Gray Media Inc (GTN) 2009 Q1 法說會逐字稿

Good day everyone and welcome to the Gray Television's first-quarter 2009 earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Hilton Howell. Please go ahead, sir.

Thank you very much, operator. Good morning everyone and welcome to the first-quarter Gray Television's earnings call. As the operator indicated, my name is Hilton Howell, and I am Vice Chairman and Chief Executive Officer of the Company. And Bob Prather, our President and Chief Operating Officer is on the line, as is Jim Ryan, our Chief Financial Officer. And I am going to have a few brief opening statements, and then Bob is going to follow up with some more detail, and then Jim with even more.

I will say as we look at our first-quarter performance that in this unique operating environment we are relatively pleased with our operating performance in Gray Television. As we have looked at all of our competitors and all the reported results that is available to us so far this quarter, we will report probably the best results of any station group in the country, with a drop of only 14%.

Now 14% drops in total revenue is nothing to brag about, but all in all we are relatively pleased with that. It has been better than our expectations. And we have been pleased to see that, in terms of what our station managers saw as what we expected to get through the course of this quarter, we have beaten it for eight weeks in a row. That, I think, might be some indication that perhaps we are finding the bottom in the advertising market.

I will say this quarter that it is the particularly gratifying to me that after years of expense with no financial return to our shareholders and in full compliance with all of the SEC guidelines, nearly two-thirds of all of our stations are now fully converted and broadcasting in the high-definition format.

Further, we have completed our retransmission consent negotiations, really throughout the Company, and in this quarter and going forward throughout 2009 we expect to be able to benefit from that added revenue.

Also, as you know, the Company sought and secured a loan covenant modification from our banking group on our eight-year term loan, six years of which remain, that will see us through the course of 2009 and into the beginning of 2010.

This quarter we have also benefited from the initiative started in the Company in 2008 that has continued into 2009 to identify and reduce wherever we could our operating costs without compromising in way our commitment to the quality of our news broadcast, to our local coverage, and to the quality of our television broadcasting experience for all of our audiences. And we have been very gratified to see those expenses come down nicely through 2008 and in Q1 of 2009.

Also, I wanted to share with you that this past quarter I visited a number of our television stations, and I'm pleased to report that in each of our different markets, and in each market in almost a unique way, our station managers and our sales staff have identified new advertisers that they have brought on, rather than relying upon sort of the old advertising paradigm of looking to the automobile manufacturers and the automobile dealers to satisfy all of that advertising need and to fill up our inventory.

In many cases our television sales staff have converted the advertisers that in previous quarters and years looked to the local newspaper to advertise their products and services, and we have converted and bought not only to our TV spot market advertising, but to various different advertising spots on our websites, which we find very gratifying.

Finally, as we look forward to the balance of 2009 and 2010, we always look to our big years, the political years. And as we look into 2010, Gray Television in particular should be enjoying in 2010 a very strong political year. We have identified in 2010, 12 contested governor's races and 15 contested senator's races in the states in which we broadcast. This compares to our 2008 numbers, which had only three contested governor's races and 14 Senate races in that year.

So we expect a strong 2010, not only in political, but vis-a-vis our Olympic broadcasting and other opportunities that we have.

Bob, you want to take it from here?

Thanks very much, Hilton. I appreciate it. First of all, I always try to be positive, as most of you know, and let me start out by saying that I think our strategy that we have really been following since day one with Gray Television of buying strong number one or number two stations in good markets has proven to be very sound.

Our 17 university markets, eight state capitals, and our other markets have been less effective within this economic crisis than other markets. I think that is why in the first quarter we were down 13.6%. Here again, like Hilton said, nothing to brag about. But best in the industry, which I am proud of. And I think here again it is a tribute to our management team out in our markets and the markets we are in. I think most of our markets are actually doing better than the national average in most of the towns we are in.

We also finished ahead of the top end of our guidance. And once again we try to be very careful with our expenses and our guidance. And Jim Ryan and his financial team did a great job of making sure that when we tell you we are going to hit a number, we hit a number.

We have converted 28 of our stations to digital on February 17. And I'm proud to say this process went much smoother than we thought. We had roughly 5,000 calls in the first two or three days. Out of a total of 28 stations, probably 90% of the calls were strictly for information purposes, where the customer was really just saying, how do I get this box on, or how do I do something. And we walked each customer through on an individual basis. We had phone banks up in every station. And I think it went extremely smoothly. And we have had virtually no glitches since then. And we are looking forward to getting the rest of our stations on the June 12 deadline.

I actually tested before Congress last month. They called me and several other people in the industry up, because we had converted more stations than any other group. And I was very pleased to tell the committee that we felt like this transition was going a lot smoother than anybody anticipated, and we thought it would in the future. So I feel very good about the fact. And as Hilton mentioned, we finally hopefully can get some benefit out of the $60 million plus we have spent on digital over the last few years.

