Gray Media Inc (GTN.A) 2014 Q4 法說會逐字稿

Good day and welcome to the Gray Television fourth-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 so much, operator. Good morning and thank you all for joining us as we discuss our record results for Gray Television in the fourth quarter and for all of 2014.

As usual, joining me are Jim Ryan, our Chief Financial Officer, and Kevin Latek, our Senior Vice President for Business Affairs.

I hope that all of you have had the time this morning to peruse our 16-page press release issued this morning as we have enhanced our presentation with results being presented on both an as reported basis and a combined historical basis which we hope will give Gray's achievements added clarity.

For 2014, we reported record revenue for both the fourth quarter and for the year. These fantastic numbers will result both record results from our pre-existing stations and record results from our newly acquired stations. For the first time in our history our revenue exceeded $0.5 billion and our broadcast cash flow exceeded $200 million.

We repaid $70 million in debt in the fourth quarter. We completed 10 acquisitions that added 23 market-leading local news driven television stations to our portfolio. These 23 remarkable institutions fit the Gray culture of local market dominance which we believe is the only way to superior financial performance that is of permanent value.

Our stations in our 44 markets really do have moats around them. This local community focused attention to detail allowed our stations to report another all-time record of $82 million in political advertising revenue which on a total basis is as large or even larger than many of our peers and many of them who are much larger than we are. Even more importantly, on a per household basis, Gray's total political revenue is preeminent in the industry.

As part of the natural connection between the local substance of our stations and the need of the public servants who serve those markets to reach their voters, it led our Company to establish our new Gray Washington DC Bureau. This exciting new venture now fully operational in all 44 of our markets will have a hyper local focus and an intensely nonpartisan lens on issues out of Washington that have a direct impact on our viewers, our advertisers, their businesses and our collective future.

Anchored by Jacqueline Policastro, a veteran of both local news and Washington reporting, our DC Bureau has already put reports on the air with our local flags on the State of the Union Address, the veto of the Keystone Pipeline, new EPA regulations that affect the clean coal industry, and the impact of the new executive order on immigration and all of its impacts. While these stories are national in scope, they have a deep impact on our local communities in Nebraska, the Virginias and Texas. Coupled with the depth of our local coverage of state politics, our stations will only enhance their position as the must buy station in every political contest in each of our 44 markets.

Gray will be unique as we look forward to 2016, a presidential election year without an incumbent, an almost unlimited window for political advertising spending due to the expansion of election day to an election month or months as each state may decide and the First Amendment right of advertisers to reach voters.

2014 also saw Gray complete the broadcasting equivalent of a Hail Mary pass whereby we renewed each and every one of our networks nationwide for long-term contracts while at the same time completing the renegotiation of new retransmission agreements with all of our MVPD partners allowing Gray to announce firm numbers today on these biggest question many of you have on our industry going forward and that is how much station groups will retain in the retransmission reverse compensation fight? That question is no longer an issue for Gray Television.

2014 also produced record digital media revenue with digital revenue hitting a record of $28.2 million. Our proprietary Moms Everyday digital vertical is now fully deployed in each of our 44 markets and we are now offering it to other noncompetitive markets nationwide.

Something that we found out at our recent general managers meeting that we are exceptionally proud of, based on a recent study we conducted with SmithGeiger, our local websites and our markets are the number one news sites outpacing Yahoo! and all network news sites and only beaten by Facebook, Google, YouTube and weather.com. That I think is an amazing confirmed fact for Gray Television, it's shareholders and our viewers.

With that I will bring my comments to a close and turn it over to Kevin Latek, who will discuss more news that we made this morning. Kevin?

Great. Thank you, Hilton. We are all proud of the achievements and milestones that marked 2014 that allowed us to announce such good news today. This morning I will address a few points quickly before turning this over to Jim Ryan for his remarks.

First, to state the obvious, 2014 was a year marked by significant deal activity for Gray Television. Three of our announced transactions, Hoak, Prime Cities and Lockwood, required complicated restructurings in the first half of the year to respond to changing FCC policies. At the end of the day however, we secured regulatory approvals for these restructured transactions in 120 days or less and we obtained regulatory approvals for the Flint and Toledo acquisitions in less than 40 days. These quick grants allowed us to close on all of our announced transactions on or before our original target dates and in any event, before we opened our major retransmission negotiation cycle.

