Gray Media Inc (GTN) 2010 Q4 法說會逐字稿

Good day everyone and welcome to the Gray Television fourth quarter 2010 and year-to-date 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, CEO and Vice Chairman of Gray Television Inc. Please go ahead, sir.

Thank you very much operator and good morning everyone. Thank you for joining us to review Gray's 2010 fourth quarter and year-to-date results. Quite simply it was a blowout quarter. A quarter for the record books. Revenues for the fourth quarter increased 48% to a new record for Gray of $114.6 million. Revenues for the year grew by 28%, also a new record for Gray of $346.5 million. These increases in revenue, coupled with excellent expense control, resulted in net income of $21.9 million for the quarter or $0.35 per share, and net income of $23.2 million for the year or $0.16 per share. These outstanding results allowed us to pay down $50.2 million of our debt by year-end.

Obviously this political season was very good for Gray Television because we hit an all-time record in political advertising, even eclipsing prior presidential election cycles, of $57.6 million. We believe that these results portend extremely well for Gray in the next political cycle of 2012. It is widely reported that President Obama will likely raise and spend over $1 billion on his reelection campaign. And, with the Republican victories of 2010, we anticipate that whoever the Republican challenger may be, he or she will be able to match the President's fund-raising prowess. Additionally, we are already seeing important senatorial campaigns coming up in several of our key states, all of which we believe sets Gray up for another record year in 2012.

So that leaves us 2011. In this morning's press release, Jim Ryan has provided our best effort at indicating where we see next quarter coming out. And he may have some more thoughts on that later in his comments. Per my point of view, I see 2011 as a typically off-year in the broadcast cycle, but a relatively favorable one. Our regional vice presidents and station managers while still loathe to stick their necks out too far in predicting their performance, are relatively bullish on the advertising outlook for 2011, especially with regard to the local advertising market.

Something else that is very positive for Gray, as a consequence of our highly successful 2010, we have been able to advance our local high-definition transitions, and it has also allowed us to reinvest more in our local news brands. Of note, KOLN, our CBS affiliate in Lincoln, Nebraska has added a 4.00 PM public affairs show with simultaneous live online chats with local news makers. And it has launched a half-hour high school sports show at 6.30 PM on Thursdays. Additionally, KOLN has added a 9.00 PM newscast on our digital subchannel to serve Grand Island, Nebraska. This has paid off well for KOLN and as it has won more first-place awards from the Associated Press than any other station in the states of Nebraska, South Dakota, or NOrth Dakota combined.

Additionally, a KAKE, our ABC affiliate in Wichita, Kansas, launched on January 31of this year, the market's very first Monday through Friday 4.30 AM newscast, an expanded edition of Good Morning Kansas, the number one morning show in Wichita. These continued investments in our already powerful local news brand, we believe will position our TV group well to repeat the kind of quarter and year we have just reported in the future. Bob, do you have some comments? Bob?

I'm sorry. I'm here. I had it on mute. Didn't want anyone to know I was in the background.I apologize.

I know everyone has read our news release. We are very happy with the year. I think it is a tribute to our management, our GMs, and our people out in the field, and also a tribute to our group of stations which I think came through the recession better than most of the markets around the country. And I think our strategy of having the major university town, the state capitol is in our markets, has definitely paid off for is. But we are very happy that TV bounced back, I think a lot stronger than Wall Street thought, or frankly probably that most of us thought. I think 2009 was an eventful year for everybody and in 2010 we are very happy to have an all-time record.

But '11 is here and in 2010 is in the past, so we have to look forward. Some of the things that we are working very hard on -- Hilton mentioned briefly -- but, local HD, I think, is extremely important. We will have most of our stations capable of doing local HD news by the end of the year. We are also, at the same time, putting in studio automation in most of these deals which will enable us to be much more efficient in operating our master control in our studios. We think we're ahead of the industry in this aspect and are very proud of our operations that we've got up and going so far. But local HD is extremely important. HD has really taken over the TV world. It is a better product, as I've mentioned now for several years, for the viewers and for the advertisers. And people are realizing it and they don't want to want to go back to the old days of standard definition. We've got to be there with our number one news stations and all our stations producing local HD news.

The other here, we are really kind of strengthened on is new media. We've got a bunch of sales initiatives going on with our Internet websites, with our texting, and with our mobile. Mobile, I think, as you all know, is really coming on faster every day around the world. I think with the smartphones, the iPhones, the Androids, new Motorola phones are coming out -- mobile is going to be the real key to the future for all communication, I think. And we have got to be there. We are still testing in Omaha. Live Mobile is working great there. Technically, there are still some issues with the mobile coalition and with the Pearl group on how this is going to actually come to market. But, I think it will get done and we will be in the forefront once it does get done.

