Gray Media Inc (GTN.A) 2014 Q3 法說會逐字稿

Good day and welcome to the Gray Television's third quarter 2014 earnings release conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Hilton Howell, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. Good morning and welcome to Gray Television's third quarter earnings conference call. I'm joined by Jim Ryan, our Chief Financial Officer, and Kevin Latek, our Senior Vice President of Business Affairs. And, as usual, after our brief comments discussing our earnings release this morning, we will answer any questions that any of you may have.

As you saw this morning Gray reported record revenue for both the third quarter and year-to-date, with both revenue and broadcasting corporate expenses above and below our expectations, respectively. We also announced, and this is something that we are quite proud of, that we have renewed all CW and NBC stations through 2018.

We are very pleased in that now every network with which we are affiliated has entered into long term agreements with Gray Television. Obviously, the political campaign this year, which concluded last night, except for our stations in Louisiana, contributed to these record results.

Our political revenue hit a record for a non-presidential year and got close to rivalling a presidential year's performance. Gray benefits from having highly rated top news providers in most all of the battleground states, and we believe that, due to our local market dominance, we get the lion's share of political advertising dollars.

All politics is local. And no group can provide access to our local markets better than Gray Television. For the quarter, Gray receives $22 million and $33.5 million, year-to-date, in political advertising.

While we are still counting, we have over $80 million on the books, as indicated in our fourth quarter guidance, an historic number. While control of the Senate has been settled last night, we still had the run off in Louisiana, which should run through November with the election on December 3rd.

I believe that on a per television household basis, Gray receives more in political advertising dollars per household than any other broadcaster by a significant margin. Due to the sheer velocity of political advertising in our stations, and despite very careful and attentive inventory controls by our general managers, some categories of our core business were slightly deferred.

But this is a trade off we are happy to accept. Moving onto our results, we couldn't be happier with them with our quarter end year-to-date. Our revenue reached a new record of $131.7 million for the quarter compared to $88.2 million for the prior year's quarter, a 49% increase.

For year-to-date, our revenue also reached a record of $330.2 million compared to $250 million in 2013, a [32%] increase. Our net income was reported at $13.9 million for the quarter, or $0.24 per share, compared to $7 million, or $0.12 per share, for the same quarter last year. Year-to-date our net income was $16.8 million, or $0.29 per share, compared to $13 million or $0.23 per share, in 2013.

However, please recall that this year we took a $4.9 million charge on the early extinguishment of our debt prior this year. Significantly, our broadcasting cash flow, our free cash flow, has increased to $129.6 million this year compared to $91.5 million last year.

And we have accumulated $80 million of cash on our balance sheet so far this year. With that, I will bring my comments on our results to a close and turn it over to Jim Ryan. Jim?

Thank you, Hilton, and good morning everyone. I think Hilton's kind of covered some of the P and L highlights. Again, we're extremely pleased with the results, both on a reported basis and also on a combined historical basis.

Our third quarter combined historical had political of $23 million, which was (inaudible) $2 million to $3 million higher than we would have anticipated. And the last part of that political came in in a big wave very late in September. And we were pleased with the SJL acquisition in mid September on the 15th.

And we were to pick up about $350,000 of political revenue from Flint and Toledo because we were able to close before the quarter end. Focusing my comments on the balance sheet for a minute, at quarter end our total debt was $1.301 billion.

Our trailing eight quarter cash flow number, as defined in our credit agreement, was $203.3 million. Our leverage ratio, according to our credit agreement, was $6.3 million, which was what we expected.

We had, on a trailing 12 month basis, our operating cash flow, as defined in our senior credit agreement, would have been about $194 million. We've been -- we're very pleased with the trajectory of the third quarter. And our outlook for the fourth quarter, again, very, very strong political in the fourth quarter.

Our core local and national is likely to be down slightly because of the sheer volume of the political going in. But, as Hilton said a minute ago, we're very happy to take that trade and, because it's on a net cash flow basis, it's certainly very positive for the Company.

Trending for the quarter in core we see business post election in November picking up as we would expect. Obviously, it was heavily crowded out in October with the massive political. In December it is trending positive. It's a little early to tell how exactly the retail season for December is going to break but the post election trend lines are encouraging.

A couple comments on the cash flows in the balance sheet. Again, CapEx for the quarter was $10 million, $20.5 million year-to-date. We're still tracking to be about $30 million for the year. We had no significant cash taxes in the quarter. And only about $360,000 of cash taxes for year-to-date.

Our retransmission revenue on an as reported basis for the third quarter was $19.7 million and $53.5 million for the year. Our reverse comp on an as reported basis was $5.3 million for the quarter, $13.4 million for the year.

