Gray Media Inc (GTN.A) 2013 Q3 法說會逐字稿

Good day, and welcome to the Gray Television's third-quarter 2013 earnings release conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Mr. Hilton Howell, President and Chief Executive Officer. Please go ahead, sir.

Thank you so much, Aaron. Good morning and welcome, everyone. As usual, I will be making a few opening remarks followed by Jim Ryan, our Senior Vice President and our Chief Financial Officer. And then he will be followed by Kevin Latek, our Senior Vice President of Business Affairs. And then also as usual, we will be taking questions at the conclusion of our comments.

It has been a busy and very productive quarter. Since our last earnings call, we completed and fully implemented our new management structure throughout the Company. We designed and launched a new logo and corporate identity that is designed to focus on the Gray lens as a brand for our broader company to add to the local brand in the communities as is appropriate for a 21st century company looking forward to its future as a television, digital, and mobile media provider.

We launched a new corporate website with fully responsive capacities, like all of our station websites, that is now up and operating. It has significant investor information and access to download our local mobile applications, both iOS-based and Android-based. I encourage you to stop by Gray.pd and take a look. I think you'll be impressed.

We completed our partnership with Excalibur Broadcasting. And together with Excalibur, we closed on the acquisition of KJCT in Grand Junction, Colorado, with affiliations with ABC, CW, and the Telemundo Networks.

We sold recently $375 million of add-on bonds to our existing bond structure at 102%, yielding 6.98%, and paid down our senior bank facility with the proceeds.

This past Monday, we announced a definitive agreement to acquire number one stations in three entirely new markets for Gray. Our acquisition of Yellowstone Television brings us the number one station in Cheyenne, Wyoming, KGWN affiliated with the CBS and the CW Networks; and the number one station in Casper, Wyoming, associated with the NBC Network.

Our new Casper station also has the NBC in Cheyenne. We will be able to bring both stations together and significantly augment their sales, and particularly their digital sales, which had previously been absent from those markets.

Also in this transaction, we acquired the number one news station in Laredo, Texas, our fourth station in that rapidly growing state, which brings us the NBC, CW, and Telemundo affiliations to the Gray Television business family. Furthermore, yesterday, we announced, together with ABC, that Gray would be opening up a first-in-the-market ABC affiliate on our [D2] channel. We are very excited to bring ABC programming to Laredo, Texas.

On a conservative basis, these acquisitions should add $3.7 million to $4 million in broadcast cash flow over our near term to our consolidated numbers. And, most importantly, all of these transactions were paid for with free cash flow generated this year and will consequently be entirely delevering.

I would like to welcome those new stations and all of the professionals working in each of those stations to the Gray Television family. Kevin Latek, who led our management team visits the last four days, may have more color on our opportunities in these new markets that he will share with you during his comments.

From a financial standpoint, our core revenue has been very solid. As has been typical both for the quarter and year-to-date, our numbers are down because of our political issues. If you look -- lack of political advertising.

Our total net revenue decreased $14.6 million, or 14%, to $88.3 million for the third quarter of 2013, compared to the comparable quarter of 2012. For our year-to-date numbers, it is a similarly solid story. Total revenue decreased $27.5 million, or 10%, to $250.7 million for the nine months ended September 30, 2013. Again, this drop is entirely due to political ad elimination.

We have frequently spoken in our prior earnings calls and investment meetings about the importance of political revenue to a news and content-centered company like Gray Television. And we received a report yesterday from our friends at RBC that I think is worth sharing with all of you, so bear with me while I go through some numbers.

So often we look at total political revenue and look at our peers in the industry and look at where they come from, but RBC gave us an analysis where it took a look at not only total 2012 political revenue, but it looked at it on a per-television household basis. To give the numbers and have them in the public records, this is what we have.

Sinclair reported political revenue of $223 million. Media General, I believe that would be pro forma for the consolidation, was $115 million. LIN Media $103 million. Gray came in at $86 million and Nexstar came in at $46 million.