We paid down $50 million of our debt last year, which I'm very proud of. We want to continue to hold expenses in line this year like we have done in the past. I think 2011 is actually going to be better than we originally thought it was going to be. Mainly, because I think auto continues to be strong. There was a big article in the New York Times yesterday talking about how much better credit has gotten for auto buyers and I think this is the key. People want to buy new cars if they can get the right kind of financing and I think it is gradually coming back stronger all over. And I think this will bode well for auto to continue to grow this year which, like I said is -- most of you know, traditionally auto is around 25% of our revenue. It got down as low as 16% I think, in 2009, but it has bounced back now and we look forward to auto continuing to be a strong leader in our advertising results.

Here again, I think one of the main emphases that we're going to work on this year is being more efficient, more automated, better ways to run our stations, cover the news, but cover it in a much more efficient manner which we want to continue to do. Because, let's face it, where our competition out there now is an iPhone -- a guy walking down the street and five seconds later it's on the Internet, and it's news around the world. And we've got to be nimble and flexible and be willing to meet the marketplace and what the marketplace wants. We want to continue to embrace social media which we're doing, and most all our stations now have Facebook and Twitter available for our anchors and newspeople. I think this is going to continue to grow in the future.

I just read an article about a 21-year-old woman who has got a website called myYearbook that's just absolutely growing like crazy, and thinks it will rival Facebook someday. And it may. That's what -- those are competition for eyeballs out there and we've got to be aware of them and be cognizant of the fact that it is important for us to make sure we embrace all these forms of communication with our audience. At this point I like to turn it over to our CFO Jim Ryan and he will go through some more of the actual numbers and we will open it up for questions. Jim?

Thanks, Bob. Good morning, everybody. I'm going to keep my comments relatively brief. I think the results for the quarter and for the year were laid out pretty well in the release with quite a little bit of detail. And certainly Bob and Hilton and Bob have both commented already on the very, very strong record-breaking results and we were very pleased with it.

Focusing a little bit on some balance sheet items that would not have necessarily been in the release. First of all, the first lean leverage ratio under the senior credit facility was at 4.46 at the end of the year with the covenant of seven times so there's ample room there. If you calculate it on a trailing 12 -- and that's calculated on a trailing eight-quarter basis. If you calculated total debt net of cash on a trailing 12-month basis, the leverage ratio for all debt would be about 6.1 times.

The Series D. Preferred Stock balance with the accumulated dividend at the end of the year was $53.4 million. CapEx for the chair year was 19.4, 8.9 in the fourth quarter, and that's reflective of the acceleration of the HD buildouts that Bob had mentioned on the local level. We currently have four markets that are completely done. We have nine additional markets where we have HD studio news capability and we are completing the rest of those as quickly as we can. So we already have 13 markets up from a new studio basis. We have four more that are in process now and another four that are queuing up. So again, as Bob said, our hope would be that we have most of our stations completed on a local HD news basis by the end of 2011.

Cash taxes for the quarter was actually a refund of $430,000 so on a net basis for the year, we actually had less than $100,000 in cash taxes. And the refund in the fourth quarter was actually a little bit of federal AMT. At this point Bob, I will turn it back to you.

Thanks, Jim. Operator at this time we would like to open it up or calls for anybody on the line.

Thank you sir, the question and answer session will be conducted electronically.(Operator Instructions)We will go first to Bishop Cheen with Wells Fargo Securities.

Hi Bob, hi Jim. Thanks for the update. Hi, Hilton.

Bishop, I'm glad you've still got the fastest finger in town.

All nine of them. The tech -- Bob, you have long been a believer in -- build it, improve it, and they will come. Can you give us your thoughts or color about what -- across the tech investments that you are doing, the efficiencies that you are looking for and please quantify as much as you can in terms of margin and overall expenses?

Jim -- Bishop, I give you a great example. Omaha is kind of our -- been our station that we really use as our test case probably, and we feel like we've got our most efficient operation there. But, there, for example, in our master control in our studio operation, we've -- through automation and through really some creative design by our Chief Technology Officer, Jim Ocon, we've reduced our staffing there from 17 to 4.5, for example. Running all our master controls for a major NBC -- it is the number one news leader in that market. So, we are trying to -- some places we don't have that many to get rid of, but Omaha is one of our biggest, strongest markets.

