Gray Media Inc (GTN.A) 2011 Q4 法說會逐字稿

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

Thank you very much, operator and good morning everyone. Welcome to the fourth quarter and 2011 year-to-date Gray Television earnings call. I will begin with a brief overview of our results followed Bob Prather, our President and Chief Operating Officer, who will add his thoughts concerning our performance this year, and then Jim Ryan, our Chief Financial Officer, will follow with a brief discussion and financial highlights. Questions will be answered at the conclusion of our comments.

All in all, we are quite happy with our results for the fourth quarter and full-year 2011. Although our total revenue dropped by 26% to $84.6 million for the quarter and dropped 11% to $307.1 million for the year, this was entirely due to the 2011 being an off year political cycle. This quarter, we dropped $28.6 million in political advertising from the record pace we set in last year's fourth quarter, where we hit a record of $114.6 million in total revenue due to a Company-high political advertising of $57.6 million. This year, significantly, we have also set a record of $13.5 million of political advertising revenue for an off-year quarter. The previous record being $10 million in 2009.

Of our five largest advertising categories, automotive, restaurants, medical, communications, and furniture and appliances, for the quarter, automotive increased by 17%, restaurants decreased by less than 1%. Medical increased by 18%. Communications decreased 2%. And for the full year of 2011, all categories increased. Automotive increased by 6%. Restaurants increased by 1%. Medical increased by 12%. Communications increased by 3%. And furniture and appliances increased by 7%. The solid performance and steady growth of our core television properties resulted in net income of $7.5 million or $0.10 per share for the quarter and net income of $9 million or $0.03 per share for the year. We also used our free cash flow to reach our $20 million of our outstanding preferred and accrued dividends in 2011, continuing our ongoing efforts to improve our balance sheet.

As we look to 2012, we expect robust and likely record growth in earnings for the year. We have had the Super Bowl on NBC, which was a huge ratings success. This summer, we will have the Olympics from London, also on NBC, which may be one of the best viewed Olympics ever. We are certain to have a record shattering presidential election year regardless of who the Republicans eventually nominate. I would also like to take a brief moment to publicly acknowledge a number of individuals who have been vitally important to the growth and success of Gray Television over the years. First, I would like to thank Bob Beizer, our Vice President of Law and Development for his 16 years of service with our Company. Bob will be retiring at the end of this month and we want to wish him the very best for the future.

Second, I want to thank Senator Zell Miller of Georgia for his service on our Board of Directors. He announced his retirement at our last meeting. On behalf of the Board and of the Company, I want to publicly thank him for his advice and counsel over the years. Finally, I want to recognize Mr. Neal Ray who has served our chief outside legal counsel and has worked with the Company since he began his legal career in the year early 1960s. Thank you, Neal, for your invaluable help over the years. I also want to take a moment to welcome Kevin Latek to our Company. He joins us as our new Vice President of Law and Development. Many of you know Kevin and are aware of his work in the broadcasting industry. We are proud to have him become a full-time team member with Gray Television and welcome him the first of March. With that I will turn it over to Bob Prather for his further comments. Bob?

Thanks, Hilton. Welcome everybody. I won't talk too much about last year. It seems like ancient history now. We had a good year and I think everybody realized that. The industry had a good year over all and once again our results are right at the top of the industry which we are proud of. 2012 is going to be a great year for us. Obviously, political is going to come in probably bigger and better than we think. As Hilton mentioned, we will have the Olympics which should be -- has always been big for us. And we have NBC with the Super Bowl, which NBC is around 42% of our revenue so it's a much bigger factor for us than when FOX has it, for example, which is a -- our ABC is a much smaller part of our revenue.

Anyway, we are really happy to be entering] this year. We are working on the same stuff we keep talking about. We are trying to get all our stations local HD. We've got about eight or nine to go, most of them in our smallest markets, but we hope to finish most of that up this year. I think it's extremely important. HD is clearly taken over the TV business and I think most of you who watch TV, if you've got an HD, you can't watch good old standard definition television anymore and I think the country is rapidly feeling the same way. So I think HD is going to continue to be a very important. One of the things we are working hard on is continuing our news dominance. We have been number one with most of our stations, the vast majority of our stations, for 50 years or more. We want to continue that and I think it's important that we embrace the social media going on today's world. We are actually involved in all our stations with Facebook and Twitter, trying to engage our audience and more interactive discussion about the news, trying to make the news more and more local, local, local. I mean I think we -- everybody says it. I think we have proved we have done it over a long period of time.

