Gray Media Inc (GTN.A) 2012 Q3 法說會逐字稿

Good day everyone, everyone, and welcome to the Gray Television 2012 earnings call. For opening remarks and introductions I'd like to turn the call over to Mr. Hilton Howell.

Good afternoon, everyone. Welcome to the third-quarter and nine-months 2012 review of Gray Television's financial performance. Happy Halloween, and for all of you impacted by hurricane Sandy, our thoughts and prayers are with you, your family and friends. We want to thank all of you for the effort it took to join us on this call.

As usual, I will begin with a brief overview of our results, followed by Bob Prather, our Chief Operating Officer, who will add his thoughts concerning our performance. Jim Ryan, our Chief Financial Officer, will follow with more detailed financial data. Questions will be answered at the conclusion of our group comments.

We are very pleased to be reporting another terrific quarter today. In fact, we didn't just break records for the third quarter; we delivered record results that were better than any other quarter in Gray Television's operating history. Record revenue for the third quarter 2012 was $102.9 million against a previous record -- not against a prior succeeding quarter or proceeding quarter -- but a previous record quarter of $85.3 million, a 21% increase.

For the nine months, record revenue was $278.2 million against a previous record of $232.4 million, a 20% increase. With regard to broadcasting cash flow less corporate expenses for the third quarter 2012 broadcasting cash flow less corporate was $46.8 million against a previous record of $31.9 million, a 47% increase. For the nine months, broadcast and cash flow less corporate expenses was $111.5 million versus our previous record of $85.2 million, a 31% increase.

Furthermore, record third-quarter broadcasting cash flow was $50.7 million against a previous record of $35.2 million, a 44% increase. For the nine months, our broadcasting cash flow increased by 29% to $122.1 million compared to our previous record of $94.8 million. These terrific results led to net income for the quarter of $14.7 million against $27,000 last year, and net income of $27 million for the year to date against the loss of $4 million. On a per-share basis for the quarter, we reported $0.26 per share. For the year $0.47 per share, respectively.

Obviously, political advertising was a huge contributor, accounting for $24.5 million for the third quarter and $42.6 million for the nine months. These records were set against the backdrop of the complete refinancing and recasting of our balance sheet, which was initiated in the third quarter and will be finalized on November 13, 2012. Many of you on this call, or your firms, participated in this refinancing, and we thank you for your support and confidence in our company.

At closing, we anticipate long-term debt at face value of $855 million, comprised of $300 million of 2020 notes at 7.5% and $555 million of the new senior credit facility with a weighted average interest rate of 5.7%. Significantly, all of the Company's preferred stock was retired during this transaction.

At this point, I want to personally take an opportunity to thank Jim Ryan, our Chief Financial Officer, and Jake Howart, our Chief Accounting Officer, and our entire financial team in Albany, Georgia, for the extraordinary job they did in a very short period of time. Every single shareholder in Gray Television owes them a sincere thank you for a job well done. I also want to thank our underwriters at Bank of America-Merrill Lynch, and at Wells Fargo, all of who did a fantastic job in this transaction. With that, I will bring my comments to a close and turn it over to Bob.

We are very fortunate to have our number-one stations, which traditionally in political years get around two-thirds of political TV dollars spent at market, and our managers do a great job of managing the inventory and making sure we have the time available to sell to the politicians. This has been an incredible year. I think I predicted way back that if the politicians raised record amounts and spend record amounts, we're clearly on track for an all-time record political year.

We will once again, I'm sure, have the highest percentage of political dollars than any other TV group out there that reports publicly. Last cycle we were considerably ahead of any other group, and I think we will be again. That's a tribute to the markets we're in and to the strength of the stations in these markets.

The other thing I'd mention, our refinancing is extremely important for the company. I want to reiterate my pledge, again, and to all the stakeholders that we will continue to pay down our debt. That's our number-one priority in this company. This year's extra cash flow will all go to prepay our debt down some more. We're very proud of this. We will continue to get our balance sheet in better shape.