More importantly -- Year-to-date, more importantly, on a fully pro forma basis for all of our acquisitions, including Hoak and including SJL, we would anticipate that our 2014 gross retrans revenue number would be about $85 million. Our reverse comp expense would be about $24 million. So our net re trans, on a fully pro forma basis in 2014, is about $61 million.

We anticipate and expect that even though CBS will kick in next year for reverse comp, as we talked about on our earlier calls, that we will be ahead of that $61 million pro forma number in [2015] on an as reported basis. Also, as Hilton mentioned, we renewed our NBC affiliations through the end of 2018, as well as our CW affiliations.

In 2015, those renewals of our NBC do not change our expectations for what we have been anticipating would be reverse comp payments to NBC in 2015. So we're very, very happy, again, that we've got all of our networks locked up in long-term affiliation agreements at the present time. At this point, Kevin, I'll turn the comments over to you.

Thank you, Jim. And thank you, Hilton, earlier. As you all have heard the third quarter remained a busy one for Gray. I wanted to take a couple moments to talk about some bigger picture issues for us. In the third quarter of 2014 our new stations continued transitioning into the Gray family.

And all of our stations have continued to innovate and [so have] local businesses [and] viewers, despite sometimes some increasing macro headwinds. Most of our stations were very busy covering and promoting yesterday's historic elections from North Carolina, Louisiana and in Georgia, in Florida, Wisconsin, Ohio, Michigan, South Dakota, of course, Kansas, among others.

Meanwhile, we continue to position Gray for long-term growth and certainty. In late July, as you know, we announced the acquisition of WJRT-TV in Flint and WTVG inToledo. In less than eight weeks, we were able to obtain both FCC consent and close that transaction.

In late August we announced we entered into long-term renewals of our CBS and FOX affiliations, including many early renewals of those affiliations. [That news, in fact, followed] by just a few months a renewal of all of our ABC affiliations.

Also in late August, we announced we had entered into agreements with some very talented broadcasters to purchase all six of the stations that we had offered under joint sales or shared services agreements. Those transactions should all close before the end of the year.

A few days ago we closed in our acquisition of the NBC stations in Great Falls and Helena, Montana. As you saw this morning, we announced we have [concluded] our affiliation renewals with NBC and CW.

These deals included early renewals for a number of those stations, as well, and thus, since the beginning of 2014, Gray entered into long-term renewals for all of its network affiliation agreements with ABC, CBS, NBC FOX and CW. These renewals are important because they provide Gray with long term stability and certainly for our most important programming relationships.

I also think it is probably unprecedented that a broadcast group has renewed all of its affiliations with all five networks in the same year. Finally, in the past few days, we've begun negotiations with our MVPD partners to renew and [reprice] the retransmission consent agreements that expire at year end.

As you've heard from us previously, we have approximately 9.5 million Big Four affiliate subscribers in total. Five million Big Four affiliate subscribers are covered by retrans agreements expiring on December 31, 2014. And approximately 900,000 Big Four affiliate subscribers are covered by agreements that expire at various times through 2015.

We expect that good faith efforts on both sides of these negotiations will result in smooth and timely renewals of all retrans contracts this year, just as we have been able to achieve in all prior years. This concludes my remarks today. I turn the call back to Hilton. Thank you.

Alright. Thank you, Kevin. Operator, are there any questions for any of us? Hello?

Hi. I do apologize. (Operator Instructions).

Great. Thank you.

The first question comes from Marcy Ryvicker of Wells Fargo. Please go ahead.

Thanks. You guys gave a lot of color so I have a quick one for you. And, Jim, you kind of addressed the Q3 and Q4 post election -- or Q4 post election was pretty good. It looks like national has actually gotten better sequentially.

I think it was down 8% in Q3, down low single-digits, if I have this right, in Q4 despite this political squeeze out. Is there anything that you can say about national at this point for Q4 and even for 2015?

I think you're right that we do think it has been, on a relative basis, improving as the year has gone on. And the latter part of the year looks a little bit better. We're in the initial phases of our budgeting process for 2015. I mean, I think we -- at the very least we think national next year is stable.

It may grow a little bit. But we -- Our current expectation for next year would not be to see continuing declines but a stabilization from this year. And moving forward, we certainly would expect our core local next year in 2015 to see definite growth there.

We would be reasonably pleased with growth rate that was a little bit ahead of GDP. So we put it in the -- maybe the low to -- Aggressively thinking, maybe low to middle single-digit range but certainly positive growth in core local next year.

And what about auto? Auto is down, I think, 3% in the third quarter. We heard about some softness last night from some of the networks. Is this something that is going to be continuing or is it being squeezed out?

