Gray Media Inc (GTN.A) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Gray Television earnings release. Today’s call is being recorded.

I will now turn the conference over to the President of Gray Television, Mr. Bob Prather. Please go ahead, sir.

Thanks very much. Welcome, everybody, to our first quarter conference call. As you’ve seen from our earnings release from earlier today, our first quarter was right within our guidance as we talked about at the end of the year. I will talk a little bit about what I think is going on in the TV industry, and then we’ll let Jim Ryan go through some more detailed numbers.

There’s an old saying that you live in interesting times, and I think we’re living in interesting times in the TV business. I think there’s more change going on right now then anytime since color came along back in the 60’s. But I personally think we’re on the cusp of a new golden age of television. I think with full digital coming with all the new technological things going on, I think more and more people are going to be more and more interested in TV. And I think it’s up to us as broadcasters to make sure we give the content that we provide to people when, where and how they want it.

We’ve got a strong initiative going on with our website, that Jim will talk about, that’s been very successful. We’ve got a strong initiative of cell phones which has worked extremely well for us. And we’ve got, we think, the strongest initiative of any group with our digital channels, we are currently right now tried to have fourteen new My Network affiliates with Bart’s (ph) Television, seven CW affiliates with the CW Network, and five Digital Fox affiliates which will put us, we think, to be the number one group in the country for digital channels. This is a way for us to monetize part of our digital spectrum, and we think this is going to be the wave of the future. And we think, based on our past history on operating these channels, we know how to operate them and how to make a profit. And we’re very excited about getting started on these new networks which will get going in September.

Frankly, the UPN announcement probably slowed us down a little bit. We had about fourteen UPNs in the pipeline. We had eleven on the air. Obviously that’s changed somewhat, and we did not get some of the CW channels in some of the markets mainly because of the price they went for. They just went for - - I think we created our own monster up there. A lot of people realize that there’s a real value to these digital channels and being pretty heavily in some in the markets we’re in where we have created a very successful UPN channel. But that’s just the way the business world works, and we’re very happy with the My Network. We actually the economic model of the My Network could be stronger for us in the long run, especially in some of our smaller markets. So we’re extremely happy with working with My Network and the CW and Fox Digital. So I think this our initiative.

In every market, we’ve gotten a majority of the cable operators to give us a second channel to operate these digital channels on. So we think this is a real growth opportunity for us in the future, along with our Internet and our cell phone initiatives. The basic business, our local continues to get stronger which you know is our bread and butter. It’s actually up 73% of our revenue right now. National is still pretty spotty and flat overall. It’s up in some areas and down in some areas. I think national is still going through a real - - on the national level, when I say national, the big ad agencies and the big advertisers are still feeling their way around the new digital landscape and deciding where they want to put money. I think this is going to continue probably the rest of this year. But every day, I read where a lot of these things that they’re trying aren’t necessarily working. So I think TV is a proven commodity, and I think a lot of these people after trying a lot of new things will come back to TV. Although I do think the Internet is going to continue to grow and continue to be a more important part of the advertising landscape in the future.

But we think we’ll have a great year. Political, we think, is going to be very strong. It started out where we’re a little bit ahead of our budget. It’s not going to come as fast as the presidential political did because they got started so early in a lot of the states. But based on everything we’re reading about some of the tough races, the Democrats think they’ve got a chance to retake one or both houses of Congress. They’ve raised a lot of money. There are a lot of tight races out there, and we think we’re going to be beneficiary. There are fifteen battleground states identified. We are in eight of them. Plus there are several states that aren’t considered battleground which we think are going to have big races. Georgia being one, where we’re located, South Carolina, Tennessee and Texas all should have big races this year that normally in the past have not really had big political spending. So we are looking forward to being in a real good position in all of those states.

But we think, overall, we’re going to have a real good year. We’d like to say we’re right on track for the first quarter, and we think that our locals are going to continue stay strong. And we think national will be coming back as the year goes on.

As this point, I’d like to turn it over to our Chief Financial Officer, Jim Ryan, and let him go through some more detailed numbers and then we’ll up it up for questions. Jim.

Thanks, Bob. Good morning, everybody. I’m going to focus really most of my comments on the pro forma comparisons because I think that’s most meaningful. And, obviously, the pro forma gets us back to the WSAZ acquisition as well as the WNDU acquisition.

