Gray Media Inc (GTN.A) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Gray Television's first-quarter 2012 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.

Thank you, operator, and good morning, everyone. Welcome to the first-quarter 2012 earnings call for Gray Television. As the operator mentioned, I'm Hilton Howell, Vice Chairman and CEO of the Company.

I will make a few brief comments, followed by Bob Prather, our President and Chief Operating Officer, and then Jim Ryan, our Senior Vice President and Chief Financial Officer, who will all add their own color to this quarter's outstanding results. Questions will be answered at the conclusion of our comments.

Candidly, it was a fantastic quarter. Total revenues soared by 16% to $80.6 million from $69.7 million last year, a $10.9 million increase. Record-setting political advertising and retransmission consent revenue coupled with strong growth in local advertising and Internet advertising were behind this quarter's record-setting results.

In what we see as a sign of things to come, Gray received $5 million in political advertising this quarter, a new record for first-quarter political ad spends. To compare, in 2011 for the first quarter, Gray received $1.4 million in political advertising. In 2010, we received $2.8 million. And in 2009, we received $3.1 million.

In what we can only see as a sign of an improving economy in our core advertising categories, our five largest local and national advertising categories all increased. Automotive increased by 8%. Restaurants increased also by 8%. Medical increased by 15%. Communications increased by 17%, and furniture and appliances increased by 5%. These excellent results led to net income of $2.2 million or $0.04 per share for the quarter compared to a loss of $4.9 million or $0.09 per share last year.

In our last conference call, we said that we expected robust and lively record revenue growth and earnings for the year and our results today have, we believe, confirmed our confidence. The Super Bowl on NBC produced about $600,000 in increase for Gray compared with last year's Super Bowl broadcast on the Fox Network. Further, we believe that the NBC broadcast of the Summer Olympics from London will be a certain ratings winner for the network and for Gray's 10 NBC stations this summer.

Obviously we expect continued to record-setting political advertising in this presidential election year.

We are also proud to note that on April 4, Standard & Poor's raised its corporate credit rating on Gray from B- to B with a stable outlook and this past Monday, Moody's followed suit and raised its outlook on Gray to positive.

With regard to our balance sheet this quarter, we have continued to reduce our debt and have prepaid approximately $10 million and expect much more substantial debt reduction to the balance of the year. Clearly we are very pleased with our results this quarter and expect great things for the rest of 2012.

With that, I will turn it over to Bob Prather. Bob?

Thanks, Hilton. I appreciate it. I think Hilton summed up pretty good. It was a good quarter. We were very happy with it. I think the rest of the year is looking strong right now. The economy at least for the broadcast industry seems to be coming back pretty strong. Local has been very, very good.

Automotive is leading the charge, as you would expect. I've talked to a lot of our managers and a lot of car dealers around and they are all saying that they are getting a huge amount of activity in showrooms and the key thing is that financing is available. Interest rates are at all-time lows. Leasing is back in a big way. And so I think the car dealers are going to continue to have a very, very strong year the rest of this year.

There's a lot of pent-up demand from 2009 and 2010 when the volume of cars that sold in this country dropped close -- almost 40% during that time period. So I think there's a lot of people out there sitting with five-, six-, seven-year-old cars that are looking to get a new car, so I think this is going to continue.

We are continuing our local HD conversion. We will be through with virtually all our stations except for a few of our smaller markets by the end of this year. I think it has gone extremely well. I think it's extremely important. I think all of you that have an HD television, I'm pretty sure everybody on this line has probably got one, you can't watch standard definition anymore once you've watched HD and that includes local news.

I think people walk with their feet if you don't have local news on in a market, somebody else does. We've been very fortunate to be first in most of our markets with local news and where we weren't first, we were right behind whoever went on first. So I want us to continue this. I think it's extremely important for us to maintain our news presence and also to maintain our strong number one ratings in three-fourths of our markets. So this is something we want to continue.

As Hilton mentioned, political is coming in strong. Wisconsin has been extremely strong, not only -- you've got a lot of factors up there with this governor recall race and the union situation up there, so that's a little bit of an anomaly. But we take the money where we can get it and we've got three very strong stations in Wisconsin. I think we will continue to benefit from the political spending up there.