Most of the towns we are in, as you know we are in midsize towns and smaller towns, the local news is even more important than sometimes in a big city where you live in a certain part of town and you really are not interested in what is going on all over the rest of town. But most of the towns we are in, the local news is important to everybody in the town and we want to continue our dominance in that area. We are also working on a lot of news research. We did a lot of research in over 20 stations last year. We plan to do some more this year to continue to learn what audience are wanting these days.

It's a new world out there. People 30 and under get their news in different ways than we did in the past and I think we've got to be alert to this. We continue with a very strong news strategy, both from the internet side, the mobile side, and we want to continue to improve our game in this area. We are also looking at the more local live program and this is something that more stations are looking into. We are looking hard at it from a lot of areas. I think it is something that makes sense. It kind of takes us back. A lot of us have been watching TV a long time back when we were growing up. Most shows, most stations in towns had live programming. I think you are going to see a lot of that coming back. It's something we control 100%. Something we -- the content and the advertising is local and I think it's something that we are looking hard at and seeing if it -- make it work economically in the next 12 to 18 months.

Here again, I think it is going to be a great year. Political, I think, speaks for itself. We have, I guess, for the last five or six political cycles, have had the highest percentage of political revenue of any group in the contrary and that goes back to our dominance in number one stations and the fact that our newscast in these towns are the ones that people want to watch, and in most of the towns where we are number one, we normally get about two-thirds of the political spending in those towns. So political ought to be huge this year, both on the presidential level and even -- though there is not as many governors races, there's a lot of going to be contested races, a lot of issue money out there and also we've got a -- looks like an election coming up from the recall of the governor up in Wisconsin. I am looking forward to a great year and I will turn it over to Jim and then we'll open it up for questions. Jim?

Thank you, Bob and Hilton. I am going to keep my comments brief because I think both Hilton and Bob have covered a lot of ground already. But a quick follow-up on Bob's comment about political is we pointed out in the release, the political in '11 set a new all-time off-year record of $13.5 million. And if you look at our guidance for Q1, the range we have out there for political puts us about $0.5 million ahead of our previous high water mark of $3.1 million in 2008. So again we are off to a good start on political.

Focusing on some balance sheet items for a minute. The total debt was $837 million. Our senior facility was at $472 million, including a $9 million draw on the revolver which was just a short-term liquidity usage and, as of Monday, we will have fully repaid all that $9 million. The second lean notes obviously were at $365 million. The cash flow in the credit facility definition is $97 million for the year on a trailing eight-quarter basis, it would put it at $116.6 million. Our credit facility first lien ratio was 4 times. We are well, well within the 6.5 times covenant. Programming payments for the quarter were $3.5 million and for the year about $15.9 million. We are going -- we expect savings there going forward. Obviously, with Oprah having cycled out earlier in '11.

Program amortization for the quarter was $2.8 million and $13.5 million for the year. Our total cash taxes for the quarter was $36,000. For the year, it was $465,000. Obviously with the anticipated increase in revenues, especially from political, we would expect to step up a little bit in cash taxes, but right now I don't think that number is more than about $1 million in 2012 and that is state tax related. As you know, we have a very, very large federal NOLs that we will be using for the foreseeable future. At this point, Bob, I will turn it back to you.

Thanks Jim. Operator, we are ready for questions.

(Operator Instructions) Aaron Watts, Deutsche Bank.

Hi guys.

Hey Aaron. How are you doing?

All right. A couple questions on the outlook. I was curious if the Super Bowl is kind of pushing numbers that you provide us around a material amount, and maybe, I know it's hard to do, but if you think about things excluding the Super Bowl impact, still fairly healthy out there, and maybe also tied to that, any big changes from the category trends we saw in the fourth quarter into the first?

As far as the Super Bowl, it was $800,000 plus on NBC, which is much higher than, obviously, with our four small FOX stations. But CBS is, obviously, the biggest hit when we get CBS Super Bowl. But it's a nice one day payday for us, but I think the overall trend is looking good. National is a little bit -- you never can predict National. Right now it's a little bit flat. Nothing to write home about.

Local seems to be very strong in virtually most of our markets, I think. In the categories, auto is continuing strong. National, here again, is a little bit flat, but Local, although, seems to be strong. I think there's still a huge pent-up demand for cars out there and we're still way behind the selling the number of cars we were selling back in 2007 and 2008, so there is plenty of upside to go. A lot of people got old cars that they are ready to trade in and the rates are fantastic right now.

