Gray Media Inc (GTN) 2009 Q4 法說會逐字稿

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

Thank you, operator. As she mentioned, this is Hilton Howell. I am CEO of the Company and, along with Bob Prather, our President, and Jim Ryan, our CFO, we will be making some general comments on our earnings for the quarter and the year. And then we will have a Q&A session at the conclusion of our remarks.

After the last three quarters, I am very happy to report that it is getting fun to be a broadcaster and a broadcast television station operator again. We have had a rough two years like a lot of businesses and our first three quarters of 2009 were pretty tough.

But during the fourth quarter, we saw significant improvement and improvement in virtually all of the lines of our businesses. And as we look into our first quarter, we see similar trends going forward.

I think it remains certain that visibility over the next quarter or two is relatively difficult, but it is also fairly certain that the visibility will be fairly positive going forward. We do know for sure that this is going to be an absolutely robust year for political advertising in 2010.

With the new Supreme Court opinion, allowing domestic corporations and unions more direct ability to contribute to campaigns, coupled with the levels of partisan sparring going on in Washington, we feel that there will be significant increases in political expenditures across the board.

In fact, just yesterday, the Republican National Committee and its counterpart, the Democratic National Committee, announced that for the month of March they had received record fundraising sums of approximately $11 million and $13 million, respectively. We believe that Gray Television is uniquely well-positioned to benefit from this soon-to-be launched advertising war.

With our dominant stations, with our dominant newscasts, we always get the lion's share of political dollars. Somewhere between 50 and 75% of all of the advertising dollars spent in our respective markets.

But something even more importantly that I think is very true today, as it has been in the past, undecided voters do not reside on cable news shows. They reside with broadcast television stations. Indeed, undecided voters don't even reside on the Internet.

So we feel that our stations are uniquely positioned, because not only are we the dominant station in those markets, but we have many highly contested rates or races in states where we have multiple stations.

As I mentioned last quarter, Marci Ryvicker of Wells Fargo predicted that Gray Television was going to be one of the single biggest beneficiaries of TV political advertising for the 2010 cycle. And all of us here hope and expect that she is going to be right.

I would also like to note that yesterday Moody's recognized the improving dynamics of the TV broadcast out business by raising its outlook for our sector from stable to positive. It is also important to note that we have been having a little party down here in Georgia with the Masters Golf Tournament in Augusta. And our station WRDW, the local CBS affiliate in Augusta, managed by [John Wray], a superlative broadcast professional, has been a leader in broadcasting that event since its original telecast decades ago.

And now we learn today as well that one of our own, [Charles Moody] has received a Masters Major Achievement Award for his outstanding coverage of the Masters for over 40 years.

I would like to publicly congratulate him for that tremendous achievement.

Of note, due to our close partnership with the CBS network on the Masters Tournament, WRDW was the first station in the United States to broadcast in high-definition television. And with this Tournament, we are the first station to be broadcasting in live, 3-D television.

So if you have the television set and a set of classes, you can watch Tiger Woods' miraculous drive in all of its Avatar-like 3-D glory.

Finally, while I am bragging a little bit about our Company, I want to brag a little bit about our leadership. Our long-term President, Bob Prather, in particular, I would like to give kudos to. Because lately I am sure that all of you have heard a great deal about the US government's attempt to take back portions of our broadcast spectrum.

The one thing that we would like to note and that we are very proud of is that Gray Television is using that spectrum. We have 39 channels of programming in the spectrum in question. That includes one digital ABC station, four digital Fox television stations, seven digital CW's TV stations, 18 digital MyNetwork television stations, seven local 24-hour news and weather channels, one digital Universal Sports Network, one independent channel and, through our spectrum, we have the potential for local voice over -- video over demand, games on demand, music on demand, and other digital downloads.

Further, as many of you already know, we are actively testing in Omaha and in Lincoln and will be looking at future delivery across all of our TV stations, television broadcast to handheld mobile devices, which we think is a unique potential future growth area for the television broadcasting business.

With that, Bob, I will turn it over to you.

Thanks very much, Hilton. I want to welcome everybody to our call. But I guess this is kind of late for year end and early for first quarter, but a lot of you probably want to talk about first quarter more than year.