I don't think you can extrapolate that to the rest of the station's markets, but I do think it's going to be a great political year all the way around. And as you all see, they are all raising regular amounts of money and I promise you they will spend it. That's the good news.

We are trying to do a lot of things in the area of continuing to improve our operating efficiencies, looking for more ways -- we have introduced these backpack units called TVUs. They are doing fantastic. Our stations really love them. They allow a photographer, reporter to go out virtually by themselves and send that live over the Internet through cellphone circuits. The picture quality is very good and we actually retired 11 live trucks this year by getting more TV units in the hands of our reporters.

So I think this trend is going to continue. I think it's something that is great for our business. This unit seems -- they get bored every time they come out with a new generation, they get better. So I think you're going to see this as something -- a way for us to be much more efficient and continue to give the excellent news coverage we do in our markets.

One other thing I wanted to mention, Hilton mentioned it briefly, I think it's very important we continue to pay down our debt. Our goal is to pay down at least $50 million of our debt this year, which I think we're well on track to do and next year obviously won't be political but we will continue to pay down debt.

We would love to get our balance sheet where we are consistently in the low 5s, even under 5 times our debt to cash flow ratio and I think this is important to all the management and our Board and we will continue marching down that road.

At this point, I will turn over to Jim Ryan, our CFO, and then we'll take some questions. Jim?

Thanks, Bob. Good morning, everybody. I will keep my comments brief and focus basically on the balance sheet.

At the end of the quarter, we had our senior term loan was at $461.8 million. Of course we have the second lien notes at $365 million so our total debt was $826.8 million. We had nothing drawn on our revolver and we had $15 million of cash.

Our first lien leverage ratio under our senior credit agreement, which is a trailing eight quarter calculation, we were at 3.71 against a 6.5 covenant. Our free cash flow ratio under the senior agreement again a trailing eight quarter calculation was at 1.32 against a one-to-one covenant.

Our Series E Preferred outstanding including the accumulated dividend was at $40.7 million at the end of the quarter. CapEx for the quarter was approximately $6.8 million and as we said last time on our call, we are expecting about $20 million for the year.

Cash taxes for the quarter were a de minimis $5,000 and for the year, we are expecting somewhere between $500,000 and $1 million and that is due to in certain states. Again we have a very, very large Federal NOL. Program payments for the quarter were $2.8 million and that was essentially the same as the amortization number as well.

With that, Bob, I'll just turn it back to you.

Thanks, Jim. Operator, at this time we would like to open it up for questions.

(Operator Instructions). Bishop Cheen, Wells Fargo.

Hi, Robert. Hi, Jim.

Bishop, I'm glad to see you've still got the fastest fingers in town.

Yes, all four of them. The update was very useful, so let me just focus on two things. One on operations, one on the balance sheet.

On operations, can you give us a primer we can understand on retrans? For the timing differences I believe the protocol now is the retrans revenue is all sort of baked into your broadcast revenue, but the reverse compensation or retrans expense is just sort of tucked into your call it operating broadcast operating expense line.

Is there a timing difference this year between your commitments to reverse retrans and your escalators in your retrans agreements with your broadband carriers? Is it making your EBITDA and your expenses choppy this year?

Good question, Bishop. The good news is there definitely is a timing difference. We have been very fortunate in that we just had a negotiations on about 40% plus of our cable and satellite operators in December and got some nice increases for the next three years. We are only paying a very small amount, our four smallest FOX stations right now. We're not paying anything to the other big three networks.

NBC we've got nine or 10 -- I think it's nine stations with them this year. They were originally supposed to start talking at the end of the year. They asked for a three-month extension. We gave it to them. They've asked for another three-month extension through June 1 I think it is and we have not heard a word from them. I know they are out in the marketplace talking to other groups right now, but we have not heard anything and we assume at some point they will call us and want to start negotiating.

Our ABC stations are up until December of '13 and then our CBS, which as you know is by far our biggest group, is December '14. So we are very fortunate to have some timing difference on the income coming in from the retrans and what we will have to pay out to the networks.

The networks are being pretty aggressive, I can tell you that. I know NBC is out there being aggressive. CBS made some deals last year that were -- they were pretty firm on what they wanted and they didn't budge virtually any on the amount of -- they are not calling it reverse. Some of them are calling it just programming payments. They are not tying it to your retrans revenue.

