Gray Media Inc (GTN.A) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Gray Television second quarter earnings release conference call. As a reminder today's call is being recorded.

For opening remarks and instructions, I'd like to turn things over to Hilton Howell. Please go ahead.

Thank you, operator. Good afternoon, and welcome to second quarter Gray Television earnings call. As the operator mentioned, my name is Hilton Howell and I am Chief Executive Officer of Gray Television, and along with Bob Prather, our President and Chief Operating Officer, and Jim Ryan, our Chief Financial Officer, we are going to be providing a few brief comments before our Q&A session this afternoon.

As you saw from our release this morning our total television revenue has dropped this quarter by about 17%. While we candidly aren't pleased with this, it compares favorably with both the television industry as a whole right now, and with other broadcast companies in particular. And from everything we are seeing and hearing in this market, we feel like we are bumping up along the bottom of the advertising market. We have seen and heard a bunch of rumblings about improvement in the second half, but right now there's nothing that we can call one way or another.

Obviously the most significant occurrence this quarter has been the award by the bank group of the Young management contract. Now, in the broadcast industry we are candidly distressed that it was necessary to award this contract at all. But in the competitive situation, we are very pleased to have been chosen by the bank group, as we feel that this validates our operational expertise, our lean cost structure, and especially the outstanding word of our regional television Vice Presidents and General Managers who, while running a tight ship, continue to keep an eye on the quality local coverage that our audiences expect and demand.

Looking forward to the implementation of this contract, I just wanted to say that we are truly looking forward to working with the professionals in Young Broadcasting throughout the course of this contract, and that we are raring to go.

Bob, would you like to add some comments to mine at this point?

Thanks, Hilton. Welcome everybody.

I guess I'll start off with the bad news. I don't think anybody in our industry right now is having a good year. I think it's tough for the broadcast industry in general, as well as the general economy, but I think television historically has always done better even in tough times, and this has been a very difficult time for everybody in the TV industry.

The good news is we are right at the top of the our industry again, this quarter and for this year. I'm very proud of that, and I think it's attributed to several things. One, our management team has, as Hilton mentioned. Second, it's attributed to the markets we are in. We've had a strategy from day one of two things. One, trying to buy number one or strong number two stations, and second, buying in strong markets, specifically university towns and state capitals. I think this has been validated by the fact that I think our most of our markets are fairing better than the general economy right now. So we are very pleased that we are right at the top of our industry again.

Hilton mentioned the Young deal. We are very happy with that for a couple of reasons. I think, as Hilton mentioned, it does validate the fact that people think we know how to manage stations, especially these are right in our sweet spot, they are mid-market-sized stations, the only one that's bigger than we've had in the past is Nashville which was DMA 29, but that market is a good market and we know the Tennessee market very well, and we think we can do well there. They've got mid-sized markets. They've got some very good positions. I'd like to say they are good stations. We hope we can make them better. That's been our history in the past, of trying to buy good stations and ideally manage them better, and we think we can continue that trend with the Young stations.

We are looking forward to it. We are working closely with the Young people right now, and once the FCC transfer is final, we will be dealing with the bank group more and with the consultants that are managing the property for the bank group. But we are very happy with the fact that we will be managing these stations.

A couple of things going on that I think is good for the future. We are testing live mobile TV right now in Omaha. I think everybody in the industry is excited about live mobile. We are a little behind in the world right now. I think a lot of you know Japan has 20 million people watching live mobile TV as we speak, and there's no reason this couldn't really be a great growth area for us in the TV business in the future. It's something we want to test in three or four of our markets. There's about 30 different markets around the country being tested right now with various groups, and I think everybody is very excited about the future of live mobile TV.

Second, we are happy to announce that we've gone local HDTV in our Tallahassee market as of August 2nd. There's been a few glitches, and we are putting a great product out on the air, and we have a dominant station in that market and we want to make sure we stay dominant. We really control the Tallahassee and South Georgia markets with our news product there, and we want to continue that tradition. We plan to go local HD in our Lincoln, Nebraska station in early September, and our Omaha station in early November.

