it, and I think we can. I think we will do real well at that.

As I mentioned, I think our operating results are right at the very top of the industry again. As far as the outlook for this year, I will let Jim go into more detail. But local looks like it's going to be just fine. Here again, national is pretty much spotty and all over the board, it seems to be. Our markets in the Southeast and the Southwest seem to be started off slow this year, our markets in the Midwest doing extremely well. So I guess that's the good advantage of being geographically diverse, because it seems to be national, especially, kind of bounces around from area to area and from year to year.

But we're looking forward to a real good year this year. And I think we're going to spend a lot of time working on these digital initiatives. We're going to spend a good bit of time working on looking at some ways to do some other hubbing in some areas that we think can be very profitable for us. We're going to continue to watch our expenses very closely. We have asked for a zero budget -- zero expense increase on our existing stations.

One thing you need to remember when you're looking at the way we do things -- we normally give raises as of January 1 in all our markets, but our managers budget so that by the end of the year, the overall expenses will be a zero increase from the year before, other than new initiatives like the CW or the Fox type things, and things like that. So we think we're going to continue to watch the bottom line and continue to have the best-performing TV group out there.

Also, I guess all of you know by now that we finished our spinoff at the end of the year of our newspapers and our paging, so we are a pure-play television group now; that's the only business we are in. And we like the business, and we want to stay in it. So I'm looking forward to having a great year, both political -- our Olympics were better than we thought they were going to be. Our Winter Olympics turned out very strong, especially in our northern markets, stronger than we had anticipated. So we are very happy with that.

And at this point, I'll turn it over to Jim Ryan, our Chief Financial Officer, and let Jim go into more detail in the numbers, and then we will answer questions.

Thanks, Bob. Good afternoon, everybody. First, as Bob said, the spinoff was completed at the end of the year of publishing and wireless. Those historic operations are all now reported as a discontinued operation in the earnings release and in our P&L. So that will explain that line for you.

Also, as part of the spinoff, we adjusted the conversion price of our preferred stock. That triggered a non-cash constructive dividend, which we have labeled in the release table as a deemed dividend on preferred stock. That's a one-time-only event, and it's a non-cash event.

Briefly, on the fourth quarter, as Bob said, first of all, the political created a high hurdle, high hill to climb, year over year. But also, we're looking forward to being on the high side of that hill in 2006. We're very pleased, though, at the local growth during the year and especially the core station local, meaning after you strip back the acquisitions and the startups of the CW's or the Fox's or any of the other digital second channels we have been working on. Same-station local grew about 10% in the quarter. Same-station national was up 5%. Now, certainly, there's the effect of the lack of political year over year and more inventory to sell to basic local and national customers. But we were very pleased with the core growth rates.

As Bob mentioned as well, we have been working hard on the expenses. The fourth quarter as a whole was down 4%, same stations were down 7%. And again, that's a cyclical impact of rep commission, sales commissions and incentive comp on what was a record-shattering year in '04, compared to the off year in '05.

Talking briefly about the full year, again, similar patterns. Obviously, political is the huge story in the year-over-year revenue comparison. But we're also pleased with, again, the local growth overall of 9%. But when we look on a same-station basis, that growth was a very healthy 6%. National ended up being flat overall and down slightly on a same-station basis, about 2% down. We had been doing better during the first part of '05, but as many of our peers had been reporting, as the year had gone along, national softened up a little bit.

For the year, our automotive was still in positive territory, up about 4%. We were pleased with that. In the fourth quarter, though, it was down slightly.

Also, on a full-year basis, we should point out that there was no -- in '05, no Olympic revenues as there were in '04, which accounted for about 3 million. And I'll talk a little bit more about Olympics in early '06.

I also should point out, as Bob mentioned before, we have been working hard on new initiatives. And among those, you have heard us talk about the last couple of years is the Internet growth we have had. We were pleased with the year-over-year growth we saw. Our Internet revenues were up to about 6.3 million compared to 2.4 in the prior year of '04. Our BCF on our Internet initiatives in '05 was approximately 4.4 million, which is about a 70% margin, and that compares to about 1.2 in '04. So we have been very pleased with that growth rate in '05, and we are challenging all of our managers in '06 to grow significantly over the '05 levels.