That leads to my second topic, our just completed retransmission cycle. We had approximately 250 separate retransmission consent agreements expiring on December 31, 2014, representing 5 million big four affiliate subscribers out of a total of approximately 9.6 million big four affiliate subscribers. On our earnings call in early November, I said we expect the good faith efforts on both sides of these negotiations will result in smooth and timely renewals of all retransmission contracts this year and I'm pleased to report that we achieved that goal, where we began and concluded all retransmission negotiations between October 2014 and the first few weeks of January 2015.

We do not have any open negotiations at this time and we do not have any material retransmission agreements expiring until the end of this year.

Importantly, the newly negotiated retrans agreements confirm that the high quality of Gray station portfolio confers ample scale to secure fair compensation for the value that our very strong local stations provide to our MVPD partners. Specifically, we project that our retransmission revenue will increase from $85 million in 2014 to between $145 million and $148 million in 2015 on an as reported basis. That works out to a year-over-year increase of between approximately 94% and 98%. We are very pleased with those results.

Like our retrans agreements, we believe that our network affiliation agreements reflect relatively favorable terms for us due to the very strong portfolio of local network affiliate stations that Gray owns and operates. By renewing and extending nearly all of our big four network affiliation agreements in 2014, we now have a measure of visibility into our network affiliation expense for the next few years.

At this time we project that our very successful retrans renewal negotiations and our favorable network affiliation renewals will result in a network affiliation expense that approximates 50% of our retransmission revenue in 2015, 2016 and 2017.

With regard to networks, I'm also able to provide a good update on our mobile efforts. This morning NBC and Gray issued a joint press release announcing that we have entered into an agreement that will expand NBC Universal's TV Everywhere offering of local NBC linear streams beyond the NBC owned stations to affiliated stations for the first time. This new agreement enables us to include the live linear streams of our 24 NBC affiliated television stations including NBC Network and local programming as part of NBC's TV Everywhere mobile and online platforms.

We've also obtained TV Everywhere rights from the Fox Network and while we have relatively few Fox affiliates and they are generally located in our smallest markets, we are working to launch those Fox station channels on a TV Everywhere platform in the near future.

Separately, we are optimistic that CBS and the affiliates will soon conclude an agreement that allows us to launch our CBS affiliated stations on that network over the top product CBS All Access. Unlike a TV Everywhere platform, CBS All Access targets broadband only customers. We agree with CBS that broadcasters need to do a better job of bringing those consumers into the broadcast television ecosystem. For that reason we are already readying our CBS affiliates to launch an All Access product fairly soon after the agreement is finalized.

Finally, another topic of great interest to us, the industry and you is the upcoming FCC incentive auction for broadcast spectrum. Like everyone else in the TV industry, we have studied the two reports from Greenhill that the FCC released in recent months that estimates spectrum values and those in many cases are surprisingly high. We have also studied the FCC's repacking analysis in some depth and those indicate that the FCC has little need to clear one or more TV stations in many of the Gray markets.

We do not rule out participation in the spectrum auction where participating would make economic sense. Nevertheless, we do not foresee many if any actual opportunities for Gray to surrender some or all of the station's spectrum for a price that exceeds the station's value as an operating entity. Rather, the opportunities that may be presented to Gray by the spectrum auction will be business opportunities to acquire programming, revenue streams and talent from competitors who do choose to exit the business via the auction. For that reason we are eager for the FCC to commence and conclude the spectrum auction because we are as always, working to grow Gray Television's vertical scale within our local markets.

This concludes my remarks today and I will turn the call now to Jim Ryan, our CFO.

Thanks, Kevin and Hilton. Good morning, everyone. First of all, I want to let everybody know that we expect that we will be filing our 10-K later today so it should be available later this afternoon. We have also filed an 8-K this morning with the press release in it but as important, that 8-K that we filed this morning also contains an updated investor presentation with our 2014 results. That investor presentation will also be available on our website as well at www.gray.tv.

I am going to keep my comments relatively brief and as far as the P&L goes, I am going to focus it on the combined historical information. I think that is giving the best view of the Company on a go-forward basis. And again, the combined historical just takes our as reported results and also the historical results of the stations we acquired during the relevant period before we had acquired them.