As you know, we closed WNDU in the first of March and we’re very pleased with that. Overall, on a pro forma basis, our revenues were up 6%. Local was up a healthy 9% on a pro forma basis. It’s certainly reflecting in parts the boost from our NBC stations from the Olympics. We ended up with about $3.4 million from our ten NBC stations in February. We’re very pleased with that. SAZ and NDU, combined, produced over $1.1 million of that overall $3.4 million Olympic revenue. So, again, we’re very pleased with how the Olympics came out.

As Bob mentioned, on the national side, it’s flat for the quarter. And it would be flat as well, not only in a pro forma basis, but if you go to a same-station basis and just look at the core stations, it’s flat as well. Local, on a core station basis, was up 7%. So, again, we were very pleased with the local growth overall.

As Bob mentioned, political was a little bit ahead of our budget expectations, but still relatively small at $1.8 million for the quarter. Obviously that will be a little bit bigger in the second quarter. But again, as Bob mentioned, we really think the very strong political season will be a very typical pattern, unlike the ’04 presidential year. And we think ’06 will be more towards historical norms with the heavy political season, post Labor Day.

Our operating expenses were up about 7%, but nearly $1 million of the incremental expense is really associated with our thoughts of our digital second channels that Bob has mentioned are what will now be CWs and My Networks. Base line increase for the quarter was more in the 4% to 5% range, and that was within our expectations.

Bob mentioned the Internet a little bit, and we’ve been very pleased with our progress there on the initiatives, both delivering content to cell phones and all the other initiatives that we’ve been launching over the last couple of years. While our Internet revenue is still relatively small, it’s growing very healthy. It’s up 30% quarter-over-quarter and the associated cash flows with that is up 37%. Cash flow from the Internet activities in the first quarter was about $1.1 million, and we’re hoping by the end of the year that will deliver about $7 million of overall cash flow for us on $9 million plus of revenue. So we’re off to a good start on those initiatives this year and appreciate the positive trends we’re seeing.

Talking about the balance sheet briefly for a minute. Total debt at the end of the quarter was $867 million. Immediately after closing, NDU was about $877 million, so we’ve already reduced debt late in the third quarter by $10 million. Trailing cash flow is $107.9 million. So with $7 million of cash on the balance sheet, a net leverage ratio at the end of the quarter on a trailing twelve month basis is just shy of eight times. It comes in about $797 million, and it’s right about where we expected for the end of Q1. And as we talked about in the last call, that will be coming down rapidly as the year progresses, not only from the increased cash flow as the year goes on, but also bringing down the overall debt level as well.

CapEx for the quarter was $7.5 million. We spent about $500,000 on DTV transmission related items. We spent another $600,000 on digital second channel initiatives, and we’ll be spending more on the digital second channel initiatives as the year progresses as we ramp up the additional CWs and My Networks.

We paid cash taxes of $250,00 in the quarter. We had 401(K) expenses of $433,000 which is a non-cash item. And our program payments and program amortization is essentially the same number at $3.3 million. We also took a - - adopted, like everybody else, FAS 123(R) which is the stock compensation accounting rules in the first quarter. We have a charge in the corporate line of about $200,000 for that accounting which was within our expectations. And we think that number will be about the same in each of the next three quarters as we go forward.

We’ve put out our guidance as part of the release. We obviously think - - we usually try to end up delivering a quarter towards the high side of the guidance. And we certainly hope the second quarter will continue the trend. The main growth in the guidance, again, will be in the local side. We think the growth rate there is pretty healthy. As Bob mentioned, national continues to be a little bit soft. But obviously the primary driver for this company are the locals. And the political revenue for second quarter, we’re expecting $3 million to $3.5 million. In April, we tracked at just ever so slightly ahead of expectations. So the political is coming about where we thought it has so far for the year. And, again, we expect most the political activity post Labor Day.

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

Thanks, Jim. Operator, I’d to go ahead and open up for calls at this point.

Yes, Mr. Prather. [OPERATOR INSTRUCTIONS]. We’ll go first to Victor Miller with Bear Stearns.

Bob and Jim, thanks for taking the questions.

Yes, Victor.

The first one, last year when we penciled it through, it looked your baseline expense growth was zero.

Right.

And that’s been your mantra. You’re talking about baseline at 4% to 5% in the first quarter. Is that more like what we’re going to see for the rest of the year? And then I have a follow-up.

