Gray Media Inc (GTN.A) 2011 Q1 法說會逐字稿

Good day everyone and welcome to the Gray Television first quarter 2011 earnings release conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Hilton Howell. Please go ahead. Sir.

Thank you very much operator, and good morning everyone. As the operator mentioned, my name is Hilton Howell, and I will make a few brief comments followed by Bob Prather, our Chief Operating Officer, and Jim Ryan our Chief Financial Officer.

All in all, we were very pleased with our results this quarter. Although our revenue was essentially flat, decreasing about 1%, or $740,000. This is primarily due to three factors. First, reduced political advertising this quarter compared to last year. In first quarter 2011, we reported $1.4 million in political advertising. This compares to first quarter last year at $2.7 million, a $1.3 million drop.

Second, we received no political royalty of advertising this quarter, and in 2009, we received approximately $2.8 million Olympic advertising revenue on our NBC affiliated stations. Finally, the Super Bowl was broadcast on Fox this year, and our one primary Fox affiliated station, and four Fox affiliated secondary digital channels, generated approximately $200,000 in ad revenue this quarter compared to last year when the Super Bowl was broadcast on CBS, and our 17 CBS affiliated primary channels generated approximately $900,000 of Super Bowl revenue.

Even with these fairly large items this quarter, our core local, national, and Internet sales, excluding political advertising, actually increased this quarter over 2010 by approximately 1%. We believe this are quite strong results especially given the overall uncertainties surrounding the health of the economy as a whole. We are also particularly proud this quarter that our Internet advertising revenue has increased by 38% to $4.2 million. We are very happy with this robust growth in our Internet sales, and expect it to continue for the foreseeable future. With that, I will bring my brief comments to a close and turn it over to Bob Prather for more color on this quarter, and then to Jim Ryan from on our financials. Bob?

Thanks Hilton, welcome everybody. Hilton mentioned, yes, we thought we had a good quarter this time. Frankly, last year was an all-time record year for us and we were a little concerned going into this year, but I think, I've talked to virtually all our GM's in last two or three weeks, and they all feel like business is better than they thought it was going to be this year. I think the only cloud on the horizon right now besides gas prices which nobody is happy with, I think the Toyota, Honda, the various Japanese car dealers are all having some serious problems with inventory because of the tsunami in Japan. We've seen some cancellations of some pretty sizable orders by Toyota especially.

I think this is temporary, we all think, obviously, they will be back strong hopefully sooner than later although I am hearing it maybe literally most of this year where they are going to be pretty strapped. I read where recently one of our dealers is a pretty large dealer, sells over 100 cars a month, got 9 cars for his inventory for May So as you can see they are not going to be advertising a lot, but I think the domestic guys are probably going to jump in there, and as they say, kick a man when he's down, and probably start advertising even stronger. But we'll get by.

Most other categories have performed real well. Overall, the first quarter is better than without, second quarter's looking good. A third quarter we don't have as much visibility as we used to, but we feel pretty good about the second and third quarter. We are spending a lot of time, as we mentioned on our last call, with local HD, we are fast getting that installed and we will have it over 20 of our stations by the end of this year. It's getting great reception ever where we put it in, as I mentioned we are also doing automation, studio automation, same time and all these operations which we think is going to make us operate more efficiently, and frankly operate better in most cases. Computers are very reliable , and they are very good about making sure the right program's on at the right time.

One thing we're doing in the new media area, we're really trying to integrate Twitter and Facebook into our newscast, both through our anchor people and through our own news directors, making sure that we use these social media to make sure we're get the word out. I think most of you know, Twitter was the first news source to get any information out on the Osama bin Laden killing, even, I think it was five or six hours before it was actually announced by the administration.

So I think this is something, especially young people, are more and more going to for their news sources, and we've got to be there and got to be in the front of their minds in our local news to make sure that we capture these people. Interestingly enough I was talking recently to a lawyer friend of mine up in Nashville, and he's early, late 40s early 50s and he says he gets most of his news off Twitter now. So it's something we've got to be very aware of and something we've got to make sure that we are staying on top of in all our newscasts.