For the fourth quarter again, we were very pleased with our revenue growth. It was a little bit more than we had expected. As we talked about at our Q3 call, because of the massive amount of political $48.5 million in the quarter on a combined historical basis, we did expect our local and national revenues to be down slightly and they were. Local was only down 1% which is actually better than we had thought and national was only down 2% again, better than we thought. We have seen that crowding out effect year -- cycle after cycle with political advertising but we were very encouraged that once the elections were over the local and national numbers for later in November and December certainly came back up very strongly. So we were very pleased with the core revenue profile within fourth quarter.

Our operating expenses for the quarter were up but really a lot of that was driven by a couple of big-ticket items. Certainly the increasing reverse comp to the networks especially with ABC Force in 2014 as well as national sales rep commission on our political revenue also drove up the expenses a little bit in Q4.

Looking on a full-year basis again on a combined historical, we were pleased to see that local was in positive territory as we expected. We had strong growth year-over-year of about 21% with a record political in a nonpresidential year of $85.5 million. We think that record in the nonpresidential year speaks very well for 2016. Please keep in mind that in 2012 on a combined historical basis, we did $118 million and we would certainly think 2016 will be above the 2012 number.

On an expense basis again, if we filter for the increased reverse comp especially to ABC because their ABC payment started in 2014 as we have talked about many times over the last several calls, and our non-cash charge for our change in paid time off and the national sales rep's commission on the political really if you peel back the one-time only or kind of the odd things for the year because the political cycle are what I would call our core revenue on a combined quarter expense on a combined historical basis really only grew about 1.8%. And we are very happy about that. We have been working hard on the expense side.

Focusing on the balance sheet for a moment, at the end of the year, our leverage ratio as defined in our senior credit agreement was at 6 times. That was down from Q3 as we expected. As Hilton already mentioned, we paid down $70 million of debt in Q4. Total debt outstanding at the end of the quarter was $1.23 billion and that was $556 million of our senior credit facility and $675 million of our senior notes.

On a trailing eight quarter basis as defined in the credit facility, our operating cash flow was $203.4 million again with a leverage ratio of 6 times. Our CapEx for the year was $32 million. Obviously in political years as you have seen before, we tend to go a little heavier. My expectation going into 2015 currently is that our CapEx run rate would scale down to somewhere between $20 million and $25 million with 2015 being a nonpolitical year.

Combined historical programming payments for the year was $19.9 million, the combined historical program amortization was $17.7 million.

As we have talked about already, our retransmission revenue for the quarter and the year was very strong and we set forth our expectations for not only 2015 but 2016 and 2017 in the earnings release and you can see that with having renegotiated the 5 million subs at the end of this year, we have 900,000 more subs up at the end of this year, the end of 2015, another 3.6 million subs at the end of 2016 going into 2017. So making some others assumptions for where we think the pricing will be 2016 going into 2017. Again from the release, you can see that we are expecting very strong growth in growth retrans revenue over the next three years. In page 14 of our investor presentation that we have filed and posted has those numbers set out. What it says is that again our net retrans is going to grow significantly not only in 2015 at about 78 million but consistent strong sequential growth in 2016 and 2017 as well and we are delighted about that.

Very briefly on first-quarter guidance, I want to remind everybody that the revenue expectations for local and national in the first quarter, you need to keep in mind that we are going against more than $3.8 million of Olympic revenue from last year that just doesn't exist this year and that $3.8 million was an as reported number obviously a full combined historical number would be a little bit higher.

So our first quarter actually based on our guidance is really where we expected to be in the first quarter and we would expect that the core revenue -- core local and national will grow at a little bit faster rate as we move through the remaining three quarters of the year with probably the fastest year-over-year growth as you could imagine and would expect would be in Q4 when we are obviously refilling the political displacement with core local and national later in the year.

With that I will conclude my remarks and turn it back to you, Hilton.

Thank you very much, Jim. Operator, we will now open up for any questions.

(Operator Instructions). Aaron Watts, Deutsche Bank.

Let me start by thanking you for the disclosure. It really is best-in-class and very helpful.