As a matter of fact, CBS wanted it for all households in the market whether they were on cable or satellite or over the air. So I think they're all coming at it a little bit different but they're all wanting the same thing. They are wanting money and they are going to get it.

Hopefully we can -- I believe we can stay ahead of them on the cable side of things and actually increase from our baseline, which we kind of consider our baseline $20 million at the end of '11, we will be about $35 million this year and it will be escalating over the next couple of years. So right now it's real good for us.

All right, and the baseline is the -- you're talking expenses or the revenue?

No, no, the baseline is what we were taking -- coming in from the cable guys and basically putting out nothing to the network. So I kind of consider that's our money we want to keep going forward, that plus we want to add to that ideally with getting a better deal from the cable operators than we are paying out to the networks. I think that is going to be our goal and I think we'll be able to achieve it for a good many years ahead of times in the future.

Okay, fair enough. Then to the balance sheet, quick, I just ask the broad question every time we talk and you give the color. Why not go ahead -- and I know it's expensive -- and recap the whole thing attic to basement?

Bishop, we talk about that every single day. Hilton and I were just talking about it this morning. Jim and I were talking about it over the weekend. You know, I guess right now -- and we watch the market every day. We're in constant contact with our bankers, both the banks we deal with regularly and other banks calling us.

You know, what it boils down to is right now I guess do we want to pay $4 million plus a year for an insurance policy that would get us out seven years or plus on refinancing? I guess that so far we haven't been able to pull the trigger on that. I'm not saying we won't. I think we are going to watch it very close. Like I said, literally daily we watch the markets and talk to the bankers and if we think it's the right thing to go ahead and pull the trigger, we will do it sooner than later.

Fair enough. Thank you, Robert.

Marci Ryvicker, Wells Fargo.

Thank you. I have a couple questions. Trying to understand what's going on in national. It was down in Q1. It's up in Q2. We have heard from Sinclair that it's actually gaining some steam. So what's happening in national?

That's a great question. If I could answer that, I think I would retire tomorrow and just become a guru for all the stations. Nationally is a fickle animal. It jumps all over the board. I always kiddingly say there's some 25-year-old computer genius up there on Madison Avenue that is sticking pins in a map and just decides to let's try national here to see what happens.

There's no -- seems to be no rhyme or reason to it and like I said in our sized markets, it jumps around a good bit. I think large markets it's more stable. The good news for us it's obviously a lot lower percentage for us than most of the large markets.

Well look, we like a good national business and we want to keep going, as I always say, my goal is to get more local and a bigger percentage of local every day by growing our local even faster. The good news is in a political year, you can be very selective on what national you take. We will be very careful because we want to make sure we are keeping our rates up and making sure we've got plenty of inventory for the political that is going to continue to come in.

So it's just a very fickle animal and it literally from market to market, we can have situations -- we have had it where Madison, Wisconsin is having a great national year and Wausau, two hours away, is having a terrible national year. And nobody can explain it.

So like I said, my goal would be to be 80% local, 20% national in a couple of years and where we have grown our local enough to offset any changes in national, good or bad.

Okay, I just have some clarification on guidance. Maybe this is for Jim. So for retrans revenue, you are guiding $0.4 million less in Q2 than you did in Q1. So what's the delta there?

There's a little bit of choppiness, Marci, a small percentage of our overall retrans involves airtime buys and there is -- it's not necessarily completely linear, so that's part of it. Those airtime buys that are embedded into a handful of those contracts is maybe 6% of the total number. So while it's not big, it can create some lumpiness quarter-to-quarter.

Okay, then for expense growth, what's driving expense growth? In the second quarter you have lower revenue growth versus Q1 but higher expense growth than Q1.

It is in part -- excuse me -- sorry for my little big of a cold. It is in part just some comp increases we are seeing and also there is some increase in at least forecasted increase in the broader program expenses going forward in Q2 and the rest of the year.

Okay, and then my last question, I know you haven't talked to NBC. We heard that they may be pulling the proxy method altogether. Have you heard that at all?

Yes, they are. Supposedly that is off the table now. I think they have given up on it. One of our managers is on the Affiliate Board and they had their meeting out in Las Vegas at the NAB and he said that's pretty much off the board right now. They are out negotiating with individual stations and groups right now.