We continue to get more efficient in our company. We're doing more and more automation and more and more digital. This is very important for the future of the company, and we are constantly working on ways to improve our efficiency and improve our news gathering without increasing our expense.

As I mentioned, we're very proud of the fact that our overall expenses are lower than they were in 2007. Even though we have record revenues, we want to continue this trend, and we want to continue to have the highest profit margins in the industry. We've got a lot of work to do. 2013 is a new year, a new challenge. Obviously, there will be a lot less political. We don't know what the economic climate's going to be. I think we're all waiting to see what happens in the elections and what the attitude of the country will be.

Overall our managers are optimistic because our core business has been so good this year led by automotive. That continues to be the number-one driver for the television business. There's still plenty of pent-up demand for autos in the American economy. The financials available, the banks, and all the financial institutions realize car loans are really resilient. They've had a very low default rate, and you'll see continued lending because any time the money is available, there's a three- or four-year pent-up demand to catch up for those three years they had to be way under the currency of the United States.

I think it's going to continue to be good for us. We're looking forward to 2013, 2014. Like I said, it's going to be hard to beat, but 2013 we're going to see continued growth in core business with policies very important to all of us. At this point, I'll turn it over to Jim Ryan for more financial detail.

Thanks, Bob. Good afternoon, everybody. I'll keep my comments rather brief. I think most of the information has been well laid out in the release, as well as the 10-Q has also been filed today as well and is available. Turning a little bit to the guidance for fourth quarter, obviously, again, we're looking for very strong political results again at record levels, driving us to a very successful year. Local and national is feeling the displacement effect of the political, especially in October.

Actually, once we get past the political window, the core non-political business seems to be doing well. If you look into pacing for December, for instance, core business is actually up mid-single digits, which is very healthy at this point. Local is actually even up mid-single digits on a pace basis.

November postal -- the first week of November after the election. Auto up for November and December, appears to be pacing very strong at this point. So not only with the political, but we think basic core business will end the year well. Obviously down a little bit for the entire quarter, but we've seen that before when we've had very large political in Q4.

Hilton already commented on the refinancing, as well as Bob. Again, we will complete the redemption of our currently outstanding 10.5% notes on November -- it's expected to be completed on November 13, which is the expiration of our call period. At the end, we will again have $555 million of a term loan outstanding and $300 million of our 7.5% notes due 2020, with a weighted average cost of capital of 5.7%.

We're very pleased with the senior credit facility, comes with a standard set of covenants. There is one debt maintenance covenant. The ratio is calculated in a trailing eight-quarter basis and it's set at 7.75% initially. We are currently looking to be on a total leveraged basis at about 6/30, at 9/30, and probably a little lower than that by 12/31, so there's ample cushion under the senior facility. Everything else in the senior facility is fairly standard maintenance backing for that type of agreement. The bonds have a standard seven-time recurrence test.

So both instruments put us in very good shape from a covenant and flexibility standpoint going forward. And as Bob said, near term focus will be continuing to use free cash flow to pay down balances and de-lever the company.

A couple of quick side points on balance sheet-type issues. CapEx for the quarter was $6.1 million, tracking at 17.7% year to date. Still coming in at about 23% for the year net of the $700,000 of insurance proceeds that we talked about last quarter call. Program expenses in the quarter of $2.8 million, $8.4 million year to date. We're tracking for about a mid-$12 million number for program costs.

We also extended our NBC affiliation again on a short-term basis, as our negotiations proceed at pace, and we expect by the next time we have a call, we'll have wrapped up our renewal negotiations with NBC. Bob, I'll turn it back to you.

Thanks, Jim. I think at this point we'll open up for questions.

(Operator Instructions)

Aaron Watts.

Appreciate all the color. I know it must be nice to focus exclusively on the business now rather than the balance sheet. One question for you, Bob, looking out toward the end of December and into next year, we're hearing about primetime viewership pressure at the network level and not exactly robust scatter market, potential fiscal cliffs giving some advertisers pause in setting ad budgets, things of that nature.