One little note we had during the quarter that was not good news, we had 2,000 foot tower in Eau Claire, Wisconsin got blown down with an ice storm and heavy 70 mile an hour winds. Luckily no one was hurt, there was no real property damage of any time. We are cleaning up the mess right now, we are taking bids on building a new tower where insurance is covering it 100% other than the deductible And neighbors in that area, the other affiliated stations, have been very helpful, allowing us to be on their towers. And we, literally missed virtually no service, and I want to thank all our competitors, our friendly competitors, they've been very, very helpful to us and we appreciate the fact that the broadcasters jumped in and were good citizens.

I think it will probably take us about a year to actually get the tower rebuilt, but, like we said, haven't missed any service in the meantime. Couple of new things were doing in the new media. We're doing a thing that we own 100% of, one called Coupon Rover which is mobile coupons that we have going on 5 or 6 stations right now, hope to have it in 15 stations before the end of the year. And then we have a thing that one of our general managers developed called Moms Everyday that has been very successful, and we are rolling that out to all the Gray stations with website related strictly to mothers and their issues, and things they want to know about on a daily basis. We feel very good about both of these issues.

One thing you've probably heard a lot about, I will go to mention it up front, Fox Network has been pretty aggressive in getting compensation from the affiliates. We recently made a deal with them, we feel very good about it, it's a three year, four year deal, excuse me. While it's not something we initiated obviously, I think it's something that we are going to see more of in the future, and obviously we've got to make sure when we are doing our cable negotiations with the cable operators that we take this into account going forward.

Overall, I think '11 is going to be a better year than anybody thought it was going to be. As I mentioned, I think the only thing that really worries me on the horizon is gas prices. Nobody knows what five dollar gas will do, I don't think we've ever seen it before, and if it comes in and stays for a length of time I think it could have a significant effect on the economy. Right now we feel pretty optimistic, and this point I will turn it over to Jim Ryan, our Chief Financial Officer to go into more detail on the numbers, then we will open it up for questions.

Thanks Bob, good morning everybody. I think Hilton kind of covered the highlights from the revenue standpoint, Bob certainly talking about the operations, So l'm going to keep my comments very brief. We are also very pleased that the broadcast expenses for the quarter came in at $48.2, which is less than what we'd thought, so we're in good shape there. A couple of quick comments on the balance sheet.

The leverage ratio under our senior credit facility, which is tested on a trailing 8 quarter basis, was 4.26 at the end of the quarter. We had debt of $831.6 million, senior debt of $466.6 million, cash was $9.8 million. The CapEx spend for the quarter was $9.2 million, and that does reflect the deployment as fast as reasonably possible the local news HD that Bob was commenting on, and we are going to continue this year to go as quickly as possible. We have quite a few markets that are in process that will finish up this year. And we have four markets that actually completed their installs late third quarter, I'm sorry, late first quarter.

Cash taxes for the quarter was $200,000, just after some states for the year cash taxes maybe around $600,000. And again, because of the very large federal loss carry forwards we have, there's no federal taxes in our foreseeable future. Program payments were $3.8 million, consistent with the amortization number. As Bob mentioned, looking ahead to second quarter, we are pleased with what we have been seeing so far.

The guidance is in the release. We are expecting growth in composite local, national, and Internet, excluding political. We been somewhat fortunate this year with the unexpected political in Wisconsin over the budget issues there. Later in the year, we also will be the beneficiary of this special congressional election in Nevada, which is actually a local Reno district, and that was triggered by the resignation of Senator Ensign, and then an appointment of a sitting congressman to fill the Senate seat. So we are looking forward to a little bit of windfall later this year in the Reno political market as well. At this point, Bob I will turn it back to you.

Thanks Jim. Operator at this point we would like to open it up for questions from our listeners.

(Operator Instructions) Aaron Watts with Deutsche Bank.

Hello, guys.

Hello, Aaron.

One question for me on local versus national. Can you maybe talk about, I know national was last year faster to come back, but can you give us your thoughts on, do expect the local to continue outpacing national? And maybe what you are hearing category wise in your local markets? And how apt people are to rejuvenate and bring back spending levels?

Aaron, I think, first of all, I think local actually is going to be going to be stronger this year than national. National has such a big bounce back from '09 and '10 it would be obviously hard to continue that pace. I think national is going to probably be low single digit growth this year compared to last year. Obviously the car thing with Toyota may affect it, we don't know yet exactly how that's going to affect things.