These are all things I think are going to be important for us to maintain our competitive advantage, maintain our number one position in these markets in the news ahead, and we've been able to do it -- actually we are spending less than $1 million per market to go local HD, which we are very proud of. We really researched hard on how to do this right and do it very efficiently and very cost efficiently, so we want to continue in our key markets to add to this over the next year or so.

We are constantly monitoring expenses. We've been able cut expenses in some areas that nobody every sees. To give you an example, our Controller came up with a way that we're saving $300,000 a year by -- we did away with all our bank lock boxes and doing our own cash collection. It's working great, and these are the kind of thing we are looking for in every nook and cranny of the Company to make sure we are being as efficient as possible in this kind of economy, and it will carry forward going forward.

Hilton mentioned we are bumping along the bottom. I think that's a perfect description. I've talked to a lot of key car dealers over the last few months, particularly Charles Ogilvie, who is Head of Asbury Group, and Mike Jackson, Head of Auto Nation, and some of the local dealers in some of our markets, and they are all saying the same thing, there is just no financing available. They are getting less than 50% of the people who walk in the door to buy a car qualified to take a loan that they would be willing to accept. And I think until somehow this gets turned around, we are going to continue to see the auto industry very, very challenged to have any growth, and I'm not sure what's going to turn it around, but I think it will and I think we will be poised to be ready for it.

But I'm very happy that we continue to be right at the top of our industry, even in this bad market.

At this point I'd like to turn it over to Jim Ryan, our Chief Financial Officer, and he can go through some specific numbers, and then we will open it up for questions. Jim?

Thank you, Bob. Good afternoon, everybody.

I'm going to keep my comments relatively brief. I think the main points were laid out pretty well in the release itself.

Speaking to the second quarter, again our overall net revenue was down 17.4%. Our local was down 12.6%, which actually was a little bit of an improvement from first quarter results. The national was down 33%. Now, both of those are excluding political. TVD reported that for the industry in second quarter, local was down about 24% and national down about 26%.

So we are very pleased on a relative basis with the performance of our local, and during the quarter, as we did in first quarter as well, and as we've been doing for well over the last couple of years, there's been a strong emphasis on developing new local business. And within second quarter, although it really doesn't show up in the global numbers because of the depth of the recession, within second quarter we were able to generate about $5.8 million of new business in our stations, and that new business involved over 1,900 different accounts. So the local sales staffs are working very hard in the markets to go out and knock on a lot of doors and bring new business to our stations, both new business and also, as you know, we've had an ongoing effort to switch business from newspapers, Yellow Pages, cable, and that has continued to be successful for us.

On the category front, the only category that was up for us during the quarter was legal. All other categories were down. Auto was down 48%, and that represents -- auto right now represents about 15% of our overall business. A year ago, that was representing somewhere in the low 20% of our business.

We are pleased that the operating expenses came in on the low side of guidance, better than expected. As Bob mentioned, we've been continuing to work hard on the expense side all year long. Originally we thought our year-over-year expense reduction would be tracking to about $15 million; based on first half results, and where we think the second half is likely to come out, we think we will actually see year-over-year expense reduction of at least $16 million. So again we are very pleased with the efforts that the stations have been making at the grass root level to control expenses as tightly as possible. For the first six months, again local was down 13%, which tracked very favorably to the TVD report of the industry average being down 24%, and again we are pleased to be tracking significantly better than industry averages.

Turning quickly to the balance sheet, total debt at the end of the quarter was about $802 million. We had cash on hand of $9.8 million. Our trailing eight-quarter cash flow ratio, as defined in our credit agreement, put us at 7.98 times leveraged. That was against a 8.25 covenant. Program payments in the quarter were $3.8 million. That was consistent with program amortization. CapEx for the quarter was about $4.8 million year-to-date. So far CapEx is about $10.2 million, and we are still currently thinking that total CapEx for the year will be approximately $15 million.

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

Thanks, Jim. Operator, at this point, we'd like to open it up to questions.

Certainly. (Operator Instructions). We'll go first to Larry Haverty with GAMCO.

Hi, Bob. Do you guys have any exposure in Texas?

We've got three stations in Texas. We are in Waco with CBS, [Bryan County] station, CBS, and Sherman, Texas, CBS.

So this Texas senatorial really isn't that big a deal for you?