It's a little harder to read. We're not terribly troubled with our Q3 auto being down a little bit. And it's likely to be down a little bit in Q4. But, again, when we think about it, it's really the political displacement on the inventory. Auto advertisers are classic news buyers, and political advertisers are also classic news buyers.

And so in September and October, it's very common for us to see auto business going to the sidelines, to some extent, and with the massive amount of political we had in October, quite actually getting pushed to the sidelines.

So we're not overly troubled with what we're seeing in the auto right now. It's -- we've seen it before with political. That's why we're not that concerned about it.

Alright. Thank you very much.

Thank you. The next question comes from Patrick Fitzgerald of Baird. Please go ahead.

Hi, guys. Thanks for all the detail. Could you just -- Pro forma for all the acquisitions, what would be your last eight quarter EBITDA? I think you said [203]. Does that take into account all the acquisitions?

Yes. The [203] is a blended eight quarter average, including all the acquisitions and it's the defined term in our credit agreement. The EBITDA number on a pro forma basis for Q3, bear with me while I look it up, it would be approximately [138] adjusting for noncash corporate charges.

Okay. Thank you. Are you guys seeing that --

That's a nine-month -- that would be a nine-month fully pro forma number.

Right. Got you. Are you guying seeing a higher portion of your political advertising coming from super PACs than it used to?

Yes. Yes. Yes, it's -- that trend has -- it started when the -- with the Supreme Court ruling and certainly has been becoming more pronounced with each cycle we've seen since then.

And could you talk a bit about the pricing differential there? Is that -- are you -- are you seeing higher prices than you're used to?

Yes. Soft money, definitely we're seeing very significantly higher prices than we would have seen in the past, in very tight highly contested races. And certainly the soft money is pricing exponentially higher than what our normal core business would be pricing in a non election cycle.

Alright. Thanks.

As an aside, and for illustration, we had a 30 second spot in Thursday Night football a couple weeks ago in a highly contested political state, and that 30 second spot went for $70,000, which would be unheard of in the market size that it was in. It was, by and far, an all-time record.

Right. Okay. Thanks. Now, your net retrans commentary was very helpful. I wish everyone would talk about it like that. Would you expect the number to continue to trend positively in 2016?

Yes.

Okay.

Through the next three years -- well, we believe it will trend positive for the -- for the foreseeable future. But, specifically, in this three-year cycle that is coming up, yes, we would expect it to be trending positive 2015, 2016 and 2017.

Okay.

It may not be perfectly linear in its trend but, certainly, positive in each of those years over the 2014 pro forma baseline. And, obviously, once we get done renegotiating those 5 million subs, they're up at the end of this year, and the other 900,000 at various points in times next year, we'll have a much better and more accurate feel for exactly how that's going to trend. But, definitely, we see it up in each year.

Great. Thanks. Could you just remind us or kind of give us an update on the JSA legislation from earlier this year? And is there any change in how operators are thinking about kind of getting by the JSA rules?

Is it as simple as hiring more sales people at the smaller station? Or is it stations are going to come for sale here in a couple years and you might be able to buy some?

Kevin, you want to --

Yes. This is Kevin. JSA rules, at this point, still require unwinding of JSAs in June of 2016. While there's legislation pending to extend that, legislation has not been signed by the president and, certainly, after yesterday, we know anything is possible going forward.

For our standpoint we don't -- when we finish selling and unwinding our arrangements this year we won't have any JSAs and we're not looking to start new JSAs. So we've not really been following the details.

What we have seen is other broadcasters are coming up with other approaches to maintaining JSAs and shared services agreements. There's going to be different, I think, a number of different approaches attempted. Some will be successful. At least our next (inaudible) has [gotten] approval for their transaction [was granted] recently by the FCC.

So there maybe a path forward here but I suspect it's going to be a different set of approaches for each company. From our standpoint, again, we just don't see an opportunity for us to go back into that business.

We've been running our stations pretty well without JSAs. In terms of future pickups down the road, I think it's certainly possible that the JSA unwinding will lead to some stations being divested.

In those circumstances, it would be my guess that the station being sold by a party is going to be the far weaker of the two stations, which would probably not be a candidate to join Gray. And given our acquisition preferences, buying a weak station that's been under a JSA or an SSA [with another] broadcaster for a few years is probably not something [that] will be very appealing for us.

But it could be for other broadcasters. But that's still a year and a half away. And, certainly, a lot has changed in this landscape in the last year and a half. It may be hard to figure out how it may change in the future.

Alright. Thanks. I'll jump back in queue.

Thank you. The next question comes from Jim Goss of Barrington Research. Please go ahead.

Thanks. Just point of clarification. I think, Jim, were you saying that the -- there would be escalators in both the retransfer seats and the program payments and sort of widening dollar amount over this next several-year period?