But I think overall, we are expecting local to continue to be strong, and we're hearing from most of our general managers that they feel real good about local business. I mentioned, the only thing with Bob and me right now is the issue of gas, and if these gas prices do stay where they are, and continue to rise, I think it could -- one thing that local, if people quit driving as much, quit going to stores, you'll see it pretty quick and these local markets, especially the size towns we are in. Where there is very little mass transit or public transit where most everybody is driving in a car out and about.

I think that will be a factor on how local those. But right now our paces look real good, and we haven't seen affects -- something we've got to keep our eyes on.

Okay. And in those local markets, hopefully gas prices don't keep going on the up and up, but do you feel that if you lose some of the auto spending from your dealers, can you replace that with other advertisers on the local level? Or is that going to be tough to do?

It's not easy, that's just always such a big category. We found out in '09 when the auto really got cut way back it obviously hurt everybody in the broadcast business. I do think, as I said, I mentioned with the Japanese car dealers. We are seeing big pickups from the Korean Kia and Hyundai are advertising heavier, and I think the domestic guys may jump in there at some point to take advantage of the slow in the market with Toyota and Honda and -- Nissan, the other Japanese car. If they do stay with low inventories and not much supply, I think they will all jump in there and try and take advantage of that.

Alright. Thing for taking the questions.

Sure.

Marci Ryvicker with Wells Fargo.

Hello, Marcy.

Hello, good morning guys. It sounds like you're guidance is taking into account the potential slowdown in auto from what you just said in terms of your last answer. Is that the right way that I should be taking it? Meaning are you taking higher than your guidance?

Marci, certainly were reflected everything we know of today. Certainly, things could still happen before the end of the quarter, but we've tried to factor in everything we've known so far. But kind of a big picture comment on second quarter is even with the slowdown, some slowdown we are seeing in auto because of the disaster in Japan, we are still actually tracking a little bit of head of our baseline expectation, and so we are -- reasonably pleased with that . Part of that above is, again, the strength in local which is a little bit better than we had anticipated. That seems to be holding up so far.

And then, certainly, the overall numbers held by a little bit , with political being a little stronger than we anticipated as well. And a lot of that political is really April money where the Wisconsin issues build into the judged rates that was in April. So, all in all, I think we feel, right now, pretty good about second quarter even knowing that the Japanese auto makers are probably going to be slower than anybody -- a little softer than anybody

All right. And then I think you mentioned you signed your reverse comp agreement with Fox, did you say that?

We have an agreement in principle, and we're working on a long form agreement with them now.

Okay. Can you tell us if it was a percent of returns or a set fee?

I -- Fox is very sensitive to public disclosures. So I guess I just say that we, like Bob said, at the end of the day feel it's a livable situation, workable situation, and we are just going to move forward.

Is this in your guidance for the second quarter and for full-year expenses?

It really wouldn't be hitting anything until -- anything of any significance until next year. And even then, not to a great extent at all.

Okay, and then my last question, you seem very excited about local news in HD. So can you tell just us what benefits you see? And I guess the positive reaction you're seeing in your markets from those that are up and running right now?

Marci, I think the main thing is, as you well know, the HD penetration in the country now is way over 50%, probably heading to 80% by the end of this year or next year. And people are used to watching HD all day long now with the network programs, the sports especially, and they know now when those bars show up on the side of the screen that it's not HD, and they don't like those bars, and we heard about it pretty quickly. And I think I mentioned that we had a market where we were not the first one to go local HD, and the station's been a perennial number three in the market went HD before anybody else, and the very next book they jumped to number one.

It's just because people, if they've got a choice, they want to watch high definition, it's just a better product as I have been saying for several years now, and the advertisers are really pushing, evan all your local advertisers, for HD commercials, because here again, their product looks better in HD. And I just think we are very fortunate with the news leader virtually all the towns we are in, or most of them, and strong number 2 in the ones we are not number 1, and I think it's incumbent upon us as news leaders to make sure that we are providing the very best product we can to our viewers and our advertisers. And I think people expect that of us, and I do too frankly. And I think that's something we have been fortunate to be leaders most of these markets for a long time.

As I like to brag at conferences, we've got 16 stations been number 1 for 50 straight years or more. That's a long period of doing the right thing by these markets, and we want to make sure we continue to do that, and HD is here to stay and we want to be leaders in it.