But we are looking for those kind of efficiencies throughout our automation process. And we are doing it at the same time that we are putting in local HD. So, we are really getting a double whammy with our audience. The audience is getting local HD and we are -- actually, not only more efficient, but it is a better product. The automated stuff actually doesn't make as many mistakes as human beings do and, as you probably know, you have a big turnover in master control production areas anyway, a lot of times in TV stations. So, this eliminates some of the learning curve and some of the problems you have with new people who aren't totally familiar with the operation. So, this is an area that we want to continue to work on this year throughout all our Company and we are very, very proud of it.

And most of the upside -- do you think you will start seeing the majority of the upside in 2012 if you are on track to complete --

I would think so. Yes, I think most of it you will start seeing in '12, right.

All right. That is helpful. Thank you.

Thanks Bishop.

We will go next to Marci Ryvicker from Wells Fargo.

Thanks, good morning, everyone.

Hello, Marci.

the first question -- actually it's two questions I have that could impact 2011. What's your view if there is an NFL lockout, which we'll hear on Friday, number one? And, secondly, what is the impact on your expenses and revenue actually with Oprah going to Discovery?

Those are two good questions. One, if the lockout happens, I think it will get settled before the season starts. But let's assume that, it didn't. Frankly, Marci, NFL is a very important product for all the networks and for us. But, for example, a lot of the towns we're in where there is not an NFL city, NFL is not as important as it is a major cities where there's a team in the town. I'll give you an example -- Lexington, Kentucky, we've got a strong CBS. When CBS lost the NFL years ago, Lexington actually made more money showing old movies during that time on Sunday afternoon than they did with NFL football. Don't get me wrong, I think it is a great product. I think our stations need it and I don't want to get rid of it, but I think it would have very little financial impact on us in the short run.

I cannot imagine any scenario where the union and league would miss any games or miss more than one or two if there was a lockout. There's just too much money involved. They are all making too much money. It is not a situation like basketball is in where you've got combined losses for $400 million for the NBA teams that -- virtually all the NFL teams are profitable because of the TV contract and because of profitability of NFL football.

The second question was about Oprah. I think we're going to wind up saving about $4 million a year when Oprah goes away. We think we've got good product in place in all the markets to replace Oprah. The revenue may not be as high obviously, but I think the expense cut we'll actually come out ahead.

Okay, one last question. How much of the auto -- of your auto dollars have you recovered since the recession?

Jim can probably answer that better than I can. Jim, do you have a number on that on how close we are?

Yes, Marci. Just a second. Auto dollars in '10 ended up -- and remember '10, with the political, there was some pretty heavy displacement in auto, Q4. But we were $58 million, almost $59 million gross. 2008, full year, and again a heavy political, but not quite as heavy, but auto was at about $66.5 million gross. We've come back -- and the low point was $46.5 million in '09, as you know. So, we've come back quite a ways, but there is definitely a ways to go to get back to pre-recession level.

Thank you so much.

Thanks, Marci.

(Operator Instructions)

We will go next to Aaron Watts from Deutsche Bank.

Hey, guys. A couple real quick for Jim, maybe. On 2011 cash taxes, you think it is going to be pretty similar to last year?

$600,000 net outflow, maybe. Not anything significant at all.

Okay. How long do you think -- how long do have that shield for?

A long time yet. Our federal NOLs are $277 million -- if you give me a second I can give you the exact number. So, we've got a long ways to go.

Perfect. Okay, and then can you just refresh us on, sort of, starting now, how much flexibility you have to deal with that expensive preferred stock, you have picking away in your structure?

Let me answer that in two parts. First of all, under the senior credit facility, we have the ability of a $10 million annual basket to do RP with that's tied to a leverage ratio that we would be inside of. So, from the senior credit perspective we basically have $10 million a year to work with.

The second lien note in venture has a pretty straightforward -- a classic bond RP basket ability that we've been building since day one. I haven't run the exact calculation, but I think that basket is probably, at end of the year, within the low-$50 millions and would probably build a little bit -- will be building as we go through '11 as well.

Thanks. That's really helpful. And then, Bob, maybe one for you. Just curious if -- you mentioned all the distractions for viewers eyeballs. Can you maybe talk to how the ratings on your news looks today versus maybe a year ago, two years ago, three years ago. Just how that has settled right now?

Yes. Aaron, our news ratings pretty much follow national trends. Morning news continues to go up, the early morning news and we are looking to put on more 4.30 in the morning type stuff. The 5.00 and 6.00 news has been pretty steady. 11.00 news in a lot of places has been gradually going down. Ours, a little bit and I think as we have talked about the past -- as you know, I was pretty exercised by the NBC stunt with Leno. That really hurt. We've got 10 big NBC stations for us and that 10.00 lead-in -- it hurt some of our 11.00 news around the country. And they've recovered from it, I think, but 11.00 still seems to be a problem.