We also completed all the contracts on our retransmission consent deals that we talked about at the end of the year. We've got $13 million of new money coming in beginning January 1. And we think this money will continue to grow in the future. We have got increases set in for the next two -- the next three years on most all the contracts. And once there, we think this will continue to be a growing source of income for us.

We have also identified $15 million of expenses, which we implemented at the end of last year, that we are taking the benefit of right now. And even in first quarter we have come up with probably another $1 million that we are implementing. And we are looking at every single expense aspect in the Company and ways to save money and be more efficient.

And also to continue being the dominant news factor in most of our markets. We want to make sure that we don't do anything that would harm our news product, because this is really the heart and soul of our Company.

One thing that we are very proud of, our new media continues to grow. And this, I think, for most companies obviously digital is a growth factor, but ours, I think we are especially proud of. We are averaging 45 million page views a month right now on our websites. 8.3 million unique visitors a month, which I think is extremely good.

Our mobile is averaging 7.2 million page views a month, which I think is probably higher than anybody out there in our size markets. We've got 735,000 unique visitors per month on our mobile phones. We are averaging 2.5 million monthly views on our video.

We've got over 25,000 Twitter followers on our stations. All of you, I am sure if you don't know who Twitter is, you'll find out. But we are encouraging all our on-air people to have Twitter accounts and Facebook accounts. And we've got over 12,000 friends and fans on Facebook pages.

So we are trying to make sure that we stay up with these new media trends, that we are with it, as you would say in the market, for especially young people, because obviously these are our future viewers and we want to make sure we capture them.

One other thing we are doing, we've got a strong promotion going to increase our text alerts, and we have done a great job. Our goal is to have at least 5,000 text alert viewers in every market, and we are getting close to that in virtually all our markets. This is something we think that if people are getting our text alerts on news, weather, sports and other things that they will be more inclined to go watch our news at 6 and 11. So we think this is a good growth area for us in the future.

The last thing I'll mention, 2010, I think Hilton pointed out, but I think it is going to be an extremely good year. I think the economy is going to be turned around at that point. As he mentioned, we've got some strong governor and Senate races. We've got the Winter Olympics on our 10 NBC stations, and we've got the Super Bowl on our 17 CBS stations. I think all these auger for a very strong year in 2010. So I am looking forward to it.

I think 2009 is going to get better as the year goes along. I think the key factor for all of us is what is going to happen on the auto. But as Hilton also mentioned, we are make a strong effort to get out and get new business. We had in the first quarter roughly 1,800 new accounts signed up, with a total of almost $6 million of revenue from people that had not advertised with us in the past.

So we are out beating the bushes, trying to find newspaper advertisers, local cable, that all go into our triple-play challenge we started back in September of '07. I think this will continue to pay dividends for us.

At this point I'm going to turn it over to Jim Ryan for more deep financial details, and then we will open it up for questions. Jim?

Thank you, Bob. I'm going to keep my comments relatively brief but just again kind of run through the highlights of the first quarter. Revenue was down 14%, although as Bob and Hilton have both mentioned, that is still -- while we are not pleased with the negative, the decline on a relative basis is better than the peer group. So we are taking some satisfaction with that.

And certainly the revenue at $61.4 million was a bit higher than our high side guidance. And the first quarter strengthened, especially as we went through March, both somewhat in the time sales, and also a little bit of uplift in some political as well.

Our local revenue was down 14%, national was down 21%. In relation to the TVB reports, again on a relative basis, we did pretty well. TVB reported the industry down about 25% in local and 26% in national.

Our Internet, combined -- the direct and the time sale related Internet ads -- was basically flat to slightly down to the prior quarter. Although we were pleased to see that the direct Internet revenue, which is actually the revenue derived directly from the websites, was up 10% in the quarter. And again we are pleased to see that the direct Internet revenue was growing as the softness in the time sales, given the overall economy, was not terribly surprising.

Political for the quarter ended up at $1 million. And again it was a little bit better than we had expected.

Looking to categories, the good news, our telecommunications and legal categories were both up. Certainly as everyone else has said that has already reported, auto was down significantly for us at about 42.6%. And it now represents about 16% of total revenues.

All of our other categories -- entertainment, financial, home improvement, medical, restaurant, furniture, appliances, electronics, and department discount stores and supermarkets -- were all down, reflecting the effect of the overall recession.

Our operating expenses were -- TV operating expenses were down 9%, which was a little bit better than we had anticipated. And again, it goes back to -- Bob has already mentioned that at the grass roots level all the way up everybody is working very hard to keep the expense reduction plan, that we have already identified $15 million for, moving forward and looking hard for additional expenses as well.

