Gray Media Inc (GTN.A) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Gray Television's first-quarter earnings release conference call. Today's call is being recorded.

Now, for opening remarks and introductions, I would like to turn the call over to Mr. Prather. Please go ahead, sir.

Thank you very much. Welcome, everybody, to our first-quarter conference call 2007. We think we're starting off the year relatively good. We feel good about the year overall. The first quarter, we knew was going to be tough comps because of our Olympics. We had a very strong Olympics last year with the NBC stations and a fair amount of political come in first quarter last year.

But overall, we're pleased. I think locals continues just being a steady business for us, steady growth. National still -- to use my term I've used for several years now -- seems to be schizophrenic, seems to be all over the board. We've got some stations doing real well national and others doing fairly poorly. And it just seems like money is moving around all over the place. I'm sure there's a rhyme or reason somewhere out there; we just don't know what it is.

But we're going to concentrate this year on getting some debt paid down, making sure all our digital channels -- we've got, I think, 39 broadcasting now. We'll have 40 soon or by the end of the year for sure, have all those up and running, developing those, getting ready to go full digital in 2009, which we think is an important date in the TV business.

Our Internet continues to grow. Our mobile strategy continues to advance. We've got video streaming available on our cell phones now in all our markets. The only issue there is just getting enough people with the right cell phones that can actually get a video stream.

Also, I think live mobile TV is right around the corner. I think most of you saw we joined a coalition with about eight or nine other broadcasters to look into how we can monetize our spectrum as far as mobile TV. Mobile TV is huge in Europe right now. I think it's definitely coming this way as more and more people get the capability to get the reception on their mobile devices, cell phones, Blackberries and so forth. So I think this is going to continue to be a growth area for us.

We're very pleased with our refinancing. Jim will give you all the details. I think it's a validation that people and the investors out in the marketplace feel like we've got an extremely strong company with great assets and great earning power in the future, which I'm confident we're going to continue to show.

We do think there is going to be some political money, maybe more than we thought, coming in this year because of the way the primaries are stacking up with the 22 states now in February, and Florida just moved up to January. That could mean some fourth-quarter political that we hadn't budgeted for at all. So it could be a real boon for us in the fourth quarter. But we feel good with our budget even if we don't get it, but I feel confident that it's going to be extremely difficult for these politicians to get their message across in just a month and so in January of 2008. So I think you're going to see some nice political coming in at the end of the year.

Our last acquisition we made, WNDU, is doing extremely well in Notre Dame. We're very happy with it; we're operating very efficiently there. That's a great market for us; obviously, it fits our profile of being an -- obviously a university town, probably the best-known university in the United States. We have got an excellent young manager there that has really taken the bull by the horns. We feel very good about the future of WNDU.

Also, our small station that we bought of UPN down in South Georgia, we're able to get the CBS affiliation for Albany market. And that station is doing extremely well, and we think it's got a huge growth ahead of it. We're not even doing local news yet; we want to get going on that soon. And we will be very pleased with that station.

One other thing that was big news for us and I think news around the country, we went local HD news up in Lexington with our CBS there. We were the -- I think there's only 40 stations on the air in the United States with local HD now; I think we are one of the smaller markets. We're very proud of our station there. It really is a great news leader in that town, has been for a long time. We wanted to send the message that we want to continue to be number one in everything in Lexington.

I think the local HD is going to be more important than people realize. I think it's something we're looking at for several other markets over the next couple of years. And we will probably be allocating some of our capital there that we may have been allocating other places. But I think it's something we've got to look hard at to stay competitive in some of our bigger markets.

But I feel that local HD is going to be very important. I think people are not going to watch HDTV all day long and then go back to standard definition in news and be happy with that. It's kind of like I've said, if you watch color TV all day and all of a sudden your local news is in black and white, people wouldn't be very happy. But I think that's coming and probably coming faster than anybody thinks it is.

At this time, I would like to turn it over to Jim Ryan, our Chief Financial Officer. Jim will grow through the numbers. Then, we will open it up for questions. Jim?

Thanks, Bob. Good morning, everybody. I'll keep the comments on the quarter focused on the pro forma. As Bob mentioned, we did acquire WNDU a year ago March. This will be the last quarter over quarter where our pro forma is needed. Beginning in quarter 2, it will be straight-up comparisons.