Got it. Thank you very much for the color.

Another little quick aside on the national. I think part of that is being driven by the auto and as of last Friday for Q2, our auto business was pacing in the midteens compared to business on books a year ago. I'm not saying that it is necessarily going to end in the midteens but certainly a very strong pace as we were basically hitting April 30. So -- and that shows up in the national numbers as well. So that's probably part of the national difference between Q1 and Q2.

Got it, thank you.

Aaron Watts, Deutsche Bank.

So you have touched on this a little bit but I guess I'm just curious if you set aside kind of the pop you are going to get in auto because of last year's comps? How would you describe the environment right now across the other categories versus your expectations maybe in January for how this year was going to unfold kind of in the first half?

I feel real good. I will let Jim -- he can give you a little more color on the detail, but I think most of our categories we are very pleased with what's going on. Jim, do you want to --?

I would agree with Bob's general comment. Certainly we saw strength in our categories. Q1 if anything, it generally feels a little bit better for Q2. In Q1, the only thing we are seeing is dragging a little bit was home improvement and discount department stores each down a percent or two. Supermarkets were also down but it's a relatively small part of the business and they were down the last quarter or two.

If you look ahead into Q2 a little bit, again we are seeing strength pretty much across the board in the pacings and again, the only thing that's looking a little sluggish as in Q1 is the department -- discount department stores and home improvement and supermarkets. So our Q2 feels a little bit relatively better than Q1, but kind of a broad-based among multiple categories. It's just not auto. Certainly auto is pacing the highest right now with everything else that looks pretty healthy.

That's good to hear. My second question, Bob, maybe for you, it is kind of big picture and I'm just curious what you think about it. So hearing a lot about kind of this migration of especially younger viewers from traditional television watching to watching online or on mobile devices and I know you don't have CW and MyNetworkTV on some of your traditional stations but maybe with some of your digital exposure you have some thoughts on this. Just what you are seeing at those stations and what you think the threat is to the broadcast owned and operated station business model with that shift going on.

Then I guess on the second part of it, if you were looking at potential assets to buy, does it make you not necessarily want to look at those assets as closely if they have affiliations with maybe especially CW or MyNetworkTV? Thanks.

That's a good question. I think the jury is out. I think that's the big question for our whole business going forward is what the young viewer, let's just say 30 and under to make it easy -- the 30 and under viewer, what their viewing habits really are. We are trying to do a lot of news research in that area. The researchers are good at what they do. They are probably not near as good at doing stuff like that.

One of the things I've asked them to do for example is poll people that have cellphone only because there's a big percentage especially of younger people that don't have a land line anymore and we are not talking to any of those people and we don't know exactly what they're watching.

I would say -- there was a big article in the New York Times just a couple of weeks ago about the very thing of primetime viewing dropping off a lot worse than anybody thought it would. I think it's a big question mark for us as an industry. I think that's one reason we have got to be really, really on the forefront of being on mobile devices, both iPad, iPhone, Android, all this stuff because clearly the younger generation is very comfortable watching television on any of those devices.

One of the other things we are trying to do is to -- we feel we are good at promoting all our digital products but we basically promote them with our own on-air projects. Well, if you are not watching us on air, you are not seeing any of those promotions, so we're trying to come up with ways to do a better job through Facebook and Twitter and Pandora and even going to some of these college newspapers in all these major university towns and trying to get out hey, if you want to get our app for our iPhone or Android or your iPad where you can click on immediately find out what's going on local weather, news, sports, whatever it is locally, I think a lot of those people would want to have that and it's something they are very familiar with using.

I think we have got to do a better job in that area but I think it boils down to you got to be -- you got to have your programming available when, where and how people want it. I think if you are not doing that, you are going to be in serious trouble in the future. I think it's incumbent upon us as a company and us as an industry if we want to maintain the kind of presence we've got in the world today, that we basically give people the news and the information we are good at however and whenever they want it.

Okay, Bob. Thanks for the thoughts.

Barry Lucas, Gabelli & Co.

Thank you and good morning. Just a couple of items. On the retrans, I think the comment you made is that you renewed about 40% of the sub-base effective 1/1.

That's correct.

So what would the -- what would 12/31 '12 look like? How much comes up this year and next year?