Turning to the balance sheet for a moment, total debt at the end of the quarter was $798 million. The leverage ratio test, which is a trailing eight-quarter test in our senior credit agreement, put our leverage ratio at 7.48 against an 8 times covenant.

On a trailing 12-month basis our trailing operating cash flow ended up being $111.6 million. And on a trailing eight-quarter basis, as defined in the credit facility, our operating cash flow number was $105.4 million.

CapEx in the quarter was $5.4 million. Approximately half of that would have been related to the final convergence of DT, where we were in several markets switching from temporary UHF transmitters and associated antennas back to permanent VHF.

Cash taxes in the quarter were a de minimis amount of about $16,000. And I currently expect cash taxes for the year to only be about $150,000 to $200,000. Our program payments were $3.9 million, and amortization was $3.8 million.

At this point I will turn it back over to Bob.

Operator, we are ready to open up for questions, if you will open up the lines.

(Operator Instructions). Marci Ryvicker, Wachovia-Wells Fargo.

I have a couple of questions. The first, I know you said auto is 16% of your revenue. Is that still the largest ad category?

Yes, yes it is.

And then what is your exposure to Chrysler and GM?

Pardon?

What is your exposure to Chrysler and GM?

Our Accounts Receivable exposure to Chrysler at the end of April was -- now when I say Chrysler, I am talking about corporate, I'm talking about the dealer associations and I'm talking about the local dealers; all combined was about $1.7 million.

The direct exposure to Chrysler corporate was about 100 -- it was less than $200,000. We had a little over $100,000 direct exposure to local dealers in Accounts Receivable. The bulk of the money is in the dealer groups. As you know, those are funded in part by the dealers and in part through contributions. So the dealer groups accounted for about $1.4 million of the total exposure.

There has been a tremendous amount of cost cutting, I think, across most media industries, broadcast TV in particular. How should we think about expenses in a recovery? Are you going to have the same type of growth that you have had before? Is it just a different expense base? How should we be thinking about that?

Marci, we want to continue to -- ideally, we want zero growth or less in expenses going forward. We really believe that in the future we have got to operate these stations more efficiently. We've got to learn better ways. We are doing more hubbing, we are doing more things that will allow us to be more efficient going forward. We are buying smaller cameras and going to video cameras in most of our markets. A lot of these things are ways that we can get the same services, cover the news with less expense.

We are looking, for example, at Skype and StreamBox and other technologies like that for being able to do live shots in the field with small cameras and with a laptop computer, as opposed to a big live truck or a sat truck. All those are ways that we can cover the news as efficiently as we have in the past, but much more -- from a cost standpoint, much less expensive. So this is something that will be an ongoing effort for us in the years ahead.

Can you just talk about how the months trended in the quarter, in the first quarter?

Yes. Hold on. We'll get that for you.

We basically saw a little bit of improvement as the quarter went. January, we were probably running, and this is combined local/national, probably running about down 15%. February the decline picked up a little bit, about down 18%, but then March rebounded and we were down about 14%. Now those percentages also are excluding our political year-over-year.

So as I said earlier, March especially kind of strengthened towards the end, which we were pleased to see. April for us came in right at expectation, or very, very close to expectation. It is a little too early to tell where May is going to shake out. We are cautiously hopeful that second quarter's pattern will be similar to first, and we will see a little bit of pickup as we move through the quarter.

Visibility at the station level, and I am sure you have heard this from everybody else who has reported, is just extremely limited. A lot of people are literally only placing about a week at a time. So we are pleased to see that April came in where we want. We are cautiously optimistic about the rest of the quarter.

[Stephen Carbone], GE Capital.

What do you expect the total retrans to come out for the year at this point?

A little over $16 million total for the year. Which we had about $3 million last year, and we will have a little over $16 million total this year.

Okay, great. Your strategy looks like now you're going for smaller accounts and accounts of customers that hadn't advertised with you before. What kind of impact does that have on margins?

Very little right now. You know, necessity is the mother of invention, they say, and I think that one of the things that we need to -- you know, in the television business we got used to auto being such a huge percentage for so long that we all kind of got used to it, I think.

So this is actually making us get out and reviewing our sales techniques, how we go after business. I think our margins are going to be just as good or better, frankly. A lot of the auto business is fairly cheap, especially national auto. They handle pretty good on the rates. So we can actually do better with local; especially most of this business is local direct, so you don't have an ad agency involved. So I think our margins on some of this new business can actually improve.

But it is still hard to make up a 43% decline in something that has been 25% of your revenue. In a lot of cases, in big cities it is even a bigger percentage than that for a lot of stations. So nobody is having any fun out there it looks like with auto. It will come back.