But as Bob said, all things considered, we were pleased with first quarter. It came in slightly better than we had anticipated. And revenue -- and again, it was not bad. The revenue of $69.7 million ended up being just $1.1 million short of Q1 pro forma last year, and that was going against $3.4 million of Olympic revenue and $1.9 million of political revenue in Q1 last year. So we were pleased with the results, and the revenue was slightly better than we had anticipated.

We along with everyone else that has at least reported to date have seen some softness in our auto category for the quarter. It was down about 5%. We also saw some softness in the financial and insurance category as well. But telco/entertainment were both up very strong, more than offsetting the other declines. And we also saw some life Q1 in department, discount stores and supermarkets. They were actually -- both those categories were positive. Quite frankly, it's the first time in many quarters that we've seen them uptick positively. So that was some good news there.

Political came in at $1.1 million, which was better than expected. That activity primarily is associated with the Kentucky governor's race that had -- to date, it has had a very active primary season. Some of that Kentucky political is going to carryover into Q2 as well. That primary is on May 22nd, and there is some talk that there may even have to be a runoff on the Democratic side after the 22nd. So we've got our fingers crossed that there will be an unexpected runoff in the primaries. But Kentucky has been strong in its governor's race primary this year.

Expenses for the quarter came in at $48.8 million, slightly under where we had anticipated. The incremental costs of our 39 digital channels added about $1 million to the overall expense increase quarter over quarter. The rest of the expense increase on the primary channels really relates to installing a sales billing system in all of our stations, and we are about two-thirds of the way through that installation at this point. We will be finishing off the rest of that in Q2.

We were pleased with our Internet growth in first quarter as well. The revenues quarter over quarter were up about 27%. We had $2 million of Internet revenue in Q1 of '07, and our Internet BCF was also about $1 million, which is up 24% over Q1 last year as well. So this category is growing quickly for us. We're pushing to grow it even faster, but we're encouraged and we're still encouraged with the full-year results we talked about last call in Internet. We are thinking it is still going to be $11 million to $12 million in total revenue and a BCF on it of $7 million to $8 million based on current pace and results to date. So again, strong growth there and we're pushing to grow it even faster.

The guidance that we put out for second quarter I think, again, reflects a relatively strong political in Q2 last year, $4.7 million Q2 this year, based on the Kentucky primary that we just talked about. We are thinking political will end up around $2.1 million. Obviously, if there's some sort of special runoff in Kentucky that would add to it. And Bob has mentioned that, certainly, there will be the definite possibility of political late this year as well.

So all in all, we feel relatively good about second quarter, especially given the political number we have to go against. And we expect our local revenues in Q2 to be growing in the mid single-digit range.

The refinancing, as Bob mentioned, we were very pleased with. There's lots of disclosure in the Q and in the release. So I think all the basic information is covered. As we talked about in the last call, we ended up pricing our term loan B at LIBOR plus 150, which we were very pleased with. We think we've got a very -- a low cost of debt capital at this point and a lot of flexibility. So we were very, very pleased with the refinancing. The redemption of our 9.75% notes has been completed in April, and we will be completing the redemption of our Series C preferred on May 22nd.

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

At this time, operator, I'd like to turn it over to the callers for questions.

(OPERATOR INSTRUCTIONS). Marci Ryvicker, Wachovia Securities.

For your digital channels, how long does it take them to turn cash flow positive? Can you give us a feel for what type of programming you're airing on these stations?

Normally, we've experienced anywhere from three to five months most of the times where we turned cash flow positive. The only problems we've had in a couple of areas with cable channels, where they put us up on the high digital tier, where there's just not enough digital cable boxes in a market. So we're only covering, sometimes, 40% to 50% of a market. That has hurt us in a couple of areas. But we just thought it was worth -- most of the times, the cable guys wanted to get three to four more years of free retrans in exchange for giving us the lower, and we just didn't want to do that.

But most of the programming is barter type other than the network stuff we've got. And we do a lot of -- trying to do a lot of local college programming, as I mentioned, a lot of college sports. We're also repurposing our news on most of our digital channels around 7:00 usually. And in 18 of the markets where we've got King World, an Oprah product, we're running Oprah in prime time, is the second run of the earlier days. And that has been very successful for us.

So it's a variety of things. Each manager pretty well decides what programs will work in his markets. Actually, one of the things we're encouraging, though, especially in these university towns is to do as much as possible with local colleges on sports that normally wouldn't necessarily be seen on the major network stuff.