But it still sounds like you're not feeling too much negative impact from any of that. Can you maybe talk about why that might be? Is it local auto that's driving that? Just curious what gives you some comfort going into next year.

The big thing is we're basically 72% local, 28% national, to begin with. A big chunk of that is auto. As I told you, I think that because of being in all them university towns and state capitals, I think most of our economies are better -- have picked up better, didn't go down as far in the recession and they picked up better coming out. We've still got a tough economy in Reno and a semi-tough economy at Colorado Springs. Reno's had a great political year that will soothe a lot of those wounds in the short run, and Colorado Springs also.

As I mentioned before, I think everybody's going to wait and see what's going to happen in the election. I think a lot of attitudes will be decided one way or another, once we know the results next week. Our managers feel good, we just started the budget process. We always like to wait late, so we can get a better idea. Most of them feel pretty good about core business next year. The fiscal cliff could change all that, but I've got to think that the guys in Congress and whoever's in the White House have got to have better sense than to let that happen. But if it happens, I guess we'll all recalibrate our numbers. Right now, we feel pretty good about going in to 2013.

That's good to hear. And then one follow-up on the categories. With telecom or communications, I saw it was down again for you in the quarter. Any turnaround yet on that in November/December, or is that category still dragging along?

It's still dragging. I'm not sure what's going on there. I think when the T-Mobile deal got turned down, AT&T started licking their wounds deciding what they want to do. You got Sprint up in the air right now, with the new ownership potentially coming in from Japan. I just think there's a lot of uncertainty. Verizon seems to be the most stable one out there. They continue to grow.

The only thing that's interesting to me about telecom is the huge explosion of the smartphones and iPads. I think these guys think automatically they're going to get the business, no matter what, because especially for the iPads, you've got to have the phone connection, you got to have the data connection. Maybe they don't think they need to advertise as much, I don't know. It's an interesting dynamic going on right now. I've talked to a lot of people about it, nobody seems to have the magic bullet.

Curious if you can put some brackets around this one, so it's on retrans. I think what started off as being a great 100%, or close to 100%-margin business, or source of income for you is maybe a little lower today. Just a comment on where you see margins on retrans going in the next three to four years based on some of the network agreements you've signed and what we can expect or model in for that revenue stream.

Right now the only agreement we've signed is with our FOX markets, which really is not indicative. We're negotiating with NBC right now. We got at the end of next year ABC and into 2014, we got CBS. We've still got some time, there are all kind of numbers out there. I think the network's goal is to get to 50% of station retrans. We feel very strongly that they don't deserve that number. We think we've got good evidence that we bring viewers to them and not vice-versa. We're still going to negotiate hard on it. We've got a good relationship with all the networks. We want to keep a good relationship. They are valuable to us, and we're valuable to them.

At the end of the day, 50% of our revenue and over 50% of our profits comes from our local dealers, which is, at the end of the day, our most important asset. I think their goal is to get the 50%, whether they'll all get there this cycle, I'm not sure. At some point that's definitely where their goals are. It might take another three or five years, but I think hopefully that will be what they're going for, for sure. We'll be pressing pretty hard to get that.

But ultimately you think you stay ahead of it, with the way you --

We certainly hope so. Yes, we certainly hope so, yes.

Davis Hebert.

First of all, congrats on the recap. I know that's nice to have that behind you. Just wanted to ask, have guys given a cash position after all this refinancing activity?

Jim, you've got that number, don't you?

We haven't given out a specific number. It's still somewhat of a moving target. We ended the quarter on a very strong cash position. We are still in a very strong cash position, even after having used some cash in the first two stages of the refinancing transaction.

So I think at the end of the year, the way I look at it is, a normal cash position for us would probably be $10 million of cash is a pretty reasonable liquid number for us, especially if the revolver is completely undrawn, which it should be and I would expect it not to be drawn. If we're roughly at $45 million of cash now, we've got room to definitely pay down some between now and December 31. But exactly how much, remains to be seen, one in political and two just how cash from core business comes up over the next six, eight weeks or so.