No. Victor, if you remember, every year we start out pretty much the same way because we give raises and there are some inflation type of expenses that hit you at the first of the year. And we normally ratchet our budget so all the costs get ratcheted down over the year. This was almost the same pattern we had last year if you went back and looked. And we’re still on track for same-station to be zero expense, other than the digital channels. And we normally, like I said, and we’re right now tracking on our budget. We’re actually ahead a little bit of where our budget was for the first quarter. So we feel like we’re right on track on the expense line. And we think on the same-station basis, we’ll be right at near zero, other than the digital expenses for the year.

On a follow-up, one of the questions I asked Lind (ph) and as I talk to investors, one of the biggest concerns I have on the TV group in general is the amount of leverage. And so, even though you will grow your EBITDA, and even though you will pay down and it looks good and maybe you take out a turn or more this year, the political goes away next year and the leverage starts to go back up again next year. A lot of guys are saying do I want to take the risk on the auto retail categories, terrorism, interest rates, oil shock, to have a company that leveraged that high when I got a whole bunch of other investments I could potentially look at that are a lot riskier from the balance sheet perspective. So the real question is an eight times leverage even appropriate for local television broadcasting in general? What are you going to above and beyond just simply growing the cash flow and using your free cash flow? Do you expect that you’ll try to be more aggressive and maybe looking at some asset sales to reduce that leverage to a more appropriate level? Thanks.

Victor, I don’t see us doing any asset sales because we’re happy with all the stations we’ve got. As we mentioned last year, we do plan to use 90% plus of our free cash flow to pay down debt. As Jim mentioned, we’ve already paid down $10 million in the first quarter. We’re going to be very aggressive in managing and getting our debt down. We don’t like these levels of debt. And as you know, our history has been when we see a good acquisitions we like, we tended to increase our leverage. If you go back, we did it in ’96. We did it in ’98. We did it in 2002. We always reduced our leverage faster than people thought we would, and we plan to do that here again. We think we’ll be down to the mid 5’s by the end of this year. And then we’re going to be very aggressive on watching our costs and expenses in 2007 because, as you mentioned, there’s not going to be any political. But we’re going to be very watchful of making sure we get our balance sheet - - ideally, we’d like to be in the high 4’s or low 5’s most of the time. High 4’s ideally, and that’s what our goal is over the next couple of years.

But I appreciate your question. I think it is something that investors are looking at in the TV space right now. And with rates going up, it is something that has more of an impact. But it is one of our main goals to get our leverage down this year and next year.

Thank you.

Thanks, Victor

We’ll go next to Bishop Cheen with Wachovia Securities.

Hey, Bishop. How are you?

Good morning, Bob and Jim. Victor always asks the right question, so let me just do a follow-up on it. For two years, we’ve been asking the (unintelligible) variations of companies. Perhaps one way to get your stocks going better is less debt and more equity. And for two years, we’ve been ignored and foo-fooed and we’ve watched everyone say no, we’re going to be more aggressive than the other guy, buying our stock, issue a dividend, do this and do that; it was the hat trick of the week. And I am sensing someone of a sea change. I’m wondering if you are. We heard it on the Sinclair call, when all of a sudden they were talking about opportunistically buying in their debt rather than buying in their stock. Are you sensing any change out there among your equity investors or among your own strategy that it may be better to reduce your debt to enhance your equity as opposed to shrinking your equity base or issue dividends?

Well, as I mentioned, Bishop, that’s our goal. That’s our number one goal is to reduce our debt and that’s - - we’re putting our money where our mouth is, so to speak. If we’re buying stock, it will be small amounts. And we’re not planning any acquisitions at, and we’re going to watch our capital pretty tight this year and basically just spending on digital initiatives and things like that. I think it’s important that, if you go back and look at our history, we’ve leveraged up to find good deals. And that’s why we’ve got the best group of TV stations and SS in the country, I think. But we’ve also been very prudent in getting our debt paid down quicker than people expect us to, and we plan to do that again.

If you look back at the cycles in this industry, the Wall Street people, sometimes they’re pushing everybody that you need add more debt and more debt. And then the trends turn it the other way and you need to have less debt and less debt. We’ve tried to run our business on a prudent basis over the years and tried to be smart in making acquisitions and then smart in paying the debt down it the periods when we’re operating the things we’ve bought, and we plan to do that again here. But I think there’s an acknowledgement out there of people in our industry that we ought to get our debt down. I think there have been a fair number of acquisitions done in the last couple years, and there have been some good properties on the market and some not-so-good properties on the market. But they’ve probably all sold at higher prices than people thought they would. So as a result of that, people have added leverage. But it’s definitely top of mind for us and it’s something that we’re working on every day.