Just a couple of questions from me. I guess on the ad environment, it seems like you had a little bit of a step up in local with what you are seeing in the first quarter versus the fourth. I guess with the recent job reports and cheap gas putting more cash in people's pockets, what is feeling better as you kind of look at 1Q and 2Q and maybe what is lagging at this point?

The auto seems to be going well for us right now, I think again filtering a little bit for the political displacement which kind of clouds Q4. I think a lot of what we were seeing late last year with auto and medical -- and bear with me I'm trying to get to my right cheat sheet. The restaurant category was up. I think that is probably reflective of the cheaper gas and people having a little bit money in their pockets.

So I think in general what we are seeing so far Q1 and Q2 is just in general no big red flags and things are kind of going along. I will say the word okay and I mean that in a positive way, not hyper increases or hyper hots that very solid and just came off a general managers meeting a week ago and really the tone from the managers was very positive and again people were expecting and saying that so far things were looking pretty good as the year got started.

Okay, that is helpful. On the TV Everywhere agreement, I apologize if I missed this but was this kind of wrapped into your affiliate agreement with NBC or was there -- is there some sort of compensation or upside for you in participating in that?

The NBC TV Everywhere agreement is frankly it is a technical document as to how we are going to interact, how we will deliver our signal and how our signal will appear on their apps. The upside to us is reaching our consumers in different ways and being part of a what we think is a new move to mobile simulcast. I can't comment on the terms specifically but the terms for us is getting our signals in front of more folks and transitioning in some ways to a more mobile environment.

Okay, got it. The last one for me, just housekeeping for Jim. I will probably see this when you file the K but did you pay down around $70 million of debt in the quarter and does that remain a priority for you of cash generation as you move through 2015?

Yes, we did pay down approximately $70 million during the quarter. Obviously we will generate a lot of free cash in 2015 and a whole lot more free cash in 2016. You can see that from the metrics. The free cash flow metrics on page 2 of the release and certainly our general expectations for 2015 would be probably a little bit higher than 2013 and 2016 is going to be a better year than 2012 so everybody can decide what those years look like for themselves. But certainly we think 2015 and 2016 are strong.

So a lot of free cash flow generation. I think as we have talked before and Hilton may or Kevin may want to weigh in a little bit on this, but certainly in the right circumstances we are still willing to be and wanting to be and desiring to be acquisitive. As we have talked about, we are going to be mindful of our leverage in doing that. We also want strong market leading stations that are not necessarily available on any given day. Those of you that have followed the Company for a long time know that for that type of station, sometimes those conversations go on for -- quiet conversations can go on literally for years before a seller gets serious. So it is difficult to predict the exact timing.

But certainly reducing debt and using free cash to help manage our leverage is a very high priority. Then obviously as acquisition opportunities present themselves where it makes sense and where it fits our profile, I am certain we will probably take -- we will take a hard look and be very thoughtful about what we can do when we can do it and what it means to our leverage going forward.

Thank you very much.

Jim Goss, Barrington Research.

A little bit more on the advertising climate. You mentioned local down 1%, national down 2%, better than expected. Although I think the local progress seemed -- was especially good though you also mentioned in the context of your press release the crowding out effect on automotive, medical, communications, furniture and appliances in particular. I am just wondering if you might put a little more color around how much of that you think you get back or are there reasons certain categories seem to be displaced more than others? It might be useful just in looking at the potential progress this year.

Yes, I think first of all, auto gets displaced because the auto advertisers love the newscasts just like the politicians do. I think the displacements you are seeing in like communications and furniture and appliances tends to be more of a pricing thing where when we go to displace somebody obviously we are looking for the lowest rates to take out and try to maintain as much of the higher placed rates as we can where the difference with the auto guys is they tend to -- since they have seen the cycles so much and are very aware of it, they tend to be more on the sidelines. And other categories will tend to place and take their chances on preempts.

But we have seen that cycle every strong political season and we think again that the year has started to our expectations. We have a lot of Olympics to go against in Q1 and the numbers we are seeing so far for Q2 and certainly our expectations for the rest of the year as I said, we would expect core local and national to be growing at a higher rate as we move through the year.

Jim, is the automotive, the local automotive more or of a national spot variety? And does national spot get booked as a national ad or a local ad?