A quick comment on pacing in the early part of '06 first quarter. We're generally pleased, especially on the local side; our local is up about 7% year over year for the quarter. National is a little bit soft, as Bob mentioned; South and Southwest stations seem to be off to a little bit slower start in the Midsouth, the Midwest and the Upper Midwest. We had a very, very strong February. Our net Olympic revenue in February '06 ended up being 3.5 million, which was above our expectations and we were very, very pleased.

Commenting very quickly on balance sheet items, total debt at the end of the year was 792 million, with cash on hand of 9.3. If you take our operating cash flow and pro forma it for a full-year impact of WSAZ, we would have had trailing operating cash flow of about 104.3 million, so leverage was about 7.5 times, which is about where we expected it. If we closed Notre Dame in March, if you were to pro forma for that $85 million transaction, leverage would be just barely over 8 times on a trailing December '05 pro forma cash flow number.

Our guidance for first quarter is in the earnings release. It's published -- we did it on an as-reported basis, but also tried to do it on a pro forma basis to show you what first quarter 2006 including a full-quarter effect of Notre Dame would look like, compared to '05 with full-quarter effects of both WSAZ and Notre Dame.

We are comfortable with the way the year has started out. Our political is not large for first quarter, but we are slightly ahead of target, and we take that is an encouraging sign. We expect a very, very strong political year this year in '06. Obviously, though, that will be heavily back-weighted to the late third quarter and fourth quarter.

At this point, Bob, I'll turn it back to you.

Thanks, Jim. One other thing I want to mention, before we throw it out to questions, is to give you an example. On the cellphone initiative, which I mentioned earlier, we just started that two or three months ago. We don't even have all the stations up with the cellphone websites available yet. But in the month of January, we had over 50,000 cellphone visits in the month of January. And on our Internet sites, we are averaging over 16 million page views a month right now on our website.

So I've told all our managers I think it's extremely important that we basically -- as the mantra is today, we give our news content and our information to people when, where and how they want it. And I think we've got to embrace technology and we've got to say, okay, we're content providers. We are going to give you the best news, the best weather, the best sports, the best any kind of information in our local communities, and make sure that people look upon us -- in all ages and all categories of people, that they look upon us as the supplier of information in the towns we are in. I think we're doing an excellent job of that.

At this point, operator, I'd like to open it up for questions.

(OPERATOR INSTRUCTIONS). Aaron Watts, Deutsche Bank.

What was your outstanding revolver balance at the year end, I guess, built into that 792.5 total debt number?

I will look it up as we go along and get back to you. My recollection is that it's about 20.

And then also, while you're checking on that, sort of maybe where that stands today, after -- where it might stand with the close of the Notre Dame station?

It's down to zero, because we deliberately overdrew on a term loan fee, locking in the same pricing as our term loan fee. We thought it was a very attractive rate, and used the excess to virtually pay off the revolver, or very nearly so.

So the top of your structure, then, will be exclusively your term debt?

Primarily -- yes, for all intents and purposes.

And then, obviously, as you kind of highlight in your expectations for the year, it sounds like you are going to be generating some significant free cash flow with the boost from political later in the year. What is sort of your expectation for the use of that cash you are going to be generating? Obviously, your stock is probably not trading where I think you guys would want it to be. And maybe that's a focus. And then, on the other hand, your leverage is sort of at a peak level for you guys.

I think we are -- obviously, we have publicly stated that we plan to probably use around 90% of our free cash flow to pay down debt this year. And I would imagine most of the balance of it would go towards stock repurchases later in the year. Now, that will be our two primary focuses, and we should have in excess of $1 a share of free cash flows.

And just in terms of your digital stations, and I apologize if you covered this ground, but with the ones you had set up with the UPN's, how is that impacted by the change in the television landscape with CW, and in terms of rolling out new second stations, new digital second stations, in the future? Is that something you kind of carry forward under the new CW structure?

Well, yes and no. I think we have got an advantage in most of our markets in maintaining the CW, if we want it, which I think in most cases we do. I will tell you there's a couple of markets where there was a full-power WB on the air, and I would say that chances are we're not going to get those markets. So the CW is kind of a marriage of convenience between Time Warner and CBS, and they are having to kind of please both constituents. So it's a little bit difficult dealing with them from that standpoint.