I think part of the fact is, as you well know, talking about the eyeballs with all the distractions, people get news now 24/7. And they don't really need that 11.00 as much as they used to. I think you find out most people still like the 11.00 to get the weather for the next morning. And maybe the late sports, but it is just not as critical to people.

I think the early morning news is becoming more and more important and will continue to become more important in the years ahead. I think one of the things we really emphasizing in all our news research right now is what's going on with early news and what can we do to make sure we are staying on top of the trends of what people want and what viewers want in the early morning. But overall, our ratings have held up real good and all our number one stations are still number one and we want to -- that's our mantra. If you're number one you want to stay number one; if you're number two, you want to be number one. We want that to be on our managers' minds everyday when they wake up.

All right, perfect. Thanks again.

Thanks, Aaron.

Aaron, real quick, to follow-up, that NOL carry-forward number is $272 million, just for the record.

(Operator Instructions)

We do have another question come in from Jim Beyloune from Oppenheimer.

Okay. Hey Jim.

Hello? I'm sorry. It is actually Charlie Avery. Jim Beyloune is here with me. You paid off, I think it was about $50 million in debt last year out of free cash flow. Is it fair to assume that your goals and intentions are to do the same thing in 2011 if you have the same free cash flow?

We won't have the same free cash flow unfortunately because of political, but we would try to use every penny that we can to pay down as much as we can in '11. And we're looking forward, I think, to '12 being even a bigger record year from a political. And we hope to pay down $50 million plus in '12. But don't worry, we're focused on our debt. We look at every day and we want to make sure we are trying to pay down, as much as we can as quick as we can. And it is our number one focus other than making sure our stations continue to be the news leaders in their markets. Those are the two things that we emphasize on a daily basis to all our management.

And I think I asked this in last quarter, as well. It seems like you are getting some pretty good cash out of managing the young properties. Is there -- I know that doesn't come up for a while, but as it proceeds through the bankruptcy courts, is there still an intention to be sort of opportunistic if they fit into your portfolio? And then assuming that's the case, how would you finance that?

Good questions. First of all, they are out of bankruptcy. They are now owned by the bank -- a group of bankers that owns the bank debt. We've got two more years to go on our management contract. We are in there and involved in working with the stations now on a daily basis.

I think the key for us would be, is there a way, if it makes sense, if the bank group decides to sell those assets in a couple years. Can we finance them without increasing our leverage? I think that would be the key for us. We want to get our leverage down and that's our number one goal. I think, if there was a way to acquire those stations at a reasonable price and make sure we did not increase our leverage, I think it is something we'd be very interested in. But it's not on the front burner right now. We are very involved in working with the stations. We want to continue to do that. Watch the -- if the ownership group decides to do a different -- go a different route and sell in 2012 we will take a hard look at that point.

I assume the banks don't want to be in the broadcast business. So, is it fair to assume you probably have a first look at something --

We don't have anything in writing. Obviously, we will know a lot about the company at that point and we would be the logical person to look at it. But it would be -- I'm sure they will go through a normal sale process if they decide to do that. They have told us from the beginning, they are not long-term holders. So, I think it is a -- when and where they decide to sell, I think probably depends on market conditions. There's been no real transactions in this space now for over two years, of any significance. So, I think it is going to take some kind of deal getting done to kind of set a benchmark for what multiples really are, and what people are willing to pay out there, and who is actually interested in the television business.

One thing -- we and most of our competitors in the public market have all been working on our balance sheets, trying to get them in better shape, refinance our debt when we could. And I don't think any of us want to jump back in and over-leverage like most of us were going into the session. I think we all learned a good lesson, and it's like the Texas banks. Very few Texas banks got in trouble this time around because they got burned so bad back in the '70s during the oil crunch. We learned our lessons and we want to make sure we are very prudent in any kind of acquisitions we do in the future.

Thank you very much and congratulations on a good year.

Thanks very much.

We will go next to Michael McCaffrey from Shenkman Capital.

Thanks for taking the question. I wondered if you could provide any commentary, if you are seeing any big push in union money in your Wisconsin stations?

The good news is we've gotten over $500,000 in the last 10 days in our three Wisconsin stations in advertising money, from the unions mostly. So, we are sitting on the sidelines saying, keep advertising. I don't know what's going to happen there. But we've been very fortunate to bring in some pretty good dollars in that area just in the last 10 days good and I guess the longer that goes on -- probably both sides will be spending money. Both the unions and the anti-union groups that are out there, the PACs and those kind of things that may be pushing it. But yes, it is been real nice for us, so far.

Are you seeing any other pull-through in some of the other markets where the expectation is that some similar political activities will start to happen?