Thank you so much.

Sure Marci.

(Operator Instructions) Bishop Cheen with Wells Fargo.

Hello everyone, thanks for all the -- .

You slowing up, buddy.

Yes I am.

We all are.

Thanks for all the color, this is helpful. Let me focus on some balance sheet stuff. You guys have done a great job in obviously producing the balance sheet and bringing normalcy out of chaos. But that pesky preferred is still there, and I'm sure it drives you crazy. Is there any color you can give us on a preferred solution? What you can do, what you might want to do in calendar 2011?

Bishop, as you know, our senior credit facility restricts us to not more than $10 million per calendar year of restricted payments. That's the very simple answer I think at this point. I think it would be fair to say that we do think about the preferred a little bit, we would like to be opportunistic, but in a reasoned approach. There is the restriction currently in the senior agreement, so if we were to do anything beyond that, certainly we would have to go to the senior holders and get a consent, which does -- it's not impossible, but certainly that raises issues as to what it takes to get something like that. We would like to be opportunistic there at the right time, and the right set of circumstances, and that is something we will continue to think about.

Sure, understood. And you just within the last 30 or 40 days, I think, maybe it was longer, you've already amended the credit facility recently, correct?

No we haven't. There has been no change in the credit facility since last year. What you may be referring to is we did trigger, on April 1, senior facility move to a pricing grid, and you're actually able to reduce our spread down to a L350 because of the leverage cast in the price -- .

That was already designed in -- ?

Yes, that was already built in from a year ago, and we couldn't use the grid for 1 year, but on April 1 we became eligible for the grid.

Okay. All right, so then moving on. Yes, we are very thankful that the tower fall was not worse. And all that, that implies. So these things are, they take awhile. Can you give us a little color on what the deductible is? And how we might think about the time, usually there is some outflows and some special insurance payments -- ?

Bishop, my recollection is the deductible is $50,000, so it's really inconsequential to us. Actually, the insurance company has been very good working with us so far, and has actually advanced us some funds towards the beginning of the rebuild process. And we expect that to be continuing at appropriate points in time as we look forward, so there won't be a big liquidity issue for us from running it and then settling up later.

From a business interruption standpoint, as Bob said, it has been negligible. So we really don't, within less than 48 hours, for all intents and purposes, we were back to full market coverage. And a combination of hard wiring into the large cable company as well as the, both the Quincy station and the Fox station each allowing us to piggyback on their digital second channel to get our signal out. And that allowed us to establish, once we get onto the D2, got us reconnected with the satellite guys as well. Other than putting 2000 feet of steel back in the air over the next course of the year, it's really a non-event, fortunately.

Okay. And just from a pure earnings and the rhythm standpoint, it sounds like you won't expect to have any meaningful impact on the way the accounting works on your earnings, or how you need to guide us through things?

Well, there will be eventually when we have a better ability to estimate the entire rebuild cost, there will be a technically a gain on the insurance proceeds, I would think of it really as a non-cash gain simply because the insurance money, the cash is going to come in and the come right back out to rebuild the tower.

So the rebuild is financed from the insurance proceeds, but there will be an accounting gain eventually, if we take the money, the amount we will get from the insurance company, and deduct the basis we had in the old tower, which was about $100,000, and the differences is going to be a pay per gain that will ripple through. But again, that has yet to be determined what that number will be, and until we get to a point where we can reasonably estimate it, we're just not in a position book it more data.

Okay, well look, knowing you, you will guide us through whatever we need to know for the resolution for earnings. I have complete faith in you James. And then the last question is the favorite, it's balance sheet and debt pay downs. We can measure either by leverage, where you'd like it to be as you head into the 2012 political cycle? Or we can measure by how much more debt you think you would be able to take down in the 3 quarters of 2011?

Well, let me start first, Bishop, we do have some incremental debt capacity in theory, because we are below 7 times on our second lien note it venture right now, and we are allowed to incur debt up to 7 times. And obviously the natural cycle of the off year, maximum debt, theoretically debt number is higher early in the year and slowly works its way down, and by the end of third quarter we will be back about 7 times on a trailing 12 month basis. And other than revolver borrowing, really have no incremental debt ability.