So to the extent you guys generate free cash flow in Q4 and 2013, is the idea to simply prepay the term loan?

Yes.

Yes. And I should say that on November 13, when we settle the 10.5%, I do expect to use a reasonably large amount of cash on hand to close that transaction, as well. So if we have $45 million, $46 million at the end of the quarter, a reasonable piece of that will be used in addition to drawing the $135 million that remains on the term loan to call out the $143 million of 10.5%s plus the related fees and expenses.

Okay, that makes sense. Thanks for going through that. And then on internet, you guys have seen really impressive growth, 22% I believe for Q3. Expecting double-digit growth for Q4. I want to get a sense for how you look at that business going forward. Do you feel that this is a sustainable growth rate? And where are you seeing the most growth? Is it banner ads, or maybe if you could take me through some of the drivers there?

First of all, we definitely see it as a growth area for us, for a number of years into the future. Now, whether we'll be able to be growing at a mid-20%s rate next year or not, I think that's a little too early to tell. But we certainly expect a very, very strong growth rate well into the teens, or maybe 20%, obviously if we can match set another year at 25% growth, we'd be delighted.

A lot of the growth we're seeing over the last year or two has really been in what I would characterize more as verticals. We've talked about before a mom's site, mom's issue, family issue vertical within our web sites, that we branded as MomsEveryday. That we've seen very, very good growth in across all of our markets. And that was a home grown idea that we deployed over the last two years or so. So that certainly provided us a growth opportunity.

Also we've been seeing growth in medical verticals as well as home improvement and similar type of verticals. The general advertising certainly is being pushed. We're trying to also push our way into a more of a mobile presence, as well.

In looking at the categories, you went through telecom. You feel like any of the categories are seeing any secular pressure, whether it's restaurants, maybe spending more on other local media, is that a trend you're seeing at all with any categories?

No, no, we haven't.

All right. And last one from me, just a housekeeping question. Can you provide cash taxes for the quarter?

Oh, yes. Cash taxes were $251,000, so it brings the nine-month number to $476,000. And we'll be well under $1 million for the entire year.

Larry Schnurmacher.

Congratulations, great quarter. I guess we should all hope for more elections more frequently?

We'd like for them to run every year. Like I said, we always encourage the rich egomaniacs to run for office.

Craziness as it is. Anyway, with all the refinancings and so on, what do you expect the run rate on interest expense to be this year?

Post-refinancing with the new structure out of the box, annual interest cost would be about $49 million.

And that compared to?

That compares to run rate prior to doing the refi of about $58 million, $59 million.

Matt Swope.

With the capital structure under control at this point, Bob, do you think M&A could be back on the table, or is it too early still?

I think it's too early. We've committed to our Board, our shareholders, all our stakeholders, the number-one priority to continue to pay down the debt. Jim and I talk about it a lot, and I think it's going to be our health in all of us, committed to making sure we continue to get our balance sheet in better shape. The fact that we have a lot of extra cash flow this year will allow us to pay down more debt than we thought. Hopefully we can continue doing that. We've tried to be very careful with our capital expenditures and do things that help us technologically, but at the same time we want to continue to, number one priority use free cash flow to pay down debt.

Yes, that makes a lot of sense. Do you guys have, to that end, either Jim or Bob, a target for where you'd like that eight quarter leverage number to be before you felt comfortable doing stuff like that?

To look at acquisitions, we've been very careful with our acquisitions over the years. We like to buy strong stations, either number one or strong number two, in good growing markets that are university towns, state capitals. Our universe is limited to what really we want to go after. I think we may be doing some M&As, and things like that that make sense, where we can do some duopolies relatively inexpensively and know we can put the two together and see quick accretive cash flow.

I would say I would like to be in the in the $4 millions, mid- to high-$4 million, before we even try to look at anything as far as an acquisition. One of the things you got to be careful about, I've been doing mergers and acquisitions throughout my business career is, you got to be careful with small deals because sometimes they can cause you a lot of trouble, a lot of pain. They barely move the needle. Ideally, we could find the right property that we could buy, at the right price somewhere down the road that would be accretive, it would be great. I don't see that happening in the near future. Paying down the debt is going to continue to be our number one priority.