Yes, we definitely expect the gross revenue is going to increase very significantly beginning in 2015 as we reprice those 5 million subs at the end of this year. We certainly have our -- As we talked about many times we'll be paid in reverse comp to CBS for the first time beginning in 2015.

So the reverse comp expense number will, accordingly, be increasing. But when we look at 2015 on a net basis, when we take the gross retrans and subtract out the reverse comp we're paying the networks, we definitely think we will be ahead of the $61 million net number we would have on a fully pro forma basis in 2014.

When you were talking about core local and national for next year, national's stable and local maybe a little ahead, is that before allowing for the -- that squeeze out phenomenon that -- such that both of those numbers might be a little better when you're doing it as a (inaudible) [or] political? Or is that factoring in the absence of political in those periods?

I think it -- it is -- it's our initial thoughts as we're beginning our main cycle and our budgeting for 2015. It may be a little bit conservative. That [crowd] out effect is always a little hard to judge between coming off a political cycle [into] a nonpolitical cycle.

You've got to balance the sheer inventory usage against the pricing dynamic, as well. As I said, the political, especially the soft money, it's a market rate and it's whatever rate will clear the market.

And, certainly, when we go back into a nonpolitical cycle, that super premium political rate isn't there. And we're back to a very healthy rate on our core business but no where close to what a super PAC would pay in a tight Senate race. So there's some balancing there. But we definitely, on the whole, would expect core business to be growing next year.

Okay. And then since you've had negotiations with all of the networks in a short period of time, I'm curious if you could talk, maybe not specifically but at least in some general characterization, about whether there is a lot of consistency.

Or is there variance by network in terms of what you are willing to pay for the networks that are performing the best and versus what the expectations of the networks are on the other side, factoring in the performance element from their standpoint.

Kevin, do you want to maybe make some general color comments on that? Jim, from my perspective -- and I'll let Kevin kind of jump in on top of me -- I think any network we have dealt with has been certainly very professional in their conduct of the discussions.

But each one, in turn, as we have worked with them and come through renewal cycles -- and keeping in mind that these are -- while we've done all in the last 12 months, they 're all in slightly various different points in time, each network in its own turn is reasonably aggressive in what they're asking for.

I don't -- I would just second that. All of the conversations were, I think -- they generally move quickly. I think people had -- In each case we went in with some expectations and they went in with some expectations.

And we talked about the specific markets, the type of stations that Gray has in those markets, what we deliver to the network, what they deliver to us and we came up -- Well, we obviously found value over lots of terms with the networks. And, in one case, we're [even] adding an affiliation and we think we've been good partners with them.

I think that is -- it's probably allowed us to get all of our affiliations done at once. And so we don't have a bunch of sort of trailing dates on different affiliations. Not sure if I fully answered the question, but --

Well, just to the extent that each of them are fighting for their own market share of viewerships and advertisers, I wondered if it pays them to be in that stronger position relative -- and it penalizes them if they're not. And then also is it the core programming or is it the spending on pro sports or other unique items that really drive these discussions?

I guess, from our standpoint, a station is affiliated with a network -- In our cases, essentially, all of our stations have been affiliated with the current networks for a decade more. Some since they signed on the air.

We don't get down into the granularity of whether you have a particular sports package or your dramas are particularly well. We're interested in the overall package of programming rights that they're delivering to us.

I think all the networks are still providing us, despite fluctuations from, obviously, season to season and book to book -- They're also providing us with the best programming available on television. We still have the vast majority of [the] best programming. And the most highly rated programming in television is coming from broadcast, and we want to secure that.

We certainly would prefer that they have more sports than they have. I think we've seen all the networks be fairly aggressive in trying to go after live sports. I think that will continue, certainly, as broadcast affiliates are becoming more partners and more -- contributing more in the networks.

I think we'll continue to see them be aggressive in acquiring sports rights, which are helpful to both of us. But on a sort of individual basis, with so many affiliations with every network, we're really not into sort of a granular conversation about types of programming that they have on there.

Jim, this is Hilton. Let me add one other thing just to your comments because my assumption is that you're looking to see if we're paying more to a network because they have higher rated shows on a gross basis.

And one of the things that I think our Company is unique about is, regardless of the networks, which are very cyclical business in where they go, whether they're number one or they drop to number three or number four, our individual stations have not been badly affected by that.

In general we stay -- If we're number one in that market we still stay number one in that market because we have a lot of stations in their markets that are [appointment viewing]. And so we enter the negotiations with the network from a different perspective.

And I respect their opinion that many of them think it's their programming and their live sports that drives the ratings. We have data for 50 years that proves the reverse. And so that's, consequently, one of the reasons we don't get into the granularity of it.