The year did finish up better than virtually anybody thought it would, I think, across our industry. Auto started coming back strong in the fourth quarter, Other category started coming back and all of our managers started feeling better about business. I think it was pretty much across the board that all our markets.

One thing I'm very proud of is, our strategy of adding 17 major university towns and eight state capitals, I think, has paid off. We were down virtually less than anybody last year overall in our -- and because our markets I think held up better than most markets. Our unemployment rate was lower than the national average. Our foreclosure rate was much lower.

So I think we are very proud of the markets we are in and the continued growth prospects they have going forward.

One thing we have been concentrating on, as Hilton mentioned, is we are -- I am a big believer in new media. I am a big believer that we have got to embrace all forms of communication and make sure that we continue to be the number one news source in the towns we are in.

We are proud to say we have got 23 number one stations on the air in about 30 markets. And we work very hard and continue to be number one. It is very important to us.

But to be number one in the future, I think we have got to embrace mobile. I think we have got to embrace laptops, car video in cars, wherever people want it.

You know, there is TV anywhere. It sounds like a trite saying, but it is true, people want to be able to get their TV anywhere they are, any time. And we have got to be willing to provide it to them if we want to stay number one in all of these markets.

And as Hilton mentioned, we are testing live mobile. I think this is a huge opportunity for our whole industry. I think it is incumbent upon us as an industry to make sure that we are the providers of live mobile in the markets we're in.

We have the eyeballs now. We have the viewers, we have the long-term history with these people. I think I've told you this before, we have got 16 stations have been number one sign on, sign off for 50 straight years or more. That is something we are very, very proud of. And it is the legacy that is a -- we want to continue in the years ahead.

Hilton mentioned that political is going to be very strong. There is no doubt about that. I think it could be the best year we have ever had, based on the races we have got and just on the fact that both parties feel like they are vulnerable right now. I think the Democrats are worried about maintaining Congress and I think the Republicans think they have got a chance to take it.

So I think they are going to be spending record amounts of money.

Auto bounces back very strong. Just to give you some numbers, halfway through the year last year, our national rep firm said auto was down 61%. By the end of the year it was only down about 35%.

At December, they were budgeting first-quarter auto to be up about 20%. They told me last week first-quarter auto was 70% up for them. That is national auto. That was 90% domestic companies, 40% foreign.

I think the silver lining in the dark cloud for Toyota for TV stations is Toyota is probably going to spin records amount of money each year on image advertising and on advertising specials deals, which they have never had to do in the past. But I think you are going to see a lot of zero financing, a lot of special incentive deals.

And you know to get the word out on those, TV is the best place to do it. And I think you'll see a huge amount of Toyota advertising over the next -- even two years probably.

But we are looking forward to a great year overall. We are ahead of our budget a good bit for first quarter. And we held our budget open even till January because we saw things getting better, but the year looks strong going ahead in pretty much all of our categories. And I think it's a lot different atmosphere than we had last time we talked to you or all last year for all of us in the industry. And I think it will continue to get better in the years ahead.

We are working hard on automation to get more efficient in our operations. Working hard on local HDTV. We will probably add eight stations with local HD this year which will mean about half of our stations have local HD. We would like to finish the rest of them off sometime in 2011, early '12.

So I think it is important for us to maintain our leadership in all of these areas of the news business which we plan to do.

And I will end it up one more thing, we just signed a new five-year deal with DirecTV on retransmission that we are very pleased with. I think it will be good for us and good for them. And they've promised that they are pointing to try to get -- they are not in all of our markets with local news now, but they are going to work hard to open up all of our markets as soon as possible for local news, which will increase their subscriber count and, obviously, be good for us in the long run.

At this point, I will turn it over to Jim Ryan, our Chief Financial Officer. And Jim can go through some more detail numbers. Jim.

Thanks, Bob. I'm going to keep my comments relatively brief. I think the -- actually the release that we issued earlier in the week was pretty detailed as well as the 10K for the year was filed. So, again, I will try to be very brief.

We were very pleased at the end of third quarter to reach an agreement with our lenders on an additional amendment to our credit facility that pushed out our covenants well into next year. We were pleased with the support and cooperative spirit we received from the lenders, and we are generally pleased -- very pleased with the outcome of that and obviously that was concluded right at March 31.