But we feel very confident. Like I said, we had 11 on the air. We think we are going to get at least eight of those, probably, with the CW. And then the balance we have got to look at on whether we want to go to the CW or the My Network. And as I said, we like the My Network economic model very much. So we will be looking hard at which direction we want to go in those markets. But I feel confident that in all the markets where we plan to have a second channel, we will have either a CW or a My Network.

Also, the Fox Digital obviously haven't been impacted by this at all, and we will have five Fox Digital stations on the air year. Like I said, we've got one now; one is going on literally in the first week of April, and then one in the latter part of April and then the other two later in the year. So we are full speed ahead on the Fox. And we think, in the markets they are going in, we're going to really do well, because they are ideal markets for NASCAR and for football and for a lot of programming that Fox has.

I was just curious on your thoughts in terms of if this shift in the affiliation landscape has any impact that you can detect thus far on sort of values for TV stations -- and not just for you, but across the industry, sort of what you are feeling in the market, or what you believe the impact could be of this change in the underlying value of your assets.

Are you talking about the CW?

Yes, with the shifting of affiliation.

Ideally, the CW is going to be a stronger network than either the UPN or the WB was. So hopefully, in that case, it ought to be better for us. We've got a proven track record; as I said, I think if you asked anybody at UPN, they would tell you that we've done a better job than any group out there of putting these digital stations on the era, of promoting them properly, getting them cash flow positive very quickly, which is good for us and good for everybody.

And so I think we will be able to do the same thing with the CW in the markets where we want it, and I think the My Network -- like I said, the economic model there is very favorable, and Fox has proven time and time again that they know how to create networks and how to make them work. And I certainly wouldn't want to bet against them.

A quick clarification -- the revolver balance at December 31st was 33 million, and that's down substantially already this first quarter. And I wouldn't expect very much, if any, drawn by the end of the quarter.

(OPERATOR INSTRUCTIONS). Bishop Cheen, Wachovia Securities.

Let me just billboard some things that I could get your color on. Retrans revenue -- how much, when and what is going to be your GAAP treatment of it, [be it cash adds]? Your comfort zone with leverage, once you get past these nice political upcycle year, plus all other things you have going on?

CapEx -- you guys are really enhancing your platform, and I'm lost on where your CapEx is, and whether it's going to be the two different book GAAP versus cash schedules.

And the last is, the 3.5 of Olympic revenue back in '04, was that net or gross?

On the retrans, we asked our managers to look hard at what value they were getting out of retrans, and value in all the various advertising commitments, the fiber commitments, extra channel commitments. And it's considerably in excess of $6 million a year. We don't really report that as a separate income item. We're getting a little cash in a couple places, small operators.

But I have taken the position from day one, and I will stand here and take it again, that I just don't think there's a whole lot of cash being paid by the big operators out there, if any. When you go to Comcast, Charter, Cox -- those guys just are not paying any cash to anybody, I don't think. And I don't think they will until the big four networks put their foot down once and for all and make them pay. And when that happens, I think all of us in the industry will have more bargaining power. I say more power to Perry Sook and his stance, and I'm glad he did it and I think it will be helpful to the industry in the long run.

But we have got very strong stations with very strong local franchises, and we feel it's important for us to maintain that connection with the viewer. And as I said, I think we're getting considerable value for our signal, but in actual cash dollars, very little.

I'll let Jim answer your other question.

It sounds like you're old-fashioned, Robert. You think that there ought to be a little cash in cash flow. What can I tell you? All right, that's helpful.

And then, your leverage right now is, depending on how you want to pro forma things, getting there at 8 times or so. And where would you like to see it, apples-to-apples, this time next year?