We've got very little I think. Next year we've got I think at the end of '13, we've got Comcast, which is our biggest single supplier, and I think -- is it DISH or Direct that's coming up in '13?

It's one or the other and then --

(multiple speakers) and then the other is our fourth (multiple speakers) one. So we will get a few of the systems plus Comcast plus in addition either DISH or Direct in '13 and then we will have DISH or Direct, whichever one we didn't get in '14.

So then we will have all -- this 40% again in December of '14 because we made all three-year deals. So we ought to have some pretty nice increases over the next three years. And one of the things we are emphasizing, Barry, just so you'll know and I think we did a good job of selling it this year, we really pushed hard on the fact that hey, guys, we've got the number one station in most of these markets. We've got a tremendous history of leadership and excellence in news and we're worth a lot more to you than these other guys are. Here's our ratings. Here's our history.

I always like to brag. We've got 16 stations that have been number one 50 straight years or more. That's a pretty good record and these communities are providing the news and the program programming that people want to see. We want to continue that tradition and ideally make it stronger in the years ahead.

But I really think we have got to make sure that we are getting that message across to these cable operators that our stations are worth more than most of these other stations to them in the market. I think it's something like I said, we did a good job with and we're going to keep doing that.

Great, not to drill down too much into the arcane here, but there seems to be a little bit of a disconnect. I was really glad to see furniture and appliances up, but home improvement as a category was down. Any regional variances or anything -- other color you can provide that would sort of explain the divergence?

I don't have a good answer to that. Jim, do you? Have you got any color on that?

Barry, no. To be honest, home improvement was only down about 1% so -- and I'm looking for you real quick. That 1% was $25,000, so call it flat, so really not all that bad.

I would need to go back and look and see how the furniture and appliance had done the last couple of quarters. It may have been a case that it had lagged a little and then just catching itself up a little bit.

Okay, last area just to come back to Aaron's question and the way you articulated the need to move into mobile devices, Bob. Where are we in terms of launching and having commercial product out there for smartphones and tablets?

Barry, right now we are testing live mobile in two markets in Omaha and in Lincoln. The industry still has not quite got their act together. There are some stations in this [peer] group that are doing some NBC live mobile right now. But frankly the networks are asking us to sign some agreements to be able to put live programming on on a regular commercial basis that we are not ready to sign, both CBS and NBC, so I think it's something we're going to be really focusing on over the next few months and trying to figure out a way.

What I am -- one thing we are doing, though, we are looking -- we are probably going to start streaming all our newscasts on our websites pretty much all the time, which is something -- we are doing a good many stations now but actually going -- we will have all our stations streaming all their newscasts over -- which will be available on PCs or on the mobile devices.

And we're looking at some technologies out there that would allow you to do some things with mobile that we can't do right now, but the live mobile itself is a great technological advance. There's no question it's just the question surrounding how do we get it on the air? How do we get a standard everybody can agree on for the devices? How do we get the manufacturer to put those chips in the devices? All of those things are still in the future and still pretty much up in the air.

Great. Thanks very much, Bob.

Larry Schnurmacher, Morgan Stanley Smith Barney.

Just a couple of questions. How does your recent revenue performance compare to peers, if there's a way you can show us that? And political, based on growth in 2008 and 2010, what does 2012 look like if you can do like a growth rate comparison?

Jim, do you want to take that? I will say I think regarding the relationship to our peers, I think we are right at the top of the industry right now or we are all in -- Jim, do you want to answer as far as going back to (inaudible)?

As far as the political for total year, given a recap starting in 2006, it was $43 million. 2008 was $48 million. 2010, we set the record at $58 million. Certainly we expect a strong 2012 and just exactly how big 2012 is, we will be able to answer that question in early November. But it would certainly be a very strong year for us no matter what the final number comes out to be. But there has been significant growth period over period, whether it has been presidential years or non-presidential years.

Great, thanks.

(Operator Instructions). Michael McCaffery, Shenkman Capital.

Just to confirm, did you guys say that you did make a prepayment on the -- I guess it was the revolver you guys paid down?

We paid down -- we had $9 million drawn on the revolver at the end of the year. That was all paid back and off and then we had the standard $1.2 million or required amortization during the quarter. So all in, we reduced total senior debt $10 million from where we were at the end of last quarter.