So it did take us a couple of extra days to put that disclosure in the K -- and get the K on file.

A couple of very quick comments on 2009. We were -- echoing Bob and Hilton, we were very pleased in 2009 with the political. Our total year number came up at $10 million which is an all-time off-year record for us and we were pleased to see that. We also had strong performance of about $5 million in the fourth quarter and a good portion of that was reflective of issue money on the national health care debate.

And we were exceptionally fortunate to have two stations in Nebraska during the fourth quarter last year when the health care debate was at its height.

We have also -- switching a little bit to the guidance we put out for first quarter. We were very pleased with what we've seen so far on a preliminary basis for first quarter. Certainly, strong performance in both core, local, and national. Bob has already commented on the resurgence in auto which we certainly have been seeing and are very pleased with.

And we certainly hope that what we are seeing in the first quarter bodes well for the rest of the year.

At this point, Bob, I will turn it back to you.

Thanks, Jim. At this point, operator, we would like to open it up for questions for our listeners.

(Operator Instructions). Steve Carboni from GE Capital.

Hello. Just a quick question on the spectrum and where the industry, as a whole, is at with this. I think I had read about a FCC report coming out and what the industry is doing as the cash together to kind of fight back against this. And what is the process here if there is a process?

The NAB is working on a detail lobbying plan (technical difficulties) for the spectrum. One thing that they really need to get the message out on is you'll hear some politicians and other people say, "Well, the TV industry got given the spectrum."

The truth is the TV industry spent over $2 billion in additional transformation getting ready for digital transmissions. So while you can say we didn't pay literally for the spectrum, we paid for the ability to operate on the spectrum.

And Gray itself has spent over $80 million on our digital and we are very proud of it. We've got a great platform here and like I said it has allowed us to have multicast channels in all of our markets. And I think other broadcasters are realizing there is a tremendous advantage to the spectrum.

Live mobile TV is going to be over our spectrum. I think this is a huge boon for all of the communities we are in. You think about it in a natural disaster scenario, where power is wiped out, but you still may be able to go -- get, pick up our TV signal on a cell device or other kind of mobile device, in a car or whatever.

So I think smart broadcasters are using their spectrum now, will continue to use it and will continue to find more ways to make it valuable and make it a real community asset for these communities that we are in.

Okay. Great. Other than the NAB coming up with a lobbying plan, is there some type of effort on a more legal type front?

I -- you know, there is nothing on the legal front because there is nothing legal to fight about yet. Unless the FCC actually issues a ruling or Congress actually passed some law, there is nothing legal to fight about it. I think at this point, it is a lobbying effort with the Congress and the FCC.

I will say most of the state broadcast associations have excellent relations with all of the Congressmen and Senators from their states and I know all the state voter associations are actively also spending time on this issue. Because I think most responsible broadcasters realize that this spectrum is important to us and valuable to us and do not want it to be bought back or taken away or whatever term you want to use.

I mean, the government has shown that they will definitely take things away from you these days. But I think it is something we have to fight hard for as an industry and as an individual company.

Sure. Okay. Thanks.

Aaron Watts from Deutsche Bank.

Good afternoon, guys. A few questions. I guess first, obviously, good traction momentum in the ad markets. You told us a little about that.

Does it feel like coming off of the first quarter where you had some benefit probably from Super Bowl and Olympics in terms of what you are seeing pacing-wise in the second quarter so far? I know it's early but how does that feel, relative to what you have been experiencing?

Aaron, our Super Bowl in first quarter -- and Olympics in first quarter basically came in right on target. We came in at about $850,000 or $860,000 for the Super Bowl and around $2.8 million for the Olympics and those were basically right on top of where we had forecast. So I think any of the pleasant improvement we saw in the first quarter is more reflective of a broader base in core local and national, rather than a special pop because of those two events.

You know, the Super Bowl itself probably doesn't bring a huge amount of incremental revenue to it. And in the Olympics, out of the $2.8 million we probably would estimate that maybe $1.5 million of that was incremental. But again even that would have been within the expectation range we had going into the Olympics this time around.

Alright so the core still feels pretty good to you as you move to the second quarter?

Yes, definitely.

I guess secondly, thinking about your auto a little bit, what kind of moves are your local dealers making, in contributing to that uptick? Is that -- are they kind of tailing or are they starting to come on pretty strong?