Interest rates and financing is pretty much wide open in the auto industry. So I think Local, we definitely feel real good about this year. National, like I said, it's up and down. I think it will be pretty strong by the -- over the balance of the year.

Okay. That's helpful. And then, with the NBC agreement, recognizing you can't really give us exactly how it's going to impact your P&L, but can you just maybe give us some framework around how that is going to be structured? I know there was some talk about NBC negotiating on behalf of its affiliates going forward. Any details you can give us on that?

Aaron, NBC, our agreements were up in January. We talked to them in November and December and they asked us for a three-month extension, which we have given them to continue our agreement like it was in the past. We have yet to hear back from them regarding starting negotiations.

I know that they are still working on trying to come up with a plan for a proxy-type deal for re-trans negotiations. Up to this point, I don't think they have anything they are ready to bring to the affiliates. So, we are frankly sitting on hold and really don't have any other details that we know of that we could tell you.

Okay. Last one for me and this is a little bit bigger picture, maybe tying to your first answer to my questions. I was reading today about how Procter & Gamble may be looking to reduce its marketing spend, partially by shifting things away from broad-based like traditional television spend to more targeted online spending. To me, that's more of a national issue. Just curious if you're seeing any of that either on the national or local level, probably more so, people looking to shift away from TV and into targeted marketing online. Thanks.

I have not really seen it local, although I think everybody out there wants to have a digital strategy and I think that's probably smart business in today's world. Here again, I think it's incumbent upon us to keep some of that business and capture new business. I think one of the --we've done real well on our digital strategy. Had a great year in 2011 and look for even a better year this year. We are getting a lot of advertising.

So we hope a lot of that advertising that may shift from TV would go to our sites and also I think we are out there getting a lot of nontraditional TV advertisers to advertise on our websites and our mobile, and that kind of thing. But I think it's going to be a continued -- National maybe a little tougher. I think national is going to continue to have these big advertisers looking for more targeted ways to -- but TV at the end of the day is still the only way to get, for a consumer product company, to get a mass appeal out there to virtually every American and I think it is going to stay that way for a long time.

Thanks, Bob. See you next week.

Bishop Cheen, Wells Fargo.

Hi, Robert. Thanks for the rundown. Okay, so you guys do a great job in the press release laying out all the details and the numbers. Let me go to Jim on the balance sheet. Preferred, I think it's roughly $45 million, $46 million, $47 million, say something like that when you add back the discount.

You are in a big free cash flow cycle year. Your growth in political, et cetera. Any thoughts you could share with us about how you would like to retire that preferred, and if you could remind us again if there is any constraints? I don't think there is now for you to use free cash flow to start retiring the preferred.

Bishop, first of all, you are right. It is going to be a very strong free cash flow year for us. If you think about 2010, we, after interest service, CapEx, cash taxes, we had $50 million of cash to work with to pay down debt or whatever else in that year. Certainly from our earlier comments, 2012 should be a better year than 2010. So, we obviously we are in that much better of a position. The senior credit facility allows us, given where our first-lien leverage ratio it is, will allow us $20 million of restricted payments per year.

So, we would have that capacity this year. Now the second-lien note indenture does limit us and prohibits us from making restricted payments when we are above seven times on a T12 trailing basis total leverage ratio, but as we cycled through this year's political, we will come back down underneath that by, certainly I would expect by the end of third quarter.

So we have the opportunity to further address the preferred later this year and we certainly based on our actions I think in 2011, would be -- if the opportunity presents itself will probably think real hard about that opportunity. That being said, given the strength of the political and the characteristics of the overall year, there will still be a lot of free cash flow generated, which, as you know, if we are not doing anything with the preferred, it is going to go to reduce the term debt on the senior facility.

That is great color. And just noticing that the term loan is 2.5 years away, not exactly in the zone of near-term, but would you look, given the state of capital markets, at recapping both the term and the preferred, sort of a bar-bell approach?

Certainly, the markets have come back a lot since about this time last year. As I think everybody on this call will probably realize better than us, it's been a roller coaster ride over the last year. We are watching that. As you said, there are basically two full years left of before we are really starting to approach, really get close to maturity windows.

It's something we are going to keep an eye on about rates and deal structures and consider being opportunistic, at the same time balancing the fact that we've got a -- all things considered a pretty good rate on our senior facility right now. If we do anything there, that rate may or may not change.