Got you. As you sit now, as you're looking out for the next couple of quarters since you can't do anything to address the preferred given the 7 times RP you've got related to the second lien notes, are you more inclined to use the excess cash flow to chip away at the term loan or kind of hold on to the cash until Q3, when you are likely to be under that threshold and you could potentially pay down the preferred?

I think it's probably more likely -- there might be some opportunity to pay down -- technically pay down in late Q2. I think it's more likely a Q3 event where that would be coming up and there may be a possibility of being able to do something on the preferred at that point in time as well or certainly by early Q4.

So just as we did in 2010, most of the voluntary prepayments we did that year were really more back weighted I would say September forward as the real heavy political money rolls in and we could gauge exactly how much we wanted to prepay once we had the cash in the door rather than trying to get that a little bit and take it on the come and take it too early in the year.

Okay, and you guys have mentioned before that in times past when there were big moves in gas prices you saw a noticeable shift in your business. Can you just comment on during the month of March when gas prices were in the news on a daily basis, did that impact any cancellations or just the general pace of business?

Mike, we didn't see it this time and I think what has happened is people have gotten a little more me into -- when it jumped up $4 plus for premium in a lot of places, I think people -- it wasn't like when it jumped to $4 back in '08 and it really spooked people because it had never been that high before. I think this time around it's probably going to take $5 to spook people this time.

But I think if it did, it seems to be coming back down right now but if it popped back up and was jumping up in the $5 plus range, I think we would clearly see some effect on local business especially.

Thanks, guys.

Todd Morgan, Oppenheimer.

Thank you, good morning. I recognize it's a small number, but the consulting revenue of $800,000 or so in the quarter was below -- excuse me, above that sort of $600,000 or so that you talk about as a base rate. Can -- the question is obviously it's not a big difference but does that mean you're getting any of the incentive payments or is there any way you could kind of clarify the guidance you provided with that? (multiple speakers)

The difference was a small amount of incentive payment that actually goes back to '11. As we talked about on our last call at the end of the year, we still didn't know exactly what we might be entitled to and so the number that rolled through in the guidance, the number that you are seeing now reflects a little bit of additional incentive that we've picked up from '11.

Just for budgeting purposes, you said $600,000 a quarter. Does that just mean that you aren't calculating any budget -- any incentive they may receive or is it --?

That's correct. We really don't -- that's right. We're just talking about the base fee going forward that we do have -- are eligible to earn a potential incentive for the 2012 year, but right now it's way too early to have any way of accurately estimating it, so we're just not trying to guess at something we don't know yet.

That's fair. Just then secondly on -- it looks to me like you're going to be comfortably below the 7 times leverage test in the bond indenture in the third quarter. Is the trigger in order to be able to make a restricted payment for the preferreds, and I'm assuming that's what you would try and do around that time, is it filing the 10-Q financial statements or what is the actual trigger to be able to make that payment?

I believe the indenture has language to the effect of when statements are quote available. I don't recall off the top of my head but it says specifically having filed, so I believe there's a little bit of -- perhaps a gray area as to exactly when we could pull the trigger. But as we get close and are comfortable that we have the capacity and comply with the indenture, we will obviously consult with counsel and figure it out and it probably wouldn't surprise anybody if we tried to -- if we end up pulling that trigger as soon as we reasonably can.

Great, good quarter. Thank you very much.

(Operator Instructions). Rich Crawford, Wellington Management.

Just following on on the preferred question, so can you just update us on what availability you have there? Is there anything in the bank line restricting you? Is it just in the bonds? I hear what you are saying and the focus at the end of the third quarter on meeting that?

The senior credit facility allows us $20 million of restricted payments in any calendar year, so that is the absolute heart stop number we have to work with in 2012 absent of refinancing transaction.

Then as you said, the second gating issue is when under the indenture we really have the ability with the leverage test under the indenture to actually pull the trigger on making that redemption -- repurchase, I should say.

Thank you.

Thank you and at this time we have no further questions.

Okay. Thank you, everybody. I want to let you know we appreciate everybody's support. As I tell you every time, we answer our own phones. We are here to answer any questions you've got if you want to follow up. And we look forward to talking to you at the end of second-quarter call. Thanks, everybody. Goodbye.

Thank you. This does conclude today's program. You may disconnect at any time.