National spot auto would get booked as national, local get booked as local.

Okay. So those are the local deals. Go ahead.

Let me just mention one thing. Jim mentioned it in his comments earlier, but we just completed about two weeks ago our general managers meeting and a lot of advertising in my judgment is sort of animal spirits just about how they feel about the economy, how they feel about the future. And almost to a man and woman in that group, there was a feeling of great optimism about the core business and great optimism about first quarter, second quarter and 2015. Huge optimism about 2016.

So we can look at pacings and Jim is very assiduous with his numbers and his guidance but I feel very comfortable with the spirit that people feel in the local markets and so I have got a lot of confidence about this year.

Okay, great. Just a couple of other quick things. The unwinding of the shared services agreements, didn't really affect that many situations, is that correct? Is there any impact from those?

No, it was a handful of situations and economically it had no impact on us. As a matter of fact in the big picture, we are ever so slightly better off having been able to unwind those the way we did.

Okay. And with the 6 times leverage, is that about at what you think is a decent targeted level or are you trying to push that lower as well?

Well, we certainly would like to see the leverage come down. I think as we think through the rest of this year that absent some really large transaction which I have no idea, I have no ability to predict whatsoever, but you could see leverage down into well into the middle 5s I would think if you are devoting all your free cash to debt reduction. You get another very large reduction in leverage as we get to the end of 2016 and 120 plus million, pick the number, it is going to be a big number if political rolls in.

As we talked about in our Q3 call when our leverage was more like 625, 630, we said it was toward the higher end of our range but we didn't think it was unmanageable and we had 6 times heading down well into the 5s and lower than that over the next -- between now and the end of 2016. We are comfortable with the glide slope that we are on.

Thanks very much.

Lance Vitanza, CRT Capital.

Thanks for taking the questions. It is actually Brad in for Lance. Just on the spectrum auction, I know you guys mentioned earlier that you are likely not going to be a meaningful participant. We are wondering if you can give us any more color sort of on the reasoning why not? Is it just a question of valuation, is it valuation and technical issues, if you were trying to broadcast with less spectrum? Just any other color you guys could provide on that would be very helpful.

This is Kevin. I will take that. The first answer is that most of our markets are not markets where there is a great need for spectrum so while the Greenhill report may suggest there are bids of $2 million or $5 million or $20 million for a station in the market, when you go back and look at the FCC's repacking analysis which is where they ran 100 different scenarios of how to repack the broadcast spectrum, we find that zero out of 100 or maybe 1 out of 100 times do they actually need a TV station in many of our markets. So the numbers are really hard to tie with the fact that the FCC just doesn't need a lot of stations in Casper -- or any stations in Casper, Wyoming for example. So that is one.

Secondly, if the numbers are there to clear one station in the market, there are weaker competitors in every market that we are in so the number that it would take for us to justify leaving is going to be much higher than what it would take for somebody else in the market to leave. So for example, if the opening bid is $100 million for a TV station in one of our markets, we might be interested in saying okay, we will consider putting in -- we will put our station in for $100 million but five other broadcasters put a bid in for $100 million so the next bid might be $50 million. That is no longer interesting to us and maybe one or other two broadcasters so we don't participate and a couple of other do.

So then the bid goes down to $20 million. Clearly not a number we would take but maybe one or two people in our market do. And the bid goes down to $5 million and a weak station that is off the air or dark says, hey that is a number I can take. $5 million is just not a value that we would find attractive for that station.

So the fact that it is a reverse auction and the fact that our markets are not typically -- not typically large markets and close to borders and the fact that we in almost every market are running the number one or number two TV station means that we have a higher going concern value on the stations than other people. So it is really sort of a combination of those factors.

We are again, the spectrum is a net positive for us. We think there will be people who will leave in our markets either during the auction or after the auction they realize they didn't find much value in the auction and that will create opportunities for us to pick up as I said programming revenue streams, talent from stations that do go away. So it is a good opportunity for us and we are eager for it to get started and get concluded.

Thanks, guys. I appreciate the color.

Barry Lucas, Gabelli & Company.