But we're trying to do -- for example, we had a great success with the Nebraska women's volleyball team, which won the national championship. We televised that from one of the semifinal games from Florida; it was extremely successful. So those are the kind of things we're trying to do to build an identity for these digital channels where they will have their own brand and image.

The other thing that's important is we've got to use the promotional ability of our major channels to promote these things. We've got the most eyeballs in just about all these towns, and it's up to us to make sure that we promote these channels properly. That's one of the things that we encouraged our managers to -- to make sure they are getting the word out that these channels are available and what's on them.

You talk about the incremental costs you're expecting for Q2, I think $1.5 million and for the year of $4.8 million. Can you talk about what you expect in terms of revenue from these stations?

Jim, do you want to give that number?

We think, first of all, the digital channels this year is going to cost us -- full-year operations for the digital will cost $10 million, maybe slightly less than that. As we said in our last call, we expect, in the aggregate, the digital channels to be slightly cash flow positive this year, which is really, as we view it, the first full year of launches and rebrandings from last year. And it's a base that we can then build on going into the future.

(OPERATOR INSTRUCTIONS). Victor Miller, Bear Stearns.

Let me ask you, on the expense side, it looks like growth -- obviously, 9% in the second quarter reflects definitely the second channels. But excluding those, it still looks like expense growth was up like 5.5%. So maybe you could talk about that and whether that changes your view for overall expense growth for '07.

Then, Jim, could you just let us know what's the pro forma debt now after taking out the preferred stock, including fees, and if you had to call it and then pay a premium or whatever?

Lastly, Bob, how are you anticipating looking at the potential for the political as you get closer and closer to these primaries? What is your sense of the budgeted number, how big it could be, et cetera?

Jim, you want to give the answer on the first one?

On the full-year expense, obviously, the digital channels we just talked about, the full-year cost there is the $10 million or less, and we're pretty comfortable with that number. When you divide that by 40 different channels of programming, the dollar average on that is pretty low per channel. So we've definitely taken a low-cost approach there.

On the primary channels, as we have said in our guidance, at the end of the year, we think the main channels will be up year over year on a pro forma basis about $1.5 million. The majority of that $1.5 million would relate to the one time-only installation costs we have in putting in a unified sales billing system at all of our stations and getting down to one system versus five or six.

And we still feel pretty comfortable on the total year -- on that total year number. There will be timing differences quarter to quarter. But historically, we've been relatively close in our expense budgeting and expense projections. So we're not looking -- nor did we intend this year to have much of an increase in the primary channels year over year.

We're just trying to back into the second quarter. We're still (technical difficulty) expense growth of 9. But setting aside the numbers you told us for a second channel, (technical difficulty) still pencils in mid single-digit. Are we wrong on that expense growth for second quarter?

Don't forget what happens is in an off-political year, we give raises to everybody in January. So your first quarter, you're going to have the impact of raises. Some other expenses just go up. But then in the back half of the year, we don't have the political commissions and things on political.

So normally, like I said, if you look at our whole year, we have tried to -- over the last few years, we have been pretty consistent, having a flat expense growth and very little expense growth on our basic -- our main -- what we call our base channels. I think that will be true again this year except for, Jim mentioned, putting in the -- spending the money on the billing system and doing the hub and stuff and things we're doing right now, which we have got some cost for severance and things like that as we do these hubbing operations.

Then the political, I think, based on -- I wouldn't want to put a number on it right now. It's just a real -- and you are closer to political than anybody I know. But just based on a gut feeling that there's no way in the world -- you got all these politicians; they are all going to be in the race or a good many of them at that point.

They have got to spend some money in the fourth quarter to get their message across if you've got virtually -- you know, the election is over as far as the primaries in February. You're going to have 22 states. And before that, you've got Florida, Nevada, New Hampshire and Iowa. It's over February -- after the February big super primary day. There's just no way you can do enough advertising in January and early February.

So I just think some money is going to have to be spent in fourth quarter. I would hate to put a number on it right now. Like I said, you probably have got a better feel for it nationwide than anybody. But I think it could be significant.

To follow up on the fully pro forma debt number, as I mentioned, the Series C will be redeemed on the 22nd. That was redeemable at our -- no premium there. That's $38 million. When that is said and done, and obviously the bonds have already been redeemed, all in, we're including a little seasonal borrowing on the revolver. Total debt would be about 933, and the term loan B would be out at its full $925 million.

(OPERATOR INSTRUCTIONS). Jim Goss, Barrington Research.