But when you look at those numbers and look at it on a per-television household basis, Gray Television came in at $11.80 per TV household. Our next nearest competitor was LIN Media that came in at $8.29. Media General came in thereafter at $6.97, Sinclair at $4.98, and Nexstar at $4.37.

What that shows is, on a per-television household, Gray Television has a 42% advantage over our nearest competitor in securing and airing really important political advertisings during the even-year cycles.

I will say with regard to these numbers that the numbers for Nexstar did not include TV households associated with Newport, CCA, Citadel, or the Stainless acquisitions, nor did they include any of the Gray Television acquisitions which have been announced over the last week to 10 days. But all of the Sinclair figures are pro forma for all the acquisitions, including the Allbritton acquisition.

I'm glad to be able to share this and I want to thank our friends at RBC for sharing this data with you -- with us, because we believe it shows the value of having number one stations in growing and dynamic markets where we commit to content, commit to news, and commit to carrying the local stories that are so valuable.

In any event, that brings my formal comments to a close, and I will turn it over to Jim Ryan. Jim?

Thank you, Hilton. Good morning, everyone. As Hilton mentioned, total revenues were down because of the natural political cycle. We were very pleased in the quarter that our local revenue was up 4%.

Our national was down, as expected, going against very tough Olympic comps. Last year, if you'll recall, we had $4 million of local and national in the Olympics and an additional $1 million of political.

If you adjust for the Olympic effect in 2012, we think that our combined local and national, after giving effect to the Olympics to last year, would be up year over year about 6% on core ex-Olympics.

Internet was up slightly in the quarter. Our retrans tracked as expected. Our political, obviously, in the off-year is only $1.4 million. Our auto was up about 4.5%, representing 26% of our total, and it has been trending well all year.

Other categories that were up were legal, home improvement, communications, entertainment, furniture, restaurant. The only categories that we had down during the quarter were medical, finance, supermarkets, and department discount stores were down slightly.

Our expenses were up only 3%, basically reflecting routine compensation costs and our increasing reverse comp that we've talked about before.

We are very pleased with the broadcast cash flow for the quarter. On a 2013 to 2011, so it is an off-year to an off-year comparison, we're up 27% in broadcast cash flow. And we are very pleased with that.

We also had solid results for year-to-date nine months as well. Our local was up about 4%. National was even, again going against some tough political comps. Combined local and national for the nine months was up 3%.

Our auto for the year, nine months to date, is up a very healthy 8%. And essentially the same categories on the nine-month basis are up and down as in the three-month numbers.

Again, on a broadcast cash flow basis, comparing 2013 to the last off year in 2011, on a nine-month basis we are up 22%. And we are very, very pleased with that growth rate.

Turning briefly to guidance. For the fourth quarter, we see a very solid core revenue growth; local up approximately 10% and national up high single-digit around 8%. Certainly, that's reflective of strong fundamentals.

Also, keep in mind we had a $40-plus-million of political in fourth quarter last year. So obviously we would expect healthy growth rates Q4 this year with the displacement of political from last year. We also will have a significant step-up in our retransmission revenue in fourth quarter, up about 28%, reflecting in great part a recently renewed contract that renewed on November 1.

Turning to the balance sheet briefly. Our trailing eight-quarter cash flow, as defined in our senior credit facility, was $143.5 million, which places our total leverage at 5.68 at the end of the quarter against a 7.75 covenant. Our first lien leverage was at about 3.6 at the end of the quarter and, as Hilton mentioned, if you gave us effect to the bond repayment -- or the bond add-on and the repayment of the term loan, our senior leverage would be about 1 times on a trailing quarter basis.

Capex for the quarter was $6 million; $18.4 million year-to-date. We are tracking for a CapEx number in the lower/middle $20 millions for the year as we continue to finish off our local HD at many of our markets.

Cash taxes were less than $100,000 and only about $500,000 for year-to-date. Programming payments were $2.8 million and $8.5 million year-to-date, and the amortization numbers are the same.

As we have talked before, our network reverse comp for the quarter was $1.8 million; $5.5 million for year-to-date. And we are tracking to about $7.6 million for the year.