But we reached an agreement that we think that the network can live with, and our Company can live with. I will say I don't personally have any issues with regard to our group or any group paying reverse retransmission fees because I have a high degree of confidence with regard to the networks as they're currently owned and constituted.

But they're going to be using those proceeds to invest in programming that is non transferable, whether it's live sports or all the rest. And, from a broadcast standpoint, the networks need to have the full participation to be able to compete with networks that may be on ESPN.

And so we are there and we're going to be good partners with the networks and we're going to negotiate and be good partners with the MVPDs. But we are going to get fees for what we deliver and for the audiences that we deliver.

Okay. Let me just add one more thing to this discussion. The cable networks are generally jealous of the CPMs the broadcast networks can command. Then, on the other hand, the broadcast networks, and you and the networks are sort of joined at the hip at this, are jealous and would like to get more in terms of retrans as an alternative to affiliate comp.

So you're each on the opposite side of one of these issues. Is there -- are we still at early stages, in terms of what you think the retrans dollars and shares can be? Or has this last several years gotten you along to -- along the chain that you think you can get to?

We think that it's going to be -- we think there's very significant growth, over time, [in] what the broadcast industry will be able to derive in retransmission fees going forward. It's not -- it's still -- to use the baseball analogy it's still in the relatively early innings of that growth and ultimate retrans fees.

All right. Thanks.

The retrans dollars, Jim, are going to move to where the audiences are. And there are still -- This is, I think, a data point that is true about how I think it's going to shift because there are cable networks that receive more in retrans and they have three viewers than some of the broadcast networks and the broadcast network's affiliates.

And I think that that fact will come -- that will come to an end because retrans dollars are going to follow the audiences. And I'm very proud of what the broadcast networks, sort of across the board, of the quality that they have put on the air.

There was a period of time, not too long ago, where what we were putting on the air wasn't as good as it should have been. But there's some brilliant shows on television today that command viewing left and right. And the money is going to follow the viewers.

Thanks very much.

Thank you. The next question comes from Davis Hebert of Wells Fargo Securities. Please go ahead.

Good morning, everyone. Thanks for taking the questions. Jim, [not to make] you slice and dice EBITDA even more but what would you -- could you provide LTM pro forma EBITDA?

LTM and -- this is -- the number I'm giving you is the broadcast cash flow less cash corporate expenses. So if you look at our earnings release to the non-GAAP [rec] you can see what line item I'm pointing to. But the LTM pro forma nine month [quote] adjusted EBITDA would be [138.6].

You said nine -- that's the nine month?

Yes. You wanted a [T 12]?

Right. Right.

[184.4].

[184]?

And, again, that's the -- that's the broadcast cash flow, less cash corporate expenses, quota adjusted EBITDA line that you see in the non-GAAP [rec] and the release, which the non-GAAP [rec] and release is an as reported. But those two numbers I gave you are fully pro forma.

Okay. Understood. Thank you. And then you announced a new affiliation agreement with the CW. And I think we're reasonably familiar with how the mechanics work with the Big Four, if you will.

If you could walk us through, how do the economics work with the network like the CW in terms of network compensation, national local ad sales, margin, profile? If you could maybe go into some of those details that would be great.

Our CWs are profitable for us. There is a modest reverse comp fee to CW. But we're very comfortable with the level of that fee and the characteristics. Now, keep in mind all but one of our CWs are running on digital second channels.

So we've been using our digital spectrum to leverage the -- these additional program streams. So they tend to be profitable because they're, obviously, levering off of the core infrastructure of the primary station stream.

Understood. Okay. And I'm not sure if you touched on this in your prepared marks, I was a little late joining. The incentive auction of the FCC has put out their Greenhill report. There's some opinion that these are very optimistic numbers. And a lot of the small markets have some outlier valuations.

I'm just curious what you're thinking on the incentive option, knowing that it has been pushed back to 2016. So maybe it's too early to talk about.

This is Kevin. I think the headline, from our perspective, is it would be great if the auction were tomorrow. One, it'd be nice to remove the uncertainty. But, two, I think it would help the broadcast landscape for companies like ours. The Greenhill -- the number in the Greenhill report do look a little optimistic and a little aspirational, if you will.

But I think the important point is that the broadcast incentive auction is a reverse auction. So if the FCC puts out a number that says they need one station in this market, and the reserve price is $100 million, you may have four or five stations [in the] market raise their hand for that number.

And then we'll go to a next auction, another round, and the price will be $75 million. And maybe one of the broadcasters is successful enough, and that's not attractive, but the remaining broadcasters raise their hands. And we'll go to another auction, another round, another round, another round, until the number is so low that only one party finds it acceptable.