Thanks and good morning. Two areas if we could, Hilton. Maybe come back to the M&A issue and certainly understand the parameters that Gray has worked under over the years. But could you talk a little bit about what you think the pipeline looks like and whether or not potential sellers are waiting for more clarity in the way that Kevin just described so that the auction is keeping properties you might like to have off the market.

Barry, I will say we don't have anything to announce today but we have been in active negotiations with a number of sellers and we hope that we will be able to bring something to fruition relatively soon. I have no doubt that to some degree the uncertainty not just of reverse compensation but of the whole retransmission negotiation coupled with the auction, it has a lot of lack of clarity into the M&A process.

That being said, I don't think that it in any way inhibits it. There's some things that need to become more clear but in the markets that we focus on, we don't see it as an obstacle. The main issue that you will see us and we continue to reiterate this is we are looking for stations whether they are a group of stations or individual stations in markets that are truly culturally news institutions and or ways that we can add news distribution and entertainment and full whole broadcast spectrum in a vertical market that we are already in. So we are fully engaged in the M&A process and we think we will have something to you them. Kevin, did you want to add to that?

Just in terms of color, this past fall I think it was pretty safe to say that there were not a lot of conversations about transactions because of the uncertainty surrounding networks, surrounding retrans, obviously political was keeping a lot of folks interested in retaining ownership of the station. We have gotten past all of those. I think most broadcasters have a pretty good sense at this point of what the retrans, their network, their core, their political prospects are going forward and some folks are sort of reevaluating their future in light of those.

The folks who are most interested in participating in the auction are probably not people who have assets that Gray would be interested in acquiring. Rather I think the more typical Gray seller is somebody who runs a great station and views Gray as somebody who could take a station to the next level by bringing in some additional economies of scale. And the Washington Bureau for example is something that Gray can afford to do but probably not a single station in a small market on its own.

So we think there are sellers out there that are tracking to the kind of company that Gray runs and if they have the right kind of station, certainly something that we would want to talk to. So the overall color would be there was nothing really happening in the fall and I think we finished the year and finished political -- finished the retrans cycle, a lot of folks are giving some thought to their longer-term future.

Thanks for that. If we could stay on the -- yes, I am sorry?

Just one thing I want to mention. Jim went through all of the different things that were going to be posted today. There is one additional thing. I am sorry that I am in it but by the end of the day today, we will have our corporate video that was put together for our TV station group and our general managers meeting and it gives a lot of examples of what that DC Bureau is doing and I think you will find it to be pretty compelling. Once it is posted under the about us section of our website, I encourage you to take a look at it.

Thanks. I'll look forward to that, Hilton. If we just continue on this sort of capital allocation theme and bearing in mind the M&A comments as well as Jim's comments on leverage, at what point do you think it would be appropriate to consider returning cash to shareholders?

I guess I will start with that. That is something that we weigh every day. I in the immediate future, I think that allocating our assets to continuing to grow the scope and scale of Gray is in the best interest of our shareholders. But in time as we continue to increase the amount of free cash flow that this Company generates, which I am very proud of our track record over the last couple of years in doing that, then we weigh and our Board weighs really every day and every quarter issues about returning to paying dividends and to stock repurchase programs.

I know that a lot of our peers have those in place and we are very conscious about that. But right now we actually really do have some opportunities and we need to take those while they are available. So we will just have to weigh that and see where it happens. But I hope to be able to do that in the shorter-term versus in the longer term.

Great. Last area for me, coming back to the spectrum issue and your description of let's say less necessity to clear that spectrum for the FCC. Again some of your peers have been a little bit more aggressive in talking about ATSC 3.0 and utilizing that spectrum internally for data distribution or what have you. Would those comments that you have made tend to suggest that the opportunity to utilize the spectrum internally is maybe less in the Gray markets than it is for some others with larger market stations?

Let me start with that. I think actually if you look at Gray I think that we are a -- we use our spectrum in a remarkably efficient way. We have effective duopolies through using spectrum in many, many of our markets and so I think that we use and that we are monetizing our spectrum as we speak. It is not to say that all of our markets have no spectrum value. We have many, many markets that are close to very densely populated markets that lead over value of the spectrum will be there and of course we will look at it.

Kevin mentioned our stations are institutions in their markets and so it would take a truly remarkable price for Gray to be very interested.