No. They are coming back pretty strong. The good dealers, really, we didn't drop off the air as most people in auto even last year, your good dealers, they cut back, but they still knew the best place to advertise was TV. And a lot of them took money out of other alternatives things they were doing and kept it in TV.

But you know, a lot of areas where I will use an example. I won't tell you the town, but one of our smaller towns here in the South, we had a Toyota dealer, had been number one in that town for years. He was spending $30,000 a month, but he cut it back to $6,000 a month and told our GM that he wanted to keep going, but that his business was down 76%.

This was about this time a year ago. I think all of it has come back pretty strong.

I think the biggest factor has been the financing market has improved a lot. I think the banks overreacted and really cut back on credit availability for people and on making it real tough on eligibility for credit. I think they all realized they went way too far and I think the default rates on auto have really been a lot lower than people realized over a long period of time.

And as I said, once the banks realized there wasn't as much risk, I think you have seen them get back to more normal credit. Mike Jackson from AutoNation told me last year that they were getting only one out of every two customers that walked in approved for a loan and now I think it's back up to 75% in that area, he told me, so --.

Yes. That makes sense. All right and then the last one for me is, you guys talked about the robust political you are expecting this year and, obviously, there will be some push out from that in terms of your normal advertisers not being able to get some of that time.

As you think about pricing as it relates to that, do you think once political kind of fades again into the background as we head into 2011 that pricing can actually benefit from all of the push out from political at the end of this year?

I certainly hope so and that has been one of the tenets of our business around here for a long time is that we usually are able to have pretty decent price increases during a political year, and we try to hold on to as much as we can of that going into the following year. And I think to stations like ours that have strong franchises, have done a good job of that over the years and I think we will continue to be able to keep some of those price increases going into the nonpolitical years. So it is something definitely important for us.

Okay. Thanks for taking the questions.

Matt Swope from Broadpoint Capital.

Hello. Just looking through the recent amendment you guys got. It looks like you're pretty motivated in there to try to do something to take out the back end of the term loan.

Can you talk a little bit, either Bob or Jim, on how you are thinking about the capital structure at this point?

I will let Jim take that one, Matt.

I think I don't want to comment too much on that. I think, clearly, the amendment provides us with some flexibility on doing something at some future point in time. And beyond that, I don't really think I can comment a whole lot right now.

Got you and that's fair enough. And we see some of your peers in the market doing deals right now and the receptivity to television seems pretty strong. So it seems like it would make sense for maybe you guys to think about something along the same lines. Maybe then I'll just leave it at that.

But can you help us, Jim, with the details on the Young Management Service agreement?

As it currently stands, we have an agreement involving seven Young stations. It excludes San Francisco and it excludes Lansing and Knoxville, where we have direct competi -- same station competition. We are both owners in both of those markets.

But with the remaining seven stations, we have an advisory and consulting agreement with Young. It provides for a base fee to us of $2.2 million per year. The agreement went into effect last August. So we got a prorated part of that in 2009 and we pick up a full year in 2010. The agreement goes through 2012.

There is also some potential for us to earn some additional incentive fees in '10, '11 and '12. It is basically if certain benchmarks are exceeded, then we have a potential in sharing in that to some extent.

Got you. And that - as they still continue to work their way through the bankruptcy process, it appears they have two competing plans vying with each other.

Does your agreement survive no matter how that turns out? Is there a way -- I guess no one will ask -- is there a way that you could --?

Our agreement is actually with the Company. So it does survive. We probably will have some issues if the unsecureds wind up in control. But the way our agreement is actually with Young Broadcasting, it does survive, no matter who the plan and whether the plan is approved by that court.

Yes. I guess that was the question, Bob, was if the unsecured are to prevail there. And that you're -- you said you would have some issues, but you think you would survive. What kind of issues would you have?

I mean I think that they would -- they probably would like to not have the agreement at that point. But legally we have got an agreement that's binding and we have been fulfilling our obligations on it and will continue to do so.

Got you. And can you talk at all, Bob, about when [Lynn] put out some of their numbers the other day, they gave some Q2 pacings. Can you guys give any Q2 pacings numbers yet?

Jim could comment on that. We have not given any, but Jim could comment on that.