And that number may drop all the way down to $1 million before you find the guy in the market who's so weak that $1 million is a great payday for him. So putting out these aspirational prices for some of the markets is -- it certainly was a good headline getter. It certainly has got a lot of people thinking about the auction now.

But I don't see it actually leading to -- we're not going do have multiple broadcasters in those markets cashing out at those prices. We may have one broadcaster in some of our markets. May have multiple broadcasters in the larger markets taking the offer, which will probably be a lot lower than what the reserve prices are.

The other -- what it means for Gray, in particular, is we do have some weak competitors in our market. And if they take the -- if they leave the business as a result of the auction, or otherwise, that creates opportunities for those who are left. Not just on a day-to-day competition basis in the market but really on a programming basis.

So we have a particularly weak affiliate in our market and they decided to leave that affiliation. And their [syndicated]programming contracts and their other assets are going to be available in the market for somebody else.

So I think we will see, in some of our markets as broadcasters leave -- we'll find some opportunities to pick up some additional programming and further leverage our reach in those markets and our broadcast spectrum.

So that's why I go back to saying I wish the auction was tomorrow. I'd like to see what those opportunities are. I'd like to get this behind us, and move forward. Does that answer the question?

Okay. Yes, it does. That's very helpful. And on the M and A environment -- So maybe -- So as sort of a two pronged question. So my first question, really, is actually about your cash on hand, about $80 million at quarter end. Presumably, you generated cash [from political] revenue. Any thoughts around debt reduction versus M and A?

Well -- this is Hilton -- that's just a balancing act that we're going to be looking at and see where we stand between now and the end of the year. Just in terms of our own individual management [time], most of our efforts, between now and the end of the year, are going to be focused on our retransmission consent negotiations.

We're always in talks with different people about acquisitions. But we have been very careful and, I think, very prudent. Each one of our acquisitions that we have done since we returned to the acquisition trail have been cash flow positive.

And there was recently a transaction with a station, candidly, we would have loved to have had. But some of the initial price talks were far beyond what that station's cash flow justified. And so Gray left because we have to make sure that we look after our balance sheet.

Fortunately, we have a very strong free cash flow out of our station group. And all of the additions that we have added are adding to that. And so we have had discussions with our board about stock repurchases versus further acquisitions, and some of that is opportunistic. So I can't give you a firm answer one way or another.

It depends on what comes along and what the prices are. But we're going to be very prudent and very careful in how we allocate our free cash flow going forward. I will say this, long-term, Gray wants to return to being a dividend payer and then repurchasing its stock. But the last year has been busy with us growing the scale of our business.

And any thoughts around debt reduction being part of that?

Absolutely. Yes, absolutely.

Okay. And I guess the second part to my question is, if you're looking at M and A multiples out there, and 2014, presumably, would be a weaker political year versus 2016 when you have the open presidential seat, do you think M and A is going to sort of take a pause as we move towards that big political year in two years?

I think M and A will continue apace. I do think that there are some expectations from buyers right now that have not yet renegotiated their reverse retransmission consent revenues or their fees to their networks, and what their retrans are going to be where an individual station's cash flow may be looked at a different -- from different sets of eyes.

And I think that could lead to a slow down in the ability to get deals done where you have buyer's expectations and seller's expectations that just don't meet in between. But I think that's the only thing that would slow it down.

Alright. Thank you very much, gentlemen. Appreciate it.

Thank you. The next question comes from Barry Lucas of Gabelli and Company. Please go ahead.

Thank you and good morning. Just couple quick items. Jim, I think you said that CapEx would be around $30 million this year?

Yes.

So how much of that was kind of catch up with the newly acquired stations? And what would it kind of look like on a normalized basis going forward?

There's probably [five] to [ten] of CapEx and this would go all the way through to the Yellow -- what we refer to as the Yellowstone stations, the Cheyenne, Casper -- that we picked up about a year ago through the -- [Hope] was in pretty good shape, the SJL was in very good shape.

So I'd say [five] to [ten], I think, going forward. As we look at 2015, we're not going to be at a $30 million run rate. We're going to be at a -- whether it's [25] or maybe even lower than that, it's definitely scaling back from the 2014 rate.

And that -- If you go back -- In a political year, with the extra cash from the political advertising, it's a little easier to justify going a little higher and deliberately placing projects in the political years.

So definitely we would scale back in 2015 and then we'll see if we need to ramp up a little bit in 2016. But I don't think, over the next couple years, we necessarily need to be hitting $30 million a year on a consistent basis.

Great. And, with that in mind, and with [Davis'] questions, is there a target leverage that you feel you have to get to before you can consider returning meaningful cash to shareholders? I don't recall what the RPB is but what are the sort of guidelines or factors that go into those deliberations?