Now I will say with regard to the new broadcasting standard, we have mentioned this in the past and Kevin, you may want to elaborate on that, but obviously David Smith has been pushing that and I think he is spot on and Gray has filed legal briefs in support of that shift and we have taken a public stance in every industry meeting whether it be the NAB or the small market television exchange in favor of that shift.

So while we may not talk about it every day, we are clearly behind that transition.

Great. Thanks very much for that, Hilton.

David Hebert, Wells Fargo Securities.

Good morning, everyone. Thanks for taking the questions. Jim, around your leverage comments, just curious your bonds become callable later this year and if you were to decide to call those either this year or next year, would that be a purely economic decision or are you focused on perhaps a little more covenant flexibility now that you are a larger sized company? Just curious how you are thinking about those bonds?

Well, I think one, we are in a very good position because of the structure we have and all the long-term maturities, we've got the best of both worlds. We don't really need to do anything in the current structure. I think with the call date coming up certainly there is a very strong economic factor there and that will depend on the math as that gets closer.

I would certainly think if we -- I have seen some other issuances and bonds the latter part of last year. I think the market right now or the market is certainly taking more covenant friendly packages from strong broadcasters with excellent cash flow characteristics like us. Certainly if we went to do anything in the future, I would certainly be looking to improve the covenant package as much as possible. But I think first and foremost would probably be just the economics of it and does it makes sense or not.

Now certainly if -- and again I am not predicting anything at all -- but if over the course of the next year or so we have an opportunity to acquire one or more stations in slightly larger transactions, certainly again that might come into play as to how we would view the bonds and called rights and how we would want to restructure the debt structure on a go-forward basis. But the simple answer is we will have to wait and see what the math says a little later this year and see what makes sense.

Okay, that is helpful. And on the NBC deal, just curious your thoughts around measurements where we are today and how far the gap of where we need to be on the measurement front from your standpoint?

I will just mention briefly, I made the comments in my opening remarks about the study that was done by SmithGeiger for us and we knew we were good, we didn't realize we were as good as they were able to actually prove with regard to our website. I am personally extremely excited about Gray's participation with NBC and TV Everywhere because it is clear that our stations in particular have to be the dominant player on every screen in every market we are in. So the broadcasting industry has to be out there and we are. We've got apps out in every one of our markets that are market leading and we were one of the very first pioneers in that regard. But it is very important to clear actual -- the ability to see television live in every screen and we are excited about that stuff.

Kevin, do you have anything you want to add to that?

No, I think you got that covered well.

Okay. Last one for me, Kevin, maybe you can shed some light on this. On the spectrum auction, the wireless carriers, two of them at least, are perhaps looking to push this thing back into late 2016, at least that is what we are hearing. Do you think there is any reason we can expect a delay from the broadcaster side? Just curious your thoughts on that?

The decision to delay is obviously the FCC's decision, not broadcasters or the carriers. There is still an important legal challenge and there is still a number of FCC rulemakings that have to be completed, some of which were on target to be done last summer and we are still waiting for them. So I think it is an administrative push to get the auction started early 2016. There is just a lot of pieces that have to fall into place.

I don't think it is impossible but given how quickly Washington typically works, it might be safer to assume that it might be a little bit beyond early 2016 before it can get started. I have not heard any definitive decision or leaning of the FCC about delaying it but the factors may suggest a slight delay.

Okay. Fair enough. Thank you very much.

John Hall, Wells Fargo Securities.

Great quarter and really loving all the color you guys give by the way. I just have a few questions I wanted to ask here. When you guys talk about your 9.6 million of big four subs, does that include your digital subs as well?

Yes, it does. It is that 9.6 million is the total number of big four subs we are paid on. So if we have a CBS and a Fox or an NBC and an ABC or whatever the combination is, if we are getting paid we do get paid for both and that is how we come up with the 9.6.

Okay, perfect. Now based on the number if I try to back into the actual retrans rate you guys are getting paid on, paid based on your guidance, it actually looks like you are doing much better on a rate basis that some of the other larger broadcasters who renewed contracts at year in 2014. Can you maybe hone into what you think is driving that strength there?