Our Q2 right now is tracking basically to where our expectations are. I don't want to get too far out in pacing for Q2 more because of, again, our visibility while it is improving a little bit, it has still been a little on the short side. But we are certainly tracking through our expectations for Q2.

So we are pleased there and I kind of look back. If I look at the first week in January and look where we finished Q1 and now look at the first week of April, you know we -- and where our pace is, using January as a proxy we certainly picked up pace in first quarter as the quarter went on.

So I would be hopeful that that pattern will repeat itself as we go through Q2 as well. But again, we are on track for Q2 and we are pleased with where we are so far.

Great. Thanks.

(Operator Instructions). Bob Nicholson from Pine Cobble Capital.

Hello. Thanks for taking the call. As we think about this year, what sort of incremental margin or contribution margin should we expect as the revenue ramps up? I know you guys have done a nice job managing the cost side. How would you think about guiding us on that part of the equation?

Jim, do you want to take that?

I think in the big picture, in the '10 political year, our overall margins probably are looking like another political year of '8 or '6 and I think '8, we had a TV margin in the 40s or low 40s, call it 40, round it -- I guess -- off the top of my head.

As far as 2010 costs, we do have some increase in cost. The $187 million of costs in 2009 is -- we really clamped down last year. What we see coming back in in '10 is really associated with the variable costs of the sales.

For instance on the political for the year, we probably pick up a swing and national rep commissions on that political revenue of $3 million to $3.5 million right there. We'll have some variable cost increases as core local comes back and core national comes back, as well, on sales commissions.

But all in all, I think our 2010 cost is on the TV line, probably at or maybe a little bit below the 2006 number and 2006 was about $194 million. So I think very good management of the costs in '10 and also going forward, we have been managing our costs pretty hard for many, many years.

A lot of the things we took out last year, I would look at as more kind of permanent reductions. And going back to the end of 2007, to the end of 2009, we have reduced our total staffing by 10% and didn't make any headlines in doing that over that period of time.

That's great. And I guess one follow-up question. On the Q1 national site, it looks like sort of national might be a little bit slower coming back in your markets than it is in some of the larger markets which is what you would expect.

Any perspective you are getting from your rep firm in terms of the acceleration in national coming down to your markets?

National is definitely picking up. As I said we didn't go down near as much on national as a lot of people did first quarter of last year. So that is one thing that it -- ours doesn't look as robust as some other people's.

But as I mentioned, just to give you an example, our overall auto was down from normally around 25% of our revenues range to 70% last year. It is backed up over 20% now. And I think, overall, national, they had originally were telling us they were budgeting for a 2% or 3% increase in overall national this year. I think they are now thinking it is going to be fairly amount higher than that.

Okay. Great. Thanks a lot.

Marci Ryvicker from Wells Fargo.

Thanks. Good afternoon. Couple of questions. First of all. you mentioned operating expenses. What about your forecast for CapEx in 2010?

We are looking at probably spending $15 million this year, which probably over half of that will be local HD. Putting local HD news in eight markets this year.

And then I just want to make sure I got your numbers right for auto. You said in the first quarter, national auto is up 70% (multiple speakers).

That's the [cats]. The cats have got 120 stations. That was for their 120 stations, overall, yes.

Okay and then what -- this is not you specifically?

We were up 46%.

Okay and how does that break out between domestic and foreign?

(multiple speakers) I don't know. We don't have -- I don't have -- Jim, do you know that answer?

We don't -- I don't have that breakdown for you. Sorry.

Okay and then, have you received any incentive fees from Young at this point?

(multiple speakers). Yes, we got paid last year and we've been paid on a regular basis quarterly in arrears. So yes, we are getting normal regular payments.

To specifically answer the question -- no. The incentive fees have become operative basically at year-end '10. So we won't even know what that number is until we get to (multiple speakers).

I thought, Marci -- I apologize.

That's okay. So that is (multiple speakers).

-- about getting paid regularly.

Yes, no, it gets determined at the end of 2010 for 2010?

Right.

Yes.

And then any idea on how 3-D could impact viewership on broadcast TV?

You know, I think that is a question to be answered. I think you are going to see more 3-D, especially probably sports. I think a lot of it would depend on how people receive it.