I think we will be in the mid 5's or a little [over] that by the end of the year, just based on all our projections. We would like to, ideally, keep it -- when we're not doing any acquisitions, which I don't see us doing anything in the near future, because we are digesting what we've got, and we're happy with what we've got, and we are particular with what we buy. So we don't see a whole lot on the horizon that jumps out at us as a deal that makes a lot of sense. And with our leverage, we just -- and we wouldn't want to do any deals right now to add to our leverage. But I think we can easily be back in the 4's in 2008, and I think ideally in the mid 4's to low 5's we're very comfortable with, based on our history of being very consistent cash flow over many, many years and also being very consistent about our budgeting process. We usually hit pretty close to what our budgets are, year in and year out. So if our budgets show that our cash flow is not going to be growing as good, we will figure out ways to cut expenses and do things to make sure we keep it in line.

And this, I am assuming, allows a reasonable cushion for you to support and enhance your stock --?

Oh, yes.

-- at the level that you think you will need to?

Yes, we will; I agree.

One other question you asked --

The Olympics?

(Multiple speakers) about the --

The Olympic, the 3.5 was a net number.

And then last is the CapEx. I didn't even see the CapEx listed for '05.

I don't have the number right in front of me. We spent a little more in '05 than we planned, for a couple of reasons. One, we had a chance to buy a new building down in Tallahassee, an existing facility. A Florida news channel went out of business, and we picked up a fantastic facility probably at 50% of its true market value. It was a fully-equipped TV facility for operating the Florida News Channel, which we basically got the equipment for nothing; it was probably $3 million worth of equipment in the facility.

But what we did was, and most of these UPN's and Fox's, digital operations, we went on the air, we wound up deciding to go ahead and spend more money in those places to go digital, automated. We found out just we're going to save money on labor in the long run by going to an automated digital system.

So we probably -- the basic cost of going to UPN or Fox is in the 250,000, 300,000 range for the equipment you actually need. We probably wound up spending 1 million plus in most of these locations, just to upgrade our master control and upgrade our facilities for more automated -- being able to operate two and three channels with a lot more automated equipment than we originally planned.

I think it was a smart thing to do, and I'm glad we did it, because one thing about the UPN's and the Fox's -- you've got a lot more syndicated programming and local programming that actually winds up taking more traffic time and more time than your CBS or your big four networks, because they have got so many today days already programmed for you.

So, can you give me a number?

Yes, we've got the number. I don't have it right in front of me.

I will loop back with you. Well, for Q1, in your guidance --

The number is in the K, and the K is due today, so we (multiple speakers) afternoon.

That's close enough for government work.

Total CapEx, all in, in '05 on the statement of cash flows is roughly 37 million, which, as Bob said, was higher than initially planned, for all the reasons he just mentioned. In '06, we are -- obviously, after a big year like that -- scaling it back. I'd say right now, 20 to 25, with 25 if political is strong and/or stronger than we currently expect, and we already expect a very strong political. Q1 I am figuring roughly 5, ballpark.

As far as your question on GAAP versus rolling cash, there was about -- as you know, we have some very good, favorable deals with several vendors now that allow us to defer our payments anywhere from six months to a year in transmission equipment. It was about 6.5 million or so locked up in payables under those types of arrangements at the end of the year, and that will, on a cash basis, roll through at various points this year, depending on which vendor it is and what our specific terms are. And I'm kind of guessing, but I would think there is probably -- by the time we get to the end of '06, there's probably a good chance there's about an equivalent number locked up in payables again, at the end of next year. So it kind of evens itself out as it rolls year to year.

Victor Miller, Bear Stearns.

Two questions, one on expense growth first quarter pro forma plus 6 to 7 corporate plus 25, 35, which is above the revenue and obviously above the 0% you would like to have for the full year, aside from special projects. Could you talk a little bit about that?

I will let Jim answer that, because he can answer it right quick. But I'll let Jim answer that.

Corporate, I think, is a fair amount of timing differences on some professional services year over year. We are, in general, going to be total budget for the year. Corporate line doesn't call, really, for any significant increase. So it's more timing of audit services and some SOX support, et cetera, that rolled into first quarter this year versus either first or second or equivalent quarters from '05.

And the core expense growth, 6 to 7?

Core expense on a core station, on a same station, is really only up about 4 in first quarter. And as Bob mentioned earlier, that's primarily driven on initial front-end load of payroll and benefit increases year over year. And I would expect that that is going to manage itself down to -- as Bob said, the goal is to be zero except for initiatives such as the digital second channels and/or -- obviously, there will be national sales rep commissions payable on the political. But that's a nice problem to have, if your political is a big number.