I think Chrysler's bankruptcy plan is in motion now. I think General Motors is probably not far behind them. And I think once we get these plans in place and get the DIP financing, they're going to have to advertise. And they won't be paying as many debts off, so they will have plenty of money to advertise going forward, and they've got to do that. So I look forward to the second half of the year actually being much better on the auto side.

Sure. That's all I have. Thank you.

(Operator Instructions). Aaron Watts, Deutsche Bank.

Two questions from me. I guess first, maybe Bob if you can just give a sense for how do you think -- when advertising does come back, and you just said how the auto companies start spending again, is it your sense that if you think about it as a pie, how far back can we get once the ad market comes back in the auto space? Like the OEMs start to advertise again, but what about on the dealer level, where maybe you have fewer dealerships that potentially have a little bit more flexibility to advertise more? Like how do you think about that?

That is a great question. I have been asking a lot of people in the car business those exact questions. I don't think anybody really has got a crystal ball to answer that right now. All the major manufacturers, or at least domestic, have announced plans to try to -- you know, General Motors wants to get rid of 1,000 dealers. I think Chrysler is 700. Ford wants to get rid of dealers.

That could work both ways, I tell you. Less competition might mean they think they can spend less. But don't forget, there is still a huge competitive factor out there between the three manufacturers and the foreign autos. I mean, Toyota is not going away. Hyundai is not going away. Nissan. None of these people -- Mercedes -- all these guys are going to be in here trying to sell cars.

They all know the best way to, at least, get the public's attention, I think nowadays is still by TV. Most of them have a big Web strategy, but the strategy is based on TV driving people to the Web. They go to the Web to get more detail. Then (technical difficulty) cars.

But I think most of your -- the people I have talked to -- and I just talked with the chairman of the Interpublic Group, Michael Roth, yesterday as a matter of fact. And he was pointing out that they lost some General Motors business last year, and they actually got more profitable, because the General Motors business is so cheap. But he said, look, I would like to have it back but we'd still like to be able to make money off of it.

But I think the local dealers have always been our strength, and I think they will continue to be our strength in the future. They actually held up much better than the national ones. The national ads we have been told from our national rep firm, their national auto ads are down 61% in the first quarter. And we are their biggest single customer, so we are down 43% in auto. And a big chunk of that is national.

So I know that's a long, convoluted answer, but I think auto is going to be -- will it come back? The other thing I might say is interesting is Mike Jackson, who is president of AutoNation, I heard him in a speech a couple of weeks ago, and he pointed out that right now we are only selling about 9.5 million cars a year in the United States. And that normally about 9 million cars a year literally disappear off the road through either just old age, wrecks, stolen, chop shops, whatever.

So we're just barely replacing the cars that disappear in a year. And there is a huge pent-up demand for people for new cars. Everybody likes to have a new car. I think you're going to see a huge -- once that people feel more secure about this economy, and feel like things are getting back to more normal, you're going to see a huge rush to the auto dealerships to get new cars. Once people, like I said, have a better feeling for what the future looks like in the economy.

All right. That is interesting color. Then my second question also a little bit big picture for you, as online providers and sites garner more and more video. So sites like Hulu, with the networks signing on for those. Do you view that as being something that will siphon off viewers and advertising, ultimately at the end of the day at the detriment of TV, especially in the younger demographic? Or do you think that it can be complementary?

I really don't. I will tell you a quick story. My assistant, Dottie, came in a couple of weeks ago and said, Mr. Prather, I need to apologize to you. She said, I watched eight hours of Hulu this weekend to catch up on 24 and some other programs she had missed. She said, now I can go back to watching at the regular time, because she didn't -- so I think it is in addition to us as a business.

I think TV, remember, is a habit. We want to keep people in the habit. People got busy lives nowadays, and they miss some of these shows that have an ongoing arc to them, as they call it, where they've got a continuing story. They can go to Hulu or CBS.com and catch up. And then they like to sit back on a weekly basis and still keep up.

So I think it can be helpful to our business and not hurt it. Especially, I think we've got to continue to have our strength in local news and local programming, but from the primetime aspect, I don't think it will be that much of an impact on those measures at all.

Okay. So you don't think that it will hurt prime time enough where it hurts your lead-in to your local news?

No, I don't. Not at all.

Okay. All right. Thanks, guys.

(Operator Instructions). Having no further questions, I will go ahead and turn the conference back over to Mr. Prather for any additional or closing comments.

Thank you, operator. I want to thank everybody for joining us today. We look forward to having you on our call next quarter. As I have told you before, we are all easy to find. We all answer our own phones, so you can call anytime and leave specific questions.

But thank you [support]. And we look forward (technical difficulty) in the next quarter. Thanks everybody.