No, it could be, yes, I think it will be great. I think the Governor's race could be really good, with Perry, if Kay Bailey Hutchison does run for sure, which I think she will, I think it could a big political for us next year.

As I understand the Texas senatorial thing, they set up a special election, so it would be noncomparable, sort of like having an extra election?

Yes.

They will still be advertising, I guarantee you.

No it would be a political campaign against a time slot where you wouldn't have any at any time?

I'm not familiar with that.

I think that's correct, they will be scheduling a special election if everything goes through as has been indicated in the press, and it would be at a different time than our typically expected political revenue.

Okay. And the auto situation, well, Mike Jackson has been lamenting to you his stock has almost tripled, Bob, or maybe it has, off the bottom. And I'm seeing a lot more auto advertising locally in Boston right now, from the point of when the Cash for Clunkers was put in, which was only ten days ago, the 6 o'clock to 7 o'clock time block, I think last night there were four different guys advertising on the station I was looking at. Has your auto situation changed very dramatically in the last ten days? Do you see any visibility there? Because it sure looks like at least in one market that behaviors are changing.

Well, I'll let Jim answer specifically, but in general the good news is we didn't have -- we didn't lose near as much as some of the big markets like Boston. They are much more dependent on auto than we are, so I think they were a lot farther down. As I mentioned, we haven't seen any clear sign that it's coming back, specifically in the last ten days. Jim, do you have any more information on the last ten days?

Talking to general managers in the last few days with respect to Cash for Clunkers, it variety a little bit by market. Some people thought it helped, picked up things a little bit, and I would stress it was a little bit. Others felt that it was -- the spend was what the spend would have been anyway, and they just rebranded the copy to point to the clunkers. There was a fair amount of consensus, though, that they thought the overall program, and of course now that it's been apparently renewed for another $2 billion, it looks like it's going to run longer, which should be good for all of us; that they thought the dealers, by having the program, the dealers were able to push some product. It would certainly strengthen them over the near term and by them getting a little bit healthier in the local markets, we certainly would -- should hopefully speak to a little more confidence on their part to be placing -- start to place orders a little longer and a little firmer. But of course that's our hope. We'll have to wait and sea if that really transpires or not.

In the retail field, yesterday I think there were four or five big retailers that raised their guidance on the quarter, largely because of gross margins. So they've got their inventory in line and the stocks are acting well. And normally what comes after that is that they decide they don't have enough inventory, and start to advertise after they've added more inventory. Do you see any signs of life in that vertical ?

Not yet. The problem we're still having, and have had it over the past several quarters now, is that placement tends to be extremely short. We are only getting a good view of literally only a few weeks out at a time. So the visibility is limited as it has been at least through the first half of the year so far.

Then in your college towns, a lot of colleges were scared to death that folks wouldn't show up for the fall because of the economy. And from what I can gather, it's especially clear up here that not only didn't that happen, but more showing up because they regard education as the key ticket to the future economy, and has that made things any more ebullient in your educational communities, where perhaps greed may be replacing fear.

I think this continues to validate our university strategy. All of the GMs I've talked to have said that all the schools are busting at the seams, and I think you're right, I think people are -- even graduate schools are booming right now because it's why not go back to school if you can't find a job. I think States will continue to realize that education is the key to successes, especially in America, and I think those kind of communities will continue to benefit from stronger than average economies in good times and bad times.

But none of the locals are is signing up for more advertising?

Here again, we just feel we've been bumping along the bottom for the last two, three months. I think what's interesting to me is I'll talk to a GM and they will be all exciting about a couple new orders or new things coming in, and a couple days later get a big cancellation from somebody else and it kind of evens things back out. That's kind of more what we've seen in the last 90 days, I think. Things hop up and things back off, so as Jim mentioned the visibility is just virtually next to none, down to a week or two timeframe now, it seems like.

Thanks.

We'll take our next question from Matt Swope with Broadpoint Capital.

Hey, guys. I know your affiliation agreements with CBS and NBC and all your primary stations don't come up for a couple of years, but can you talk about what you think the dynamic is going to be like when it comes to talk about how you might share in the retransmission consent revenues?