Well, we have technical capacity under both the senior credit agreement and the bond indenture for returns to shareholders. And in each document it's a little different in the metrics. In the senior credit, [if you] look at a trailing eight quarter blended average and the bond indenture looks at a trailing 12 month cash flow number.

But [suffice] it to say that in each document there is technical ability to do some things. As Hilton said, it gets more to -- and I'm not trying to speak, certainly, for the board but it gets more to a question of resource allocation, as Hilton was speaking to a couple minutes ago. I don't think we necessarily have to have a specific target leverage to do something on that front.

Certainly, as leverage comes down, as we expect it will over the next couple of years, there is -- it certainly is much easier to do those things. But I don't think there is a hard and fast leverage number that creates a bright line trigger for us.

Great. Thanks. And maybe just the last area, getting back to the election, which was certainly intriguing and helpful for your stations. With the Republicans taking control of the Senate, does that change anything in your mind with regard to the regulatory outlook?

Does Wheeler maybe act with a little bit lighter touch? Does it change the spectrum auction or outlook for combination stations in smaller markets?

I'll start with that, and Kevin may want to follow up with it, but that is certainly our hope. There has been a great deal of regulation that has been issued in the past and, obviously, the FCC has put a lot of new regulations and constraints upon the broadcast business that I don't think any of the broadcasters are in favor of, we just learn to live with it.

Whether or not that changes or not will be yet to be seen. But I'm certainly hopeful that things will be relaxed, especially when you look at the size of some of the people that our industry is now competing with. And so I hope that that is a result of last night's results. We will see.

I would like to share one thing with you. And we don't have the firm data on this yet but we will. One of the things, two years ago, that I spoke in one of these earnings calls following the presidential election year was we really felt like the Democrats had outplayed the Republicans in a dramatic fashion, based upon the pattern that we saw of the Democratic Party and the president's campaign.

And the Democratic-affiliated soft market players stepping up very, very, very early. And if you just look at the results of our numbers so far in our first, really our second, and third quarters, we've had pretty good political that came in and started on an earlier race. And, obviously, this is not a presidential election year race.

And, in the past, the great majority of the political that we received was in the fourth quarter, which we have yet to report. And so I continue to believe, and I think every election cycle expands this, that the window around which we will be receiving political advertising has increased dramatically from what it was historically.

And I think they're going to be necessary because in many of these states, Colorado, for instance, where we're pretty big in two of the three DMAs in that state, advertising started very, very, very early.

And there's just only so much inventory that's left out there, and it's a highly competitive sort of area. And we're going to participate. I think that's going to be very positive for all of the broadcasters.

Great. Thanks for the color, Hilton.

Thank you. The next question comes from Matt [Bergeron] of [Woodmont]. Please go ahead.

Thanks for taking my questions. Just had a couple quick follow ups. Just talking about the spectrum option. I think in previous calls you guys mentioned that you guys weren't interested in doing anything, on your end, relative to those auctions.

And I think you kind of referenced that you probably wouldn't be as much with the new numbers that have been out there from the pitch book. Just wanted to clarify if that is still the case.

And then my second question is with regard to M and A. With those pitch books numbers out there in mind, if you could maybe just give maybe a broader context on how that landscape changes with that.

Let me try to start and then, Kevin -- let him finish. But if you look at Gray and our Company historically, I think we have done better than any other broadcaster in the space in terms of using our spectrum.

And when the new regulations came about with regard to eliminating SSAs, et cetera, or JSAs, we use spectrum to solve a lot of that. And so, from Gray's standpoint, we would have to give up things that we're making money on to sell some of our spectrum. What was your question on M and A?

Just with that in mind, how does that change the M and A landscape, whether it's from your end, from other people's end or from the buyer's -- or from the seller's expectations end?

Well, I mean, it doesn't have any impact on us. I'm not sure what it has to do with regard to other folks because you have the spectrum speculators that out there. And if they can get more selling from the spectrum than we can afford to buy to operate then they're, obviously, going to go [in] that direction.

But we're in this business to be broadcasters, and not spectrum speculators. But if some of those crazy numbers come around we would certainly look at it for certain things that didn't put us out of business. Kevin, do you want to follow up with that in any regard?

One point I might add is, how we look at acquisitions is a little bit affected by the FCC's approach on SSAs and JSAs. And by that I mean we're not particularly interested in moving and exploring an acquisition that has lots of SSAs and JSAs that would require a lot of restructuring and capital improvements and transitioning programming or waivers of the FCC.

If you look at the deals that were announced a year ago that are only now starting to get approved or restructured and closed, that's a year wasted of both parties and their employees with dealing with uncertainty in trying to find a way forward. We were able to get our Hoak deal approved in the clean markets in a couple months.