Secondly, notes coming to call rights beginning in November, although the first call right is probably a little expensive, but it all boiled down to, Bishop, what the markets are giving for rate on new money and whether it ultimately makes sense or not. But it is something we are definitely going to keep our eyes on as we go forward.

Well it's a nice uptown dilemma. You have a lot of optionality there.

Thanks, Jim.

Thanks Bishop.

Marci Ryvicker, Wells Fargo.

Hi, good morning, thanks.

How are you?

Good. Just a question about National. Is the somewhat weakness there have anything to do with the scatter market at the network level? Can you just talk about any correlation between Scatter and National spot?

Marci, I've been watching that for a long time and frankly, I don't see a correlation. There may be one, and maybe in the bigger markets, they might feel it more, but I think in our size markets, it is just not -- I've never been able to see a correlation between it. I am not saying it's not there, I just don't see it from where I've been watching it. I keep an eye on it year in, year out. I just don't -- I'm not sure there's a correlation.

The National is a misnomer. All National means, and I don't think people don't realize this, is just that it's not locally placed advertising. So, even though there may be a, quote, National buy coming down, they may only want to buy 10 of our stations or 15 of our stations or 5 or whatever. It is a misnomer and National, we found that over the years, other than the big markets, the top 25 markets, really jumps around a lot to do, I think, with just testing markets.

I think they move money around a lot more in some of the medium-sized markets we are in just to see what effect they have on consumer spending and consumer thinking, and so we've always looked at National. We like it, but here again, we would rather -- we're 70% plus Local now. We would rather be 80% frankly. If we can keep growing our Local, that's what we want to do in the years ahead.

Okay. And then I just have a quick one for Jim. The guidance for re-trans in Q1. I think the $8.4 million. Is that a good run rate for the rest of the year? Or should we see another bump at some point in time?

No. That would be a pretty good run rate for the year and that reflects the renegotiation and renewal that we did on about 40% to 45% of our subscriber base at the end of the year. There will be a little bit of fluctuation in that number. Of the overall amount, there's a relatively small component, very small component, that is add by, related, and obviously the MBPDs in those few instances, where that's a component. Do have some discretion to spend that during the year, as it matches their marketing needs. But that is not going to move the needle quarter-to-quarter by a whole lot.

Okay, great. Thank you both so much.

Thanks, Marci.

(Operator Instructions ) Barry Lucas, Gabelli & Company.

Thanks and good morning.

Hey, Barry.

Two items maybe for Bob and then for Jim. Bob, you touched on Digital and Social Media. So, I was hoping you could just expand a little bit on the thread or opportunity, and how does a Gray Television take advantage of -- if you can, of Facebook, Twitter and some of the other social sites?

Well, what we've done -- Barry, all our news directors and our GMs are very focused on making sure that virtually all our on-air people have active Facebook pages and Twitter pages with dialogue, with their viewers. It's amazing when you think about it, but most -- all the big events, if you think about it, just take three examples in the last year.

Bin Laden getting killed was on Twitter before the President came on TV and announced it. The tornados in Alabama were all over Twitter before anybody got a hold of it on the National media. And even the Whitney Houston was out on Twitter before it got to all the news networks. So I just think it's something we've got to embrace. Young people especially are, and not just young, you are reading where Twitter is growing in all age groups. And the same way with Facebook. It's a new source and I think we've got to integrate it totally into our news product to make sure that we are out there, what the public wants, frankly.

As more and more young people -- I've got a three-year-old grandson that can operate an iPhone better than I can. What's going on out there in today's world with the technology is, we've got to embrace it and we have to wrap our arms around it and make sure we are seen as being on the cutting edge, as far as the viewers are concerned, whether you are 20-years-old or 75-years-old.

I think we've got a good plan in place and I think we'll continue to tweak it and improve it. But it is something I think is very important to us, especially going back to, at the end of the day, our basic mission, I think, every day when we wake up is make sure we put the best possible local newscast we can on in every town we are in. I think as long as we are doing that, we are going to be, as I've always said in the past, technology proof.

Great. Thanks, Bob. One other item. If you think about the question that Bishop asked on capital markets and maybe extend that to the M&A market, and then think about your portfolio of stations. Are there opportunities maybe to take advantage of a more active M&A market, prune the portfolio, maybe find some other duopolies that fit better? How carefully are you examining those opportunities?