Well I can confirm, having known you for two decades, that probably you’ll confront it. And that you have often, through cycles, used your free cash flow to take down your debt.

Well, we’re going to do it again.

Okay. And then one quick follow-up, the political that you spoke about in Q2, I thought Jim said $3 million to $3.5 million. Is that net or gross?

That’s net, Bishop.

Okay.

Just as a general rule, whenever we’re on a call, we talk about revenues in net. And unless I specifically say gross, you can always assume it’s net. That’s a net number.

Thank you, gentlemen:

Thanks, Bishop.

We’ll go next to Larry Schumacher with Oppenheimer and Company.

Hi, Bob.

Hey, Larry.

A question. Is pro forma for the acquisitions made after ’04, what are the political revenues and cash flows or what were the political revenues and cash flows for ’04? And do you think ’06 political and cash flow will exceed ‘04’s? If that made sense.

No, I understand.

You got it? Thanks, guys.

Jim, do you want to take that one? Thanks, Larry.

On the quarter, again, we had about almost $1.8 million pro forma. If you go back to ’04, there was probably closer to $5.5 million of political. But as we commented before, I think the ’04 political year was fairly unique in that the president race started very early in the year and continued strong all year long. So the difference in political really doesn’t surprise us. The smaller amounts in ’06 are more indicative to what we think the historical spending patterns in a political year are.

As far as a total year picture on political and a total year expectations, in ’04, pro forma total year all in was $52 million, I believe. I may have been $53 million, but I think it was actually $52 million. And I’ll let Bob speak to what he thinks the ’06 political year is. As he said already, we think it’s going to be a very strong year for us.

Larry, our budget is not that high, but we always try to be conservative on budget in political. But just based on what we see, the amount of money being raised and the - - and I monitor it pretty closely on what’s going on in these races. We feel like it’s just going to be a huge political year and should be hopefully close to ’04. Now that - - sometimes races get hot in one area you don’t expect and cool off in an other area that you don’t expect. But if history follow its pattern, we’re on track to be close to or equal or even surpass 2004 political revenue.

Okay.

Alright. Thanks, Larry.

Thank you.

We’ll go next to Ed Ronco with South Bend Tribune.

Hi, thank you. What effect will the thirteen layoffs at WNDU have on the company’s second quarter performance?

Jim, do you want to try that?

Given the size of the overall company, from an overall perspective, it will not have a significant impact. We are sensitive to the actual station itself and have recently made some staffing decisions there. But we have tried to be careful and prudent in arriving at those decisions and certainly are sensitive to the impact on those individuals at the station.

Okay. Just a follow-up, if I can. The jobs, I know there were just a few jobs on the news side of that. Do you anticipate any effect on the news product from that?

No. We try very hard always - - from time to time, not only at WNDU but across the company in all of our stations, from time to time, there are some staffing decisions made and/or just adjustments in the ordinary course of business. But our first and foremost focus always in looking at those types of decisions is to be very, very careful that we don’t do anything that we believe will damage the news product. Because we are very, very committed, not only in the South Bend community, but in all of our communities, to deliver the very best news product that we possibly can.

Thank you.

We’ll go next to Laraine Mancini with Merrill Lynch.

When you talked about the first quarter at the end of the fourth quarter, you suggested that national would finish down 4%, yet you finished with flat. Was there some pick-up or change in business during the quarter that made it finish better than what you had expected? And at the time, you also said that there were weakening turns in the southeast and southwest. Did that reverse or is that consistent?

I’ll let Bob speak to the geographic trends a little bit. I think what we saw ultimately was that in March that national come back a little bit. Also, I think at the end of the day that our February ended up being a little bit healthier than we had anticipated in our March call. And that was probably really just afterglow effect, either directly or indirectly some afterglow effects of NBC’s station performance and the Olympics.

Laraine, I think on a regional basis, I think the southeast still seems to be lagging a little bit nationally and the southwest Texas area. But the Midwest seems to be very strong and some other properties are very strong. So, here again, I think there’s a lot of experimentation going on in the national world right now. They’re moving money around and trying to figure out and see what works in different places and I think that’s happened in the past. It just seems to be even more frequently now. And as I mentioned, I’ve mentioned this before on calls that we’ll have markets that are ninety miles away where one’s national will be very strong and the other one will be weaker and down. So I think that’s just a pattern that’s going to be with us for awhile, as I mentioned earlier. But I think national will pick up at the end of the year.