At this point, I will turn it over to Kevin for his comments.

Thank you, Jim, and thank you, Hilton, earlier. I'm happy to follow Jim's comments, especially when he tells us that our cash flow is up 27% over 2011. It's a great lead-in and I hope to follow in his footsteps with more good news.

Last night, Bob Smith, our Senior Vice President for the Midwest and West, and Jason Effinger, who is our Senior Vice President for Media and Technology, and myself returned from a few days out in Wyoming in Laredo. We flew out on Sunday and then spent the next several days visiting our newest stations with Yellowstone, so I thought I would just spend a quick moment talking about these stations.

As you saw in the press release, each of these stations is the highest-ranked television station in its market according to BIA revenue data. And while that was one thing that attracted us to these stations, the most attractive feature of these stations was that we felt from what we knew of these stations that they had the commitment local news and community involvement that distinguishes Gray Television.

We believe, from we could tell before we acquired the stations, that they were able to exceed in their local markets without the resources that our Gray stations have. And we figured that a combination of those stations with the Gray workflow, Gray resources, Gray technology, and the other indicators of our company and leaders within our company would allow these stations to really excel.

So just briefly let me tell folks, because I have gotten a lot of questions about the transaction itself. This transaction with Yellowstone, literally, began with a phone call on a Thursday evening. Over the next, literally, several days we were able to start and complete negotiation on an investment in Yellowstone and an acquisition of Yellowstone; start and complete our due diligence; receive Board approval; and complete the wire.

From the first call to the moment we that sent the wire to Yellowstone was about six days. I think that is a great reflection of the new management structure at Gray and our commitment to moving quickly when opportunities present themselves.

With Yellowstone we have acquired, as Hilton mentioned, the top -- and as mentioned in the press release -- CBS, two NBCs in Wyoming and an additional NBC in Texas. We also announced yesterday, as Hilton mentioned, something we are very excited about, which is the addition of ABC to KGNS in Laredo. That will be yet another new big four affiliation that we will be adding to a small market.

The Yellowstone stations have done very well, as I mentioned before, despite not having a large company behind them and we give great credit to the wonderful folks at those stations. These stations all have high-definition and high-definition programming from the networks, but none of these stations have a local HD newscast. Two of the stations do not have the capability to do local commercials in high-definition and one of the stations could not even put out a live remote shot during the local newscast.

None of these stations have their own app and their digital presence is negligible. We view all of these as upsides. Within Gray we have two dozen markets with stations that are end-to-end HD. We're already looking at ways that we can enhance their digital products, certainly their news products, their sales products, and otherwise allow these stations to really excel.

With the addition of Yellowstone, Gray Television now owns and/or operates television stations in 34 markets. We are the number one or number two ranked station in 32 of 34 markets. We have number one new stations in 26 markets. We operate stations in nine state capitals.

With the addition of the Yellowstone stations and KJCT in Grand Junction, which Hilton mentioned with the transaction that closed last Thursday, Gray now owns and/or operates TV station that broadcast a total of 97 channels. If we do not add an additional channel between now and the launch at ABC in Laredo, we will have 98 channels and we are very, very proud of that.

Gray Television is a company that, as we mentioned many times, makes great use of our spectrum in all of our markets, from the largest to smallest. With the addition of Yellowstone we now cover 6.5% of the country, and that is a segue to briefly two points I want to make in the regulatory front.

There has been, obviously, a lot of concern and discussion about the FCC's efforts to redefine the national ownership cap by changing the UHF discount. This move, while interesting to us, we do not believe will have any impact on Gray.

Whether the FCC changes the UHF discount formula or not, Gray's coverage is well below the cap. As I mentioned, we are at 6.5% of the US; the cap is at 39%. We have a long way to go before that becomes an issue.

The other regulatory point I'd like to mention is on spectrum. Spectrum continues to be an important issue for all broadcasters and we have been following with great interest the efforts of Sinclair and other broadcasters to explore the possibility of changing platforms.