Barry, we look all the time. I think it's incumbent upon us to make sure we know what's going on out there. My impression is that there were a fair number of deals, the Freedom deal last year and then the four points that Sinclair did, NextStar and (technical difficulty) they were up for sale. I have not heard anything on what's happened there. Nothing has happened yet. I guess it's been seven or eight months or longer.

My impression is multiples are just not attractive enough to sell anything right now. I am not saying that -- I think we've got an open mind, but knock on wood every year, but year-in, year-out, we don't have a single station that's not performing well. All our stations perform well in their markets. They are all profitable and we are happy with them. We have got good managers. It would be -- I'm kind of like Warren Buffett. We are not looking to sell anything, although I think if something that came along that we would look at any offer that we could not refuse, I guess you would say.

I think the M&A market is still going to be challenged for a while. I think the private equity guys are on the sideline, kind of looking in. I think at some point if they think multiples have dropped low enough, they may jump in, but I think currently right now, you just -- I don't think you're going to see many deals get done in the near future because of what is going on out there, the attitude.

I think most of the TV guys, us included, are looking to pay down debt, not increase debt right now. I think you're going to see everybody would like their balance sheet in better shape after we all went through what happened in 2009.

Great. Thanks very much, Bob.

Okay, Barry.

Matt Swope, Gleacher Securities.

Good morning, guys. Hi, Matt. Jim, could you remind us on the Young deal, how long the contract for the consulting is?

That will end at the end of this year, 12/31/12. We are starting our final year.

And what happens from there? Do you think that will get redone or do you think that goes away?

I think it's premature to speak to that, one way or the other. It is over. There is no automatic extension rights or renewal rights. It is really up to the both sides to decide whether it continues after 12/31 or not.

Is there anything in that agreement that, maybe following Barry's question, that gives you a look to buy those stations?

No. There's nothing but a little color on that when that agreement was first put into place several years ago actually. The Young side was very adamant that there would be nothing like that so that it would not color or even have the appearance of coloring any possible thing that they would want to do in the future.

So, if something comes up in the future on those lines, we've -- we don't have any special privileges. We'd have to compete in the market just like anybody else for a deal. If and when or if ever a deal came up.

That's helpful. And then Jim, you also mentioned earlier that the seven times our P-test and your bonds, and I think that maps to the incurrance test as well. Is it safe to say, as you think about your capital structure, especially post that amendment you got from the credit facility last year, that until you are under seven times, there's not a lot you could do there?

There's not really a lot I can do with RP until we get below seven. You're correct. The point is that we should be back well below that and continuing to move down below that by the end of Q3, and therefore have flexibility and certainly be in that much better of a position by Q4.

But that said, it would be hard to see any capital markets activity from you until later in the year?

I take that in two pieces. One is, if we are using free cash flow to do anything with the preferred, you're right. That does not come until later in the year. As far as a broader question of capital markets and maybe a potential refinancing or partial refinancing, I think it goes back to what the overall markets look like, what the rates look like, how opportunistic we could be, and I think there's more flexibility there on timing, certainly. We are allowed refinancing debt under the second liens. It would be a case of more of what opportunity is out there in the marketplace on any given day and whether that make sense or not to us.

Got it. That's great. Bob, maybe one for you.

Yes.

We are kind of back to the digital spectrum question and it feels like maybe we are getting a little closer to a situation where the TV spectrum could come back into the mix. If there were a situation where, through some auction process or some other vehicle, that you were going to be paid for your spectrum, could you see that happening?

Matt, that's a good question. I think it would boil down to a question of dollars. We've got 40 digital channels on the air. They are profitable, doing real well. We are doing what the FCC originally intended us to do with the spectrum. If an auction happened out there and there was a real viable market that was, we thought was, selling some of the spectrum was more valuable than doing what we are doing with television, I would say we have to look at it.

I don't see that happening anytime soon. And like I said, we are very -- we like what we are doing with our spectrum right now. We are doing well with it and we want to continue to grow our digital footprint on that side of the coin. I would say that we never say no, but I think we would have to have a real attractive offer to want to sell any of our spectrum.

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

Thank you.

And gentlemen, at this time, we have no further questions. I will turn the conference back over to you for any closing remarks.

Thank you very much, everybody. We appreciate it. We're looking forward to a great year as we said. You know you can find us anytime. We answer our own phones, so don't hesitate to call if you've got any further questions, and we'll look forward to talking to you in June or thereabouts, about first quarter and what's going on for the 2012. Thanks, everybody.

And that does conclude today's conference. Again, thank you for your participation.