And as I said, I think it’s real easy right now not to spend money on TV. I know a lot of people - - nobody’s going to get fired for trying an Internet strategy or some other strategy for spending money. But I think many of these things that people are trying out don’t necessarily work. And I think a lot of these people that have taken money out of TV will be back and wanting to spend it. Because I still think it’s the best value for the dollar in the advertising world.

And one more question on the national, your guidance for Q2, you suggested that national was flat in that guidance which is where you ended up on Q1. So does that mean that the improvement that you saw at the end of February and March has stabilized? Or is this flattening maybe a little bit conservative in this guidance and you’re just giving yourselves some room?

I hope it is, yes.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS]. We’ll go next to Bryan Brundis with Highland Capital Management.

Hi. Just a couple of questions. On your website, you pro forma for 2004 did $161.5 million of broadcast cash flow and about $150 million of EBITDA. And you’ve also said that you expect leverage to come out at around 5.5 times end of the year. And let’s assume you pay down $40 million of debt from where you are right now. That basically implies about $150 million of EBITDA for 2006. Is that a safe assumption to make? Whereas the street has you doing about $135 million for ’06.

It sounds to me like you’re pretty good at math. We like that number. We’re not projecting that number right now. But I think based on our past history and based on what we think our growth prospects are, we’re certainly not uncomfortable in feeling like we’ll reach the math numbers you read off to us.

And then on the local revenue, given that the $52 million to $53 million in ’04 and you feeling pretty good about that number, and presumably maybe having two $20 million quarters of political, give or take, are your sales people really trying to push advertisers to get a lot of business done in the second quarter in light of inventory really tightening? And then also how the new digitals will help you manage that inventory for the rest of the year with two potential huge political quarters on the horizon? Some color on that would be helpful. Thanks.

I would say good sales people are always trying to figure out ways to get people to spend their money. But I think political really becomes a supply and demand issue, as you know. And we always think it’s important for our people to let the advertisers know that there’s going to be a lot of political money coming and to try to get them to advertise ahead of that. A lot of people actually - - regular advertisers sit on the sidelines during the September, October and early November period a lot of times just because rates get pretty high and they wait until the political gets over and then come back in strong the rest of the year.

But that’s one of the beauties of our business having twenty-four number one stations. We get probably 60% to 70% of the political in most of our markets where we are strong, and we think that will continue. And we definitely plan to use our digital channels to hopefully get some political advertising on them when we’re sold out on our main channels because we think, here again, we can deliver demographic and a much cheaper rate to politicians. So that is one of our strategies to hopefully increase our political by convincing the politicians to advertise some on some of our digital channels.

Thanks a lot.

Thank you.

Well go next to David Teacher with Lowe’s.

Hello, Bob and Jim.

Hi, David. How are you doing?

Fine, thank you. My question is just could you please give us a little better detail as to what segments of the market have been strong and which ones have been weaker perhaps than what you have expected, and whether you’ve seen any trend changes in those particular areas? I mean such as retailers, fast food, banks, local dealers, etc.

Right.

Thank you.

David, as we said, the auto for the quarter was flat. It ended up being about 24% of the overall versus a year ago, it was a little over 25%. Categories that were strong for us in the quarter, financial was up quite a little bit. Medical was up about 7%. A broad restaurant category was up about 14%. Furniture and electronic was up mid-teens as well. We actually got a nice bounce back from communications which is - - parts of last year and the before, some consolidation was taking place and had lagged a little bit. As we’ve commented many times, it seems like several quarters now in a row, the discount/department store category, again, seems to be lagging. And those are the highlights. The only other big category that was soft a little bit in the quarter was entertainment. I think that more has to do with the flow of major movie releases than anything.

Jim, if I could just drill down a little bit further. The auto, when you’re saying what the measures were, is that national and local combined? Or is that - - ?

Yes, that’s national and local combined. I don’t have it split between the two.

Okay, thanks.

Thanks, David.

[OPERATOR INSTRUCTIONS]. And we have no further questions at this time.

I would now like to turn the call back over to Mr. Prather for any additional or closing remarks.

Thank you very much, Matt. Listen, once again, I want to thank everybody for being on the call today. As I always tell you, Jim and I are easy to find, so don’t hesitate to call directly if you’ve got any other questions. And we’re looking forward a good year and looking forward to talking to you at the end of the second quarter.

Thank you, everybody. Good bye.

That does conclude today’s conference call. You may disconnect at this time.