And Bob, on a different front, the FCC has started the NPRM on the broadcast spectrum. Can you comment on how you guys look at that, and is that an asset we should be starting to value in some way other than you using it for TV?

Well, we are using ours very profitably, I think we have 43 digital channels on the air now. By the way, I didn't mention our three digital CBS D2s that we mentioned the last quarter, they are up and running and on the air. We think those are going to be real good growth areas for us the next few years. And we use -- we're the poster child for using the spectrum.

I think this spectrum thing is still a good ways off. One way, if you get a new administration, all that stuff could change. The FCC has a hard time, they're about like Congress these days. They're pretty much grid locked, can't seem to make a decision. Spectrum's just too far in the future for me to think much about, frankly.

So you can't see a scenario where you'd be selling some of your stock and into an auction?

I never say never, but I really can't see that, no.

Lucas Barry.

Thinking about the guidance, just wondering what kind of disparity or variance you see, as you look into the markets that are hot, politically, so the Nevadas, Wisconsins of the world, versus the non-battleground states, I'm thinking your bigger markets, Tennessee, Kentucky, or stuff like that.

Core growth has been pretty strong across the board. Obviously, some of it gets squeezed out in these real strong political areas. We're seeing pretty much across the board, and telling our managers about the budgeting process, they all feel right now pretty optimistic about core growth for next year. I should say they seem to always be optimistic. Most of all of them back in 2009 and 2010 they weren't too optimistic. But right now, I think they're pretty optimistic. It will be interesting to see what happens in Reno, because Reno has had such a strong political year, and that economy's been so tough. That might be one that falls back to earth pretty quick. But, other than that, most of our markets have been pretty steady.

Somewhat separate topic, Bob. You touched on spectrum use and the internet. But we keep waiting to hear something more positive or more formal, formative about the mobile opportunity. So maybe touch base a little bit about the mobile opportunities in your markets, when they evolve, and when they actually hit the income statement.

Are you talking about live mobile or just mobile in general?

Yes, live mobile.

I think they're still a ways away. We're still testing about three markets now, the technologically is great. I'm still not sure anybody has got the forward for how to make it work from an economic standpoint. We are on this OMBC board, we follow it. I'm not overly confident anything is going to happen soon where we can actually show real dollars coming in. In 2013, I won't go any farther out than that, I think it's a ways away.

I hate to see it, because I had big hopes for it a few years ago. It seems they've bogged down with the usual suspects. You know, who's going to get paid when, how the networks get paid, how the syndicators get paid, how the -- you know, the other AP, CNN, everybody's got their hands out, wanting to get a piece of the pie, nobody's come up with a formula that can seem to work yet, I don't think.

Brandon Davis.

You mentioned getting down to high-$4 millions leverage before looking at M&A. If you get down to that level and don't see any opportunities, would the next bucket be returning capital to shareholders? Certainly been a lot of announcements of --

I think we'd take a look at all alternatives at that point. I think we are going to continue to have strong free cash flow. And we've been good stewards of it in the past. If it makes sense to do something for the shareholders, I think we'd look at -- I would want to feel very comfortable. One of the things I learned from the recession in 2009 and 2010 is that you can never have too much equity, and you can never have -- you can always pay your debt down. It's not a bad idea most of the time. I would think we could look at all angles. Right now our priority will continue to be paying down debt.

There are no further questions.

I want to thank everybody for being on the call today. As you all I'm sure recognize we're very proud of the record year we've had so far. I think it will continue also in the fourth quarter. we look forward to the election next week to see what happens. I think we're all waiting with bated breath to see what happens there one way or another.

It's been a great year both election-wise, political-wise and just core business, and we look forward to going into 2013 with an optimistic outlook on our business. Thanks, everybody, for your support. We always say you can call us any time. We answer our own phones. Thank you again. Talk to you again after the first of the year.