The loss on early extinguishment of debt, did you put a per-share figure that you're assigning to that effectually non-recurring item? Maybe that's one.

And I was wondering if you have additional digital channels you think you are likely to have, or are you getting pretty close to being all there with your digital expansion?

I was wondering, Bob, if you feel the digital transition actually is going to happen on schedule this time. It seems like (multiple speakers) --

I'll answer those, Jim. Then, I'll let Jim answer the first one. I definitely think it's going to happen on time. I think there's a tremendous inertia now, and I think everybody in the TV business realizes that the sooner it happens, the better. I think we're all on the same page on that now.

And I think Congress -- I think you may see some push to get some more of this money for set-top boxes, which, with the Democrats in, that could happen. But I think it's definitely going to be -- I think it's a firm date now, and I would just be stunned to see it get moved at this point. I think it's important for our industry and too important for the country as a whole.

I think one thing the NAB has got to do is get out a real message. On this transition, I read recently that 40% of the country doesn't even know there's going to be one. So there's a tremendous -- and I've encouraged all our stations to be preaching the message themselves in their own markets, be ready for it. For example, as of April 1, it's illegal to sell analog TV in the United States now. You can't even buy a new analog TV. So clearly, the Congress has a firm date, and they want to keep to it. So I'm convinced of that date.

To your second question about whether we're full up or not -- here again, we try to be opportunistic. I think, if in a particular market we find a digital channel that will work, ideally, we would like to have four channels going in every market at some point down the road. I think that's ambitious, but I think it's something we can do. It's incumbent on us to figure out how to make money on all of them.

So I would said that we're happy with what we've got right now, but we will continue to look to fill in the blanks in our spectrum and other areas, including possible live mobile, which we had used some of our spectrum for that in some of the markets. Does that answer your question?

Yes, it does. And then the other (multiple speakers) --

Jim, you answered the question about the per share on the debt extinguishment?

A loss on early extinguishment for Q1 is a line item in the P&L. It was 6 point --

6.492.

-- 6 million. On a pretax basis, that looks like it's about a $0.14 per-share item. I suppose you could just take the tax rate for the quarter and apply it to get a net of tax rate.

Okay. Same tax rate applies, then?

Yes. Really, the volatility in the Q1 taxes is more of the new income tax FASB, which will probably produce some volatility over the next few quarters. But yes, I'd just use the quarterly rate.

But one other issue, Bob, you had just mentioned and reminded me that you have been talking about the mobile platform applications that your local news can go to. How near a prospect is that, especially now that, say, Sprint and Verizon are starting to roll out actual live (multiple speakers)?

I think just right around the corner. I went to -- matter of fact, Victor Miller and I went to a demonstration at the Consumer Electronic Show in January of Samsung. They took us in a motorhome and drove about 20 miles out of town, and we were getting the local broadcast from the Sinclair station there just clear as could be on a mobile device. They are actively testing.

We understand Harris Corp. is also testing some technology they've got. I think the manufacturers are ready to roll this thing out sooner than later, and I think the consortium that we've joined with these other groups, I think we're pushing for the best way to monetize it, whether it be through deals with cell companies which looks like the most likely. And that's the way it's done in Europe. But I think it's wide open on how you monetize this.

Lance Vitanza, Concordia.

Could you tell me the number of shares outstanding either at the end of the quarter or a later date?

Shares outstanding based on the Q is -- and that's as of I think we dated that March 30 -- I'm sorry, April 25th. There's about 47.9 million shares out.

47.9?

Yes.

And then is the Q out?

Yes, it's being filed this morning. So it will be hitting today. So it will be out there today.

Then I just want to understand that I think you mentioned something about $8 million of seasonal revolving credit borrowings. Is that pro forma to March as though all the transactions are completed, or would that reflect borrowings that were sort of subsequent to the end of the quarter?

A little bit of both, so I wouldn't read too much into it. Just at the end of the day, based on bringing in the preferred in a couple of weeks, I would expect total debt to be about $933 million and then coming down from there.

And at this time, it appears there are no further questions. I like to turn it back over to today's presenters for any additional or closing comments.

Thank you very much, everybody. We appreciate your being on the call, look forward to a good second quarter coming up. Please -- as I always say, Jim and I are easy to find, easy to -- we answer our own phones. So if you've got any other questions you need answered, don't hesitate to call us. And we'll look forward to catching up with you again at the end of the second quarter. Thank you, everybody. Goodbye.

That does conclude today's conference. You may disconnect your lines at any time.