And then, obviously, we restructure the rest of the transaction around the JSAs and SSAs. And it's, frankly, a lot of work. And while we were able to pull it off I don't think we're particularly interested in going on to the uncertain path of a large number of JSAs and SSAs in the Company.

We've had, I think, much better success in finding some very, very good stations that are operating without JSAs and SSAs. And I go back to the SJL transaction which, of course, had no JSAs or SSAs. And so the day we announced that deal, the day that we closed, was about eight weeks. Actually it may have been a little bit less than eight weeks.

That gives us, it gives the seller and certainly the employees, the vendors [and] networks just a lot more certainty to know that we can move quickly and start integrating the operations that we find so attractive. So from our standpoint I'd say, to the extent that the new rules impact us, it means that we are certainly more interested in clean deals than messy deals.

Thank you.

Thank you. . (Operator Instructions). The next question comes from Howard Rosencrans of VA. Please go ahead.

Yes. Hi, guys. Thank you. You signed a new deal with CBS, you indicated previously. And I don't remember the tenure of that reverse deal but -- and you may have fielded this earlier in the call, and I apologize.

What are your thoughts regarding the prospects for near term and 2015, 2016 getting into a position where your net retrans is growing? And particularly given (inaudible) involvement and what he's projected in terms of how much CBS will demand for their content. And, longer term, what your views are on your ability to increase net retrans. Thank you very much.

Yes. Going to recap that again. First of all, on a fully pro forma basis in 2014, our gross retrans number, revenue number, would be about $85 million. We would have paid networks reverse comp of about $24 million.

So our net number, on a fully pro forma basis for 2014, is about $61 million. When we look ahead to 2015, 2016, 2017 -- First of all, we see significant growth in the gross retrans revenue numbers. Because we think there is significant room to continue to move up the fees from the MVPDs simply because of the sheer quantity of viewers we bring to the table to the MVPDs.

Certainly, our reverse comp numbers in those years are going to be going up, as well, and, certainly, in 2015 we'll be paying CBS for the first time. But in 2015, 2016 and 2017, we still expect our net reverse comp number to be above that $61 million benchmark number, pro forma, for all acquisitions in 2014.

So that's, I assume, an attendance fee, [an] increase in what your net retrans -- Because, as you said, CBS -- the first year you're paying CBS is 2015. So I assume that that's the year of sort of maximum squeeze.

And then in 2016 you would be able to go up as you negotiate more retrans deals. And 2017, the trajectory is there. Please remind me what the tenure of the reverse -- how many years is the CBS deal?

Our CBS deal is until August of 2018, August 31st. Our new NBC deal is to December of 2018. Our FOX deal is out three years. Our ABCs are generally out until 2018. And our new CW deal is also out until the end of -- until, basically, August of 2018, as well.

Actually, one minor correction. The CBS deal goes out to August 31, 2019, not 2018.

I'm sorry. I stand [corrected].

And your vision is that each year on a net basis you'll be increasing the amount of retrans net [basis] --?

Yes. That's our current expectation. Exactly what that will look like, we really need to get through the repricing of the 5 million subs we have up at the end of this year and the other 900,000 at a couple of points next year, out of our total 9.5 million sub base, to have clarity on what that will look like. But we definitely expect it to increase in those years, yes.

Okay. And I'm sure you fielded this previously. Regarding pacings for Q4, and, specifically, could you concentrate on the post election period, November, December, and how you're seeing core during that period?

Core business, post election in November, is certainly picking up and that's natural to see. Because it was badly crowded out in October and the first four days of November. So we're pleased to see that. And that's -- we expected that, and it's occurring as we expected.

December is a bit of a ways out yet but with the trends we're seeing for December so far are encouraging. Now, exactly how the December retail season will break, and the spending from the retailers is, again -- a little bit remains to be seen. But we're definitely seeing positive signs for the core business post the election cycle.

But, unfortunately, given the sheer magnitude of the political and the use of the inventory for the political in October, and the first few days now in November, it's still likely that our core business overall for the quarter could be down slightly just because, like we said earlier in the call, we're happy to trade tens of millions of political for a relatively small amount of core business.

Okay. That's certainly helpful. And your expectation, though, for December, at least -- as it stands, your expectation for December in core business, as we stand, is that core will be up for the month of December? I know you gave us all the qualifications but just as we stand today.

Yes.

Okay. That's great. Thank you so much.

Thank you. (Operator Instructions). There are no further questions at this time. Please continue.

Well, I want to thank everyone for their time this morning, for their support of our Company and the support of our industry. We thank you. If you have any other questions, be sure and give us a ring. And I look forward to speaking to each of you at our next scheduled earnings call next year. Thank you, Operator.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line. And have a great day.