We are going to just say no, as Nancy Reagan used to say. I think they are going to try, and we are going to say no, and I hope we can get our industry to really all realize that this retrans is hard fought money for us, and we need to keep all of it. NBC tried to get some from us last year and we said no, no, no, and they eventually agreed to renew the contract for three more years, just like it was. I think they are all cutting back, trying to do three and five-year deals. No one is wanting to do ten-year deals right now on either side.

I think a lot of it is depending on how the economy is at this point, how the networks are feeling about the world. I think for us on the local TV broadcasting side of the industry, it's something we really have to fight, and this retrans money is important to us and will continue to be, and I just think it's something we have to really hold the line on.

Did they try to make an argument about percentage of revenue you get from prime time or percentage of ratings that come from network programming? I mean, how did that discussion go?

They have not mentioned that at all. They just wanted a percentage of our overall retrans fees with a floor. They backed down fairly quickly from that, when us and several other stations pretty well -- there weren't many NBC deals up last year, I would say maybe seven or eight markets in the whole country. But I know eventually they backed off of that with everybody, as far as I know. I don't know the details of anybody else's negotiations, but I didn't hear of anybody giving any retrans money to them.

I heard that FOX is really going all out for retrans with their affiliates when they come up, and they may be coming up sooner than others. I think it's just a battle we are going to have to fight. I think it's something that our industry really needs the -- I think the NAB and all our affiliate groups and all that really need to be on the same page on this.

That's great. What about, just a separate point, have you seen any signs for political advertising for the third and fourth quarters? We've heard from some of the other operators --

Advertising going to healthcare plans, things like that. There is always, it seems like, issues going on in States, where both sides are putting up money. So we had earlier in the year, for example, the Seminole Indians were lobbying real hard for legislation down in the State of Florida, and we got some really good political in the first quarter down there. The issue advertising continues to grow, and it's not necessarily the same time as the other advertising, so it's nice to be getting it in these off-years.

We are seeing a fair amount of healthcare from both sides, the Democratic side and Republican side in healthcare, and I think that will continue over the next month or so. There's a lot of town halls going on right now, a lot of Congressmen testing the water seeing what the temperature is. I think these groups who have money are going to be spending it to get their message out.

Just one on the cost side. You mentioned in the press release some professional services, legal expenses and then some kind of consulting arrangement with the former Chairman. Can you give us more detail on those two things?

What we are doing on legal expenses, are you talking about --

Specifically the uptick in legal is primarily related to the costs we incurred in renegotiating the retransmission consent agreements. We had most of the economic terms nailed down by December 31, and then moved to negotiating the long form agreements during most of the first quarter, and some of that actually dribbled into April as well. So that's really what drove the legal costs the first part of this year.

But when you put it in the context of $12 million of incremental revenue from it this year, and that $12 million gross a little over the next couple of years as well because of some of the uptick in the agreements we struck, it's money well spent to secure that revenue stream for us.

That's fair.

Regarding the consulting agreement, we do have one with our former Chairman, Mack Robinson, and our Board voted that his advice and counsel was obviously very valuable to me and all our management, and we wanted to continue that, as Mack is one of the most successful businessmen in America, and knows our business and been actively involved as basically my partner for 16 years, and we just felt we needed to make sure we had his advice and counsel going forward.

Okay. That's great. Thanks, Bob, thanks, Jim.

(Operator Instructions). We'll go next to Aaron Watts with Deutsche Bank.

Hey, guys. So a few questions for me. To start off just to continue on the cost side, you've obviously had to make some drastic and, I know, difficult decisions this year in light of the environment. But once things do get a little better and advertising comes back, how sticky are these costs? Because obviously I guesses especially with the debt load that you're carrying now every cent dropping to the bottom line matters. Do you think with the exception of maybe commissions that most of these costs, it's sort of a new reality for the cost structure of the Company?

Aaron, I don't think there's any doubt of that, as a matter of fact I think everybody in the TV industry better realize that, because I think we all need to figure out a way to operate more efficiently, and I think even going forward we have to look for more ways. I think you are going to see in our business a lot more automation, a lot more video journalists, a lot more use of user-generated video, all these things that will help us lower our overall costs.