You know most of the surveys you see, young people like it better than the older crowd. You know it is something new. It is fashionable right now. Obviously movies like Avatar, and some of these movies have made it real popular again.

But I think it's a wait and see, but I think it could be -- it is going to be good for our business if people like it and want more of it, they will demand it and their producers will give it to them. And here again, I think it is just another element of entertainment that we can give to people.

Great. Thank you.

(Operator Instructions). Dennis Leibowitz from Act II Partners.

Yes, I wonder if you could tell me how you calculate the nine times? Is it the 12 months through March 31 based on the debt? Because it would seem like it would imply a fairly enormous increase in the first quarter to meet that.

And also, maybe you can disclose this, what are the step downs after that?

I think you are talking about the revised covenant package based on the amendment we had at the end of March.

Yes.

And let me first say that those covenants are set with a very, very, very generous cushion part of our dialogue with our lenders was that as we push those out, we basically wanted to not have to think about them again throughout the rest of this year. So it's at nine times for first quarter. 9.5 the second and it tops out at 9.75.

I expect to be significantly below all of those levels all for -- all throughout the year. And, actually, based on the information we put out in -- for Q1, if you just kind of look at the revenue and expense line and do a back of the envelope whether it is an EBITDA calculation or if you want to look at the BCF calculation, (technical difficulties) it clearly shows that Q1 '10 is going to be better than Q1 '8. And our leverage covenant and credit agreement is calculated on a trailing eight-quarter basis.

So obviously it is good to see Q1 '10 moving ahead at Q1 '8 on an EBITDA or OCF type of basis.

I didn't realize it was eight quarters. And so is it based on EBITDA?

(technical difficulties) it's a defined term, but a reasonable proxy of it is the -- in our earnings release you can see -- well, just to keep it simple, I guess the actual amount per the defined term in the credit facility for -- as of the (inaudible) quarters at the end of 2009 calculated to be $95.1 million. So that is the average of the last eight quarters.

Okay. Thank you.

Calculated leverage ratio per the credit agreement was at 8.42 times.

As of the end of the year?

Yes, as of the end of the year.

All right. Thank you.

(Operator Instructions). Bishop Cheen from Wells Fargo.

Hello.

Hey, Bishop, you are supposed to be at the front of the line not the back of the line.

No, no, no. When you come back to the high-yield market we will get (multiple speakers) but I always listen in. We learned a lot from your calls.

Look. Here's just a technical question. My sleuthing is not as good as it used to be. Looking at the 10K, I saw -- I can't remember exactly what page -- I have it here, the nice summary that you did. But the language of the amendment we didn't see in the 10K, you know, for some of the more details. Is that going to be in a separate 8K filing?

We have already done that (multiple speakers).

Since the amendment happened this first quarter that isn't technically needing to be filed until we actually file the Q. And quite frankly, even just a summary in the subsequent event footnote and elsewhere I think provides the material items of the amendment. And quite frankly, we were trying to get the K filed quickly since we were already on an extension and didn't take the time to process the amendment.

So we will be filing that, expect that we will be filing that with the first quarter Q.

Okay, great. So for things like LIBOR florists and all that that's all (multiple speakers).

There's no LIBOR floor and neither has there ever been a LIBOR floor in that agreement.

I know there wasn't, I was just wondering if there was a change in some of the pricing and such as that.

Well the summary indicates that the prior to the amendment, the all-in pricing was L650, the pricing did step up to L850. In the event in some point in the future we were to pay down the existing term loan by at least $200 million, our all-in pricing would drop back to L plus 475 and as we indicated in the disclosure in the K, there are further reductions in pricing that might be available to us in the future.

Again, all premised upon if we were to make a paydown sometime in the future as well.

Okay, but directionally this is what you needed the [relief] and the headroom and the flexibility to try and burn your way back into your capital structure?

You got it, Bishop.

Okay. Thank you, gentlemen. Be well.

At this time we have no further questions in the queue and, gentlemen, I will turn it back over to you for any additional or closing remarks.

Thank you very much, operator. We appreciate everybody's interest and support. We always finish up by saying we answer our own phone, we are easy to find. So anybody's got any further questions don't hesitate to call.

Thank you, everybody, and will talk to you at the end of next quarter.

Goodbye.

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