Could you tell us what the trailing multiples wind up being for Charleston and South Bend, and what kind of upside you see from there, in terms of shaving the purchase multiple one year out?

Well, I think, on the WSAZ, the Huntington -- Jim, the trailing, what, is 12-something? And the South Bend is probably about the same. I'll tell you, on South Bend, we hope to double the cash flow there within two years. I think we'll be able to. Huntington is very well-managed, as you know, very high margins. It's going to continue to grow, just because we've got a good management team there that knows how to grow a TV property. And political ought to be real strong for them, this year with Ohio and West Virginia both having some pretty good races. But South Bend is where we think we have got the huge upside because of, ideally, both revenue growth and expense, watching the bottom line on the expense side.

Do you think Charleston in '05 did 15 million in cash flow?

'05? Jim, do you remember the number?

Because in my numbers (multiple speakers).

(Multiple speakers) it would have been --

10 million or 11 million for last year?

In '05, it would have been around 12-ish.

And so, I see -- when you say 12, you're saying that's more like this year? Or you're thinking --

Yes, I was (indiscernible). We'll be -- they are going to have it budgeted for a very strong year this year.

Also, to put West Virginia in context, it did a high-teens cash flow number in '04. So it's a very strong political station.

(OPERATOR INSTRUCTIONS). Harvey Sandler, Sandler Capital Management.

My question has to do with core stations, how political would be from '04 to what you think '06 will be, and how you think cash flow would relate in '04 versus '06?

I think, on a core station basis, our budgets are for a little lower political. But we always try to leave a little cushion on political, and I would say virtually every year, we underbudget political, year in and year out. But they will be a little bit under on a same-station basis for our core stations, not counting Huntington and South Bend, which in turn would make our -- if you take those stations and compare them to '04, based on our budgets, would be a little lower than '04. But here again, like I said, we try to be very conservative on projecting political. If you add in the Huntington and South Bend, we will be considerably over, obviously. But the core stations we are budgeting a little bit under '04. But here again, like I say, I'm very confident that we will beat that budget.

And cash flow?

Cash flow, I think we will beat the budget also, based on the political being where we think it will actually be.

Your budget will beat '04?

I think so, yes. One thing that we try to do, we spend a lot of time -- and frankly, Victor Miller does a very good job every year on the political races of trying to project. And also, Katz, our national rep firm, does a good job. We spend a fair amount of time trying to project where these dollars are going to be, and where they're going to be spent. Invariably, you have areas where there's a lot more spending than we projected. Some areas you have somewhat less.

But, year in and year out, our political continues to grow. And I don't see any reason it's not going to grow this year. I think the Democrats really think they have got a chance to take over either the House or the Senate or both. And so I think you're going to see a lot more money spent on House races, probably, than you have in the past. And there's some fair number of hot races out there that, in areas where there hadn't been in the past -- in Texas, for example. In Georgia, we are going to have some very strong House and Governor race. Tennessee has got a very strong Senate race, which they haven't had in several years. South Carolina has got a strong race. Alabama has got a very strong Governor's race; they haven't had any strong races in several years.

So we think -- there's 15 battleground states identified. None of those are accounted in the ones I just mentioned, and we're in eight of them. So we feel very good about Michigan, Wisconsin, Ohio, West Virginia, Florida, Nevada, Colorado. We think there's going to be very, very strong political in all those states.

Gentlemen, there are no further questions at this time. I'd like to turn the conference back over to you for any additional or concluding remarks.

I want to thank everybody for joining the call today. I think our industry is in some interesting times right now, because of the perception on Wall Street that we are old media, and old media somehow is not going to survive. I will promise you I think the future is very bright for us and for the TV industry in general. I do think, as I mentioned earlier, we have got to embrace this new technology and make sure we are part of it. And we certainly plan to do that, and we are looking forward to a very strong year this year.

And like I always say, Jim and I are easy to find and easy to talk to. So don't hesitate to call us personally if you have got any other questions or comments. I want to thank everybody, and I look forward to talking to you again on the first-quarter conference call. Thank you, everybody.

Once again, that does conclude today's conference. I would like to thank everyone for joining us. Have a good day.