Our news product is the most important thing we have, and we don't want to do anything to cheapen it, but I will tell you this, people like the immediacy of user-generated video on news stories, even if the quality is not broadcast quality. I will give you an example. I was out in California a year ago, and they had a bunch of tornadoes hitting Los Angeles, which are unusual. All four major stations news that night had nothing but user-generated film of the tornadoes. It was people out with iPhones and cell phones or whatever, or cameras, and they were shooting the tornadoes that were coming right at them. What's the chance of having a news crew out at that same moment, who is going to do the story for us?

So I think we have to adapt and be very flexible, and be willing to make sure that we take advantage of the Internet and all the good things about it that it can do to make sure we get -- that we are recognized as the news leader in all these markets we are in.

Okay. And actually I wanted to follow on with a news question. Obviously it's a centerpiece for what you do. How is viewership -- or do you have a sense for how viewership has held up through this downturn separate from advertising, just are the eyeballs still there?

Yes, based on our ratings, we -- I tell you what you see more than anything, Aaron, is if you see a drop in eyeballs usually in a market from one rating period to the next, nine times out of ten we usually dig into it immediately with Nielsen, and it's usually where the books felt that particular time frame.

Sometimes they wind up with diaries, we are all diaries at one market in Knoxville, and sometimes the diaries just get in an area that for whatever reason there's not much viewership or lower viewership than normal. And usually if you go back, and we are very particular, all our managers are watching very closely with Nielsen and the consulting firm we use for news, they are very, very Nielsen-oriented as far as keeping an eye on usually those kind of things that revolve around your diary and where they felt that particular rating period.

Okay. And the newspapers have been pretty pummeled by the online availability of news. And how much -- how big of a threat do you view being able to access local news online to your platform? I know YouTube kind of -- some early talks of them just putting local news, streaming local news on their site. How much of a threat are these things to your broadcast?

I frankly think it's an opportunity, not a threat. I think we are in a three-screen world now, where you have a TV screen, a computer screen and a mobile screen, and I think it's important for us to be top of mind in the local news in all three of those screens, and that's one of the things that we are working hard every day in our news product and all our local stations to make sure that we deliver the news any way people want it.

I think you see a lot of young people walking around with an iPhone in their hands all the time, and we want to make sure those people are -- if they want to know that's going on in the local market, whether news, weather, sports or community activities, they know they can go right on their mobile device and go right to our website and see, and I think live mobile is going to be even more important going forward, as you can literally access the programming we've got on the TV at home.

So I look at it as an opportunity, not a threat for us. I think we are the best out there in the video business, and I think that's our real advantage over any other sources that are providing news. And as I mentioned to you, I think we have to be flexible about having to user-generated stories, and I think we have to be aware, which we are, of Twitter and Facebook and these kind of things, and their involvement in the news business these days.

Thanks for the color, guys.

Thank you.

We'll take our next question from Marci Ryvicker with Wells Fargo.

Good afternoon. I have a couple of questions. Yesterday, CBS had their conference call, and Les Moonves was pretty bullish about the CBS network and the station. So I'm just curious as to how your CBS stations are trending versus your other affiliate stations?

And then, secondly, can you just give us more color on the Young relationship, and how this may or may not impact you financially?

I'll start out with Young first, Marci. We are signing an agreement with the creditors group that has taken over Young. We are going to be paid a base management fee, plus we get reimbursement of our reasonable travel expenses, things like that. And then we will have an opportunity to earn an incentive based on increasing the cash flow over a base amount, starting with next year's cash flow.

So it could be a real home run for us, frankly. We think Young has got a good group of stations. We think we can improve their operating next year, and we think this is just a great opportunity for us. I would call it a lot of upside and virtually no downside. So we are looking very forward to getting involved full steam ahead on that.

Regarding CBS, we go more by market, I think, than by network. We traditionally have most of our number one stations year in and year out -- the strength of the market, economically, is more important than the strength of the network. And I will give you a good example. [Delta] in Alabama is a market that's a strong dominant CBS but [Delta's] is having a rough year. Their economy is down probably more than other places, and so even though we have a strong CBS there, it's lagging behind some other stations. But here again, some of our university markets are doing much better than the economy in general.