I will start and I think Kevin can probably add a lot more color. But I think first and foremost, it is the depth within the markets that we have that allowed us to have some very serious conversations with even the biggest MVPDs. It is one thing to go to an MVPD and say hey I've got 40 markets up and it is a mixture of some really good stations and some not so really good stations. But we were in a position to be able to go the MVPDs and say I have got 20 markets up and oh by the way, 18 of them are market leading number one news stations. I am obviously using it as an example, don't hold me to the exact numbers. But the basic point is that it gets the MVPD's attention because they understand they really don't want that problem in those markets if we can't come to some reasonable conclusion as to what the rate ought to be. And I think that helps us.

I think having the -- using our spectrum very efficiently and having as many dual big fours as we do also helps us all lot. Then we go for the best rate we can.

Kevin, you were in the thick of that so you may have some other comments.

Jim is spot on. Everybody says their children are above average. I think Gray alone is able to demonstrate that almost all of our children actually are by using Rentrak, Nielsen or any other measure people want to look at. I think -- I have not done an average sub calculation for us versus anybody else or even just for us but the characterization that our rates may be a bit higher than you would expect or that others may have expected would at least be consistent with the comments that we heard consistently from the MVPDs about our rates being in new territory for them which is perfectly fine with us. Because again, we are bringing to the table a portfolio of stations and value that they are not getting from others whether they are cable networks or broadcasters.

So we are obviously very pleased with the way it worked out. We have said on calls since I began here three years ago, Gray does not think that scale for us means that we need to be in 30% or 40% of the US. We probably never will be in 30% to 40% of the US but we do think that scale for us means vertical depth and that is the way we will succeed. And I think this retrans cycle and our recent network affiliation cycle has proven that the strategy is working.

Perfect. Then back to spectrum for a moment. Kevin, you mentioned the business opportunities of potentially picking up programming revenue streams. Correct me if I am wrong, but I think you are actually using most of the bandwidth on your current license via D2s. So is it really just a matter of swapping a non-big four for a big four given that it wouldn't be a license transfer and wouldn't trigger ownership rules? Maybe can you detail for us exactly what those affiliation opportunities are going to look like?

You are right. We have been pretty aggressive about using our spectrum to put on a second big four where available or something -- CW, MeTV, other products that we think will do well in the marketplace that obviously have a very positive ROI. So in some cases, we are sort of bandwidth constrained and something would have to go and those are very difficult decisions and very difficult conversations to have. But economically you can't turn away an opportunity.

And this is not spectrum related but last year we launched an ABC in Laredo, Texas where we had an NBC station and on the digital channels that had a Telemundo and a CW and unfortunately we looked at the landscape and had to have difficult valuation opportunities and we decided that NBC, ABC Telemundo was a better combination then ABC Telemundo and CW. So we negotiated to end the CW affiliation early and add ABC.

So we will confront that opportunity, that challenge and a couple of others -- if these opportunities arise. There may also be opportunities in some markets to pick up low-power TV stations or perhaps even some smaller satellite stations that are not being used properly or efficiently and use those as homes for some of the new programming.

We may have to acquire some weaker signals in the market that will survive the auction for the spectrum space and in other cases we may need to have these difficult conversations that you mentioned.

Okay. Last one for me, Jim, it will probably be in the K later today but can you remind us what your NOL balance is as of year-end 2014? Thanks.

Our NOL balance at the end of 2014 was approximately $160 million.

Perfect. Thank you.

(Operator Instructions). Mike Johnson, RBC Capital Markets.

Thanks for taking the question. Just a quick one on the TV Everywhere. Should we be expecting some incremental costs coming in here as you guys package these streams for the new OTT products? Maybe not just the NBC but as you look to do the deals with the other networks?

This is Kevin. At this point our projections are that there is an immaterial additional cost and we are hopeful there is a little immaterial additional revenue. So overall we think that this TV Everywhere plan will be generally revenue neutral for us in the near term and obviously we consider this an investment with a pay off that is maybe the two-year timeframe but a little further down the road.

Great. Thanks. That is all I had.

Thank you. There are no further questions at this time.

Operator, thank you for that. I just want to take just a brief moment to thank everyone on this call for your attention and for joining us this morning. We really are excited about the opportunities and we love this business. I hope that shows. Thank you for being here and we will talk to you next quarter.

Thank you for your participation. That does conclude today's conference.