Insignificant -- several other states where we've got Indiana, we've got our station in South Bend and Ohio.

In Michigan I was thinking.

Which one?

Michigan.

Michigan, yes, we are in Lansing there. Very insignificant at this point. Although those things usually you don't really see the dollars until those things really heat up. So obviously, Madison is white hot right now. And probably, what happens in Madison may determine a lot of what goes on in those states, too. I think they probably are all waiting to see what actually happens there before they really turn up the heat in these other places.

But it is an interesting going on -- virtually every state in the union has a deficit and they are all looking for ways to trim that deficit and they all had federal money from a year ago and now that's gone. So, the state of Georgia, for example has a $2 billion deficit, and we've always had a very conservative-run state government, but they are looking for ways everywhere they can to cut expenses and even, in some cases, raise taxes. But in different ways, but I think your going to continue to see a major pressure all over the country to figure out ways -- and obviously these public unions and public pensions are a huge expense for virtually all these states.

Great, thanks.

Sure. Thanks Mark.

And we have a follow-up from Bishop Cheen.

All right Bishop, one more time.

Robert, you've been very clear and consistent on what your priorities are. So, my question is on M&A and I'm not insinuating, you know, you're about to pull the trigger on anything. But, as a student of M&A, is the buying pool -- do you think the buying poll is still as thin as it was? And secondly, because I have a feeling, I know what the selling pool is. But tell me about your perception of the gap on bid-ins.

Bishop, that's a great question. I think it is something I've thought about a lot. I really think -- the Freedom deal's out in market right now. I guess that's the only one I know of that's of any significance. I really, really think the key is that what happens there determines -- I don't know, that company's both newspapers and TV whether they get sold as one entity or whether they get split up. But until there's some kind of benchmark set on multiples of a significant acquisition, I think that private equity guys and, like I said the groups that are out there, are all kind of on the sidelines saying, let's see what happens.

If those things sell at 10 or 11 times cash flow, I think everybody will be cheering and you will probably see more sellers and buyers both pop up if it goes in a much more lower multiple, you may see people still sitting on the sidelines. I have not seen private equity really ready to jump back into these deals. They've had a pretty good fill of deals through Citadel and Clear Channel and some of these things have really been -- Univision, I guess had bounced back some, but they've all had some major, major restructuring on debt in most of these deals. Not to mention, the guys like Young and others that filed Chapter 11 during the crunch. I think until there's a deal done and you get a benchmark for multiples, I don't think you know what the buying group or the selling group is right now.

That makes sense. Thank you, Robert.

Thanks, Bishop.

And we have another follow-up from Aaron Watts.

Okay.

Just one other thing I wanted to lob in at you. I saw your guidance for expenses for 2011 and I'm curious, kind of baked into that number, how your programming costs are looking maybe in 2011? And also just your view on what direction those costs are heading going forward?

The program costs --

-- Aaron, I go every year to try to keep our expenses flat from the previous year except in the political years when we have $3 million plus of commissions on the political and the national from our rep firms. I think with our continued emphasis on the automation and more efficient ways to run the stations, we want to keep our expenses as flat as we can. And I think our expenses right now are running below what they were in 2006, for example.

And we want to make sure that we stay on top. One thing that we normally -- first-quarter usually looks a little up simply because we have a fair number of raises that go in first quarter, but it evens out as the year goes along. And we watch these things pretty close. We are proud of the fact that we've done a great job controlling expenses and we try to do in the right way. We've never had mass layoffs. When we do automation deals we do stay bonuses and try to have a very good severance plan for people and we work to figure out other jobs for them to do if possible. So, like I said, we've been very fortunate to do this over a period of time where we've done it with as little disruption as we can for the people and, yet, doing the right things to make sure we operate these stations as efficiently as possible.

Aaron, the question about the program cost itself. As we said with Oprah going away, that saves nearly $4 million on an annualized basis. So, with roughly -- our program cost this year was about $15.5 million. Next year, in '11, it is probably in the $14.5 range. And if you thought out to '12 and you get a full year's worth of Oprah impact in '12. '12 should be definitely under the rate of '11 on a program line.

Okay. Perfect. That's really helpful.

Thanks, Aaron.

It appears there are no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, operator. I want to thank everybody. As I said, we are very part of the year we had and the quarter. Looking forward to the 2011, not being as good a year but being better than most people thought. So, want to thank everybody for your support. Looking forward to hearing from many of you. As you know, we answer our own phones, so don't hesitate to call anytime. And we will see you on the first quarter report later this year. Thanks, everybody. Thanks, operator.

You're welcome, sir. And, again, that concludes today's presentation. Thank you for your participation.