So that's going to follow a natural cycle over the course of this year, and obviously in a political year at that cycle reverses itself and goes the other way. I think at the end of the quarter, on a trailing 12 basis total, leverage was at about 6.1. And again, senior leverage was about 426. If the year goes the way we certainly think it will, and hope that will so far, I think your senior leverage is going to continue to fall probably into the very lower 4's, and that's on a trailing 8 quarter basis. Obviously the leverage level will pick up on a T 12 basis simply because of the beyond off year effect of the cash flow.

But we think we will be in good shape at the end of the year, either at, or a little bit better than where we would've thought we would be this time last year, and well-positioned for the 2012 cycle.

Fair enough. Sounds right to me. Thank you gentlemen.

Thanks Bishop.

(Operator Instructions)Barry Lucas with Gabelli and Company.

Thank you, good morning.

Hi Barry.

Hi Bob. Couple of quick items, maybe, can you remind us what CapEx will be this year, higher than normal for the HD deployment? And then where that falls off to next year?

We are shooting for $20 million Barry, and then next year I would say, Jim correct me, but we probably would be more in the $12 million to $15 million range next year.

I would agree with that Bob, and also just to be clear on the $20 million for this year, that would exclude any CapEx from the Tower rebuild that's funded through the insurance proceeds. Again, were not exactly sure what that number is going to be, but since that's covered by insurance that's not part of the $20 million number we are talking about.

Okay, helpful. And we would like to think that as you said Bob, that the domestic auto makers will take advantage of the Japanese misfortunes, but have you seen the domestic nameplates ramp-up their spending in 2Q pacings to take advantage?

We have not seen that, Barry, with the domestics. I said it looks like the Korean key on Hyundai seemed to be picking up though. They're not exactly friends with the Japanese anyway, so maybe they are jumping on them quicker than our guys over here. And evidently, General Motors and Ford seem to be doing well, and maybe they feel they're doing just fine doing like they are doing. I don't think anybody knows how long this part shortage and car shortage is going to last, so it may be a 90 day thing, a 6 month thing, or a year thing, I don't think anybody knows at this point.

The Japanese are pretty resourceful, and I wouldn't count them out on getting cars built quicker than we think they can. I'm surprised domestic hasn't jumped up more, but like I said, we've seen it with Korean manufacturers but haven't seen much on the domestic side yet.

Okay, helpful. I understand the sensitivity of Fox in these discussions on reverse re-trans, but is there any sense that you can provide that Fox gives something and doesn't just -- it's not just a claw-back?

I'll let Jim answer that. I get in trouble sometimes when I answer.

Barry, keep in mind we've got our Fox, There is 1 low-power and 4 digital secondary channels. So, first of all, our Fox footprint is tiny. In our case, getting the cable space, the MSO space for those digitals especially, the Fox name and programming, both in sports and primetime, is certainly what got us that very valuable shelf space. There are certainly continuing to provide all of that going forward, and that does give us a stronger position in order to have those channels up and active in those markets.

Okay that's helpful Jim. Last item, I'm going to put on my Bishop Cheen hat here, and as you look at the bank credit agreement, I know goes out to '14, but we still got some pretty attractive interest rates right now that are only likely to go in one direction, so how do you think about the credit? What you think about going back to the banks and maybe amending and spending further, or is it too early? How do think of that Jim?

I think that's something that we understand, first of all, that the credit markets are very strong right now, and that certainly rates are at, what appear to be, at least from what we are hearing, pretty attractive levels. I think in very general terms Barry, that's something to think about and consider.

Right now, we do have a pretty well priced agreement and its LIBOR 3.50, there's no LIBOR floor, so there's a little bit of a -- if you thought about it I agree in the -- over time rates are going to go up, so it is something to I think be thoughtful about as to whether, there might be something -- an opportunity to do something that's opportunistic, but at the same time doesn't necessarily drive up in a very, very short-term, meaning this year and into early part of next year wouldn't accessibly drive-up our short-term cost as well, because we do have a very attractive deal right now.

That's something to think about hard.

Okay, thank you.

Thanks a lot, Barry.

And gentlemen it appears there are no further questions.

Operator we want to thank everybody for joining on the call. As always, we answer our own phones, so call anytime if you need any other information, and we look forward to talking to you at the end of second quarter. Thank you everybody.

Once again that does concludes today's conference. We thank you for your participation.