Most recently, Gray has weighed in at the FCC on a, frankly, a new and I think novel idea that Sinclair has submitted that has gained traction and further support from broadcasters. And that is that we suggested and supported the FCC's -- I'm sorry, Sinclair's proposal that the FCC at least consider allowing TV stations to make flexible use of their spectrum if they waive their right to reimbursement under (technical difficulty).

We are not taking a position on whether Gray would waive our reimbursement expenses from a repacking or not, but we think it is worthwhile for the FCC to at least consider this proposal. And that concludes my remarks today.

All right, operator, will open it up for questions.

(Operator Instructions) Marci Ryvicker, Wells Fargo.

This is actually Eric Katz in for Marci. So we have seen you make a nice tuck-in acquisition with Yellowstone and also launching the ABC station.

Does that sort of sum up the M&A strategy going forward, a lot of singles and doubles? Or do you think you can make a more sizable acquisition? Are there any larger groups that interest you?

This is Hilton. I think candidly, Eric, the answer is yes. There's nothing that we have that we are ready talk about. But we are looking at larger transactions and we are also looking at smaller transaction and tuck-in acquisitions within our markets that would add into our portfolio stations similar to what the Yellowstone stations are there.

Okay. Also, you have quite a bit of your retrans footprint coming up for renegotiation over the next year or so. Does the strategy change where you think you can do bigger deals once you mark your retrans rates up to market?

I think the answer is, yes, and I actually think -- and I would like take a moment to kind of brag on Kevin Latek. Because we finished, without going off the air and got very successful terms, with Dish and made that announcement and had very little fights. We hope that we can follow up.

We have one more large provider this year and then everything else with our current portfolio comes up at the end of 2014. And we're hoping that we can have similar productive and positive negotiations so that they can get what they need and we get what we need. I think that that does help us a great deal.

I think, regardless of whatever we have, we are picking up repricing on over 2 million subscribers in the fourth quarter and then everyone else will reprice by the end of next year. And then we anticipate through 2014 that we're going to have an extremely strong political year that will give us a great deal of added cash flow.

One of the things that we are very pleased about is that Gray is, today, a significant contributor of free cash flow during political years and in nonpolitical years. One of the things that we like about this Yellowstone transaction and about the transaction with Grand Junction is that we were able to acquire all of it without tapping any of our financial resources. It all came from cash on hand and cash, candidly, that came in through the course the year.

And so those stations and the assets and the cash flow that they represent are going to be able to allow us to continue to delever and to continue to have operations to expand our footprint at the same time.

Great, thank you. I just have one more question; this might be more for Jim. How is Q4 core pacing, ex-political? And can you talk to the monthly pacing throughout Q3 and into November?

Q4, ex-political, currently is pacing up about 10%, so we are pleased with the trend there. Obviously, October -- if you look at it sequentially during the quarter, October is up very significantly because of the political displacement, but November and December are currently pacing at healthy mid-single or better digits as well. So the trend for the quarter looks good.

Third-quarter trendline was slower first part of the quarter. I think September picked up and again we are liking the initial trends we are seeing for fourth quarter.

Thank you very much.

Eric, let me follow-up on one other thing that I would just like to mention with regard to those acquisitions, because we just kind of glossed over it. But within the Gray management structure we are really excited about picking up these two Telemundo affiliations in Grand Junction and in Laredo.

Obviously, the television viewing population in Laredo is very heavily Hispanic and that Telemundo there has, we think, a tremendous amount of upside that has not been pushed as well as perhaps it could be. And we are very excited to be part of that network now because these will be our first two stations. Hopefully, they won't be our last.

(Operator Instructions) It appears there are no further questions at this time.

All right. Well, thank all of you for joining us on our conference call today. Please feel free to reach out to us at any time that you have questions. We will answer what we can.

I hope that means that we covered a great deal already with you guys and you don't need to have questions to answer -- or have answered, but if not, let us know. Thank you for attending and thank you so much for your support and interest in our company.

This does conclude today's conference. We thank you for your participation.