So I think we go more by market than we do by network. I'm glad Les is bullish. He's usually always bullish, but he's clearly more bullish than normal, and what's good CBS is good for us, I promise you.

I just have one follow-up. You mentioned live mobile video and I just -- when do you think this will be a material revenue stream for the TV industry?

I still think it's probably a year to 18 months away. The testing is going on the balance of this year. I think there's still a lot of questions about exactly how the economic model is going to work, whether it's going to be a subscription base or an advertising base.

The big issue if it's subscription base is, at that point if you are getting paid by the phone company or whoever is delivering the -- to the consumer, the networks want a piece of it, the syndicators want a piece, AP and CNN want a piece. It would require some pretty heavy duty negotiating of all the stakeholders, I guess you'd say at that point.

I personally think it's going to be an advertising-supported medium, which is what we are the best at. That's what we know how to do. But I think the key there is how do you measure it, and make sure we can measure it, because I think it will bring added viewers to TV that we can monetize.

Thank you.

Thanks, Marci.

(Operator Instructions). Well will hear next from [David Hunter] with [Loews].

Yes, hi, Bob, Jim. Lows. Just one question I have is can you please talk about what the advertising rate market is? For example, are there spots where you have to decrease the rates where you maybe able to attract advertisers because of either the newspapers in the area or radio stations, and how are you able to attack that? Just to get a sense on whether or not that appears to be firming up in certain markets, or I guess just a general discussion on what you are sitting at competitively versus those other mediums? Thanks.

That's a good question. I guess one thing I'm a big believe in is, most of our number one stations is rate integrity, and trying to -- making sure when we are number one in the market that we are also the price leader in the market. And we've held our prices better than most, I think. Where we've got real tight competitive situations with our other TV stations, we probably had to lower prices more than we want to do in some cases, but overall I think we've done a good job of keeping prices, David.

As far as newspapers and radio and things like that, we try to -- one of our selling points is that -- especially regarding newspapers is that we are -- just newspapers are extremely expensive to buy on a cost per thousand, if you really dig down and really see what the newspaper's readership actually is. And we've got a real plan that we use against newspapers, showing people that we think TV is a much better buy.

Same thing with local cable. Local cable has done a terrific job, frankly, of stealing a lot of advertising for us by selling "cheap spots," but if you really look at their cost per thousand, they're outrageous in a lot of cases. Here again we have a selling campaign that we use against local cable, that we really work hard on trying to show people that a TV broadcast by, especially in some of our markets where we got really dominant positions, you are just getting so many more eyeballs for your money than do you in any of those other type mediums.

So we try to sell on strength, is what we try to do. We try to show people that television is still without a doubt the best value for getting the most viewers with the least amount of dollars.

Bob, do you think that at this point that the rates, you mentioned several markets where you thought you had to lower pricing to be competitive, is your sense by and large in those markets that rates have firmed and you won't have to do that in the future, and perhaps have even a little pricing power or we are not there yet?

I think so. As Hilton mentioned and I followed up, I would use the term we are bumping along the bottom. We really haven't seen the pressure like we were seeing -- really, if you go back David to after the elections last year, from that November until about the end of March, early April, it was -- our forecasts were down virtually every week. And then we started firming up, and we actually went up about ten weeks in a grow, not great but a little bit every week, and then we kind of bumped along where we had up one week, down the next. I'm not talking about big swings.

So I think that it seems to us that rates have firmed up. As Jim mentioned in his initial thing, we really have gone after a lot of new business. You have car dealers -- basically, car advertising dropped from 25% of our revenues a couple of year ago to 15%. That's a lot to replace. I think we've done a good job replacing it. And as I said, I think when the car advertising really comes back it will come back strong, and we will be a big beneficiary of it. That would be a good problem to have at that point. Hello?

Thanks.

Thanks, David.

We have no further questions from the phone audience at this time. I will turn the conference back over to our speakers.

Thank you, very much, operator. I want to thank everybody for being here today. We appreciate your support. We always tell you, we are easy to find. You can call us any time here if you have further questions, and we look forward to talking to you again on our third quarter call. Thank you, everybody.

That does conclude our conference call for today. We'd like to thank you all for your participation.