Gray Media Inc (GTN) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Gray Television third quarter 2011 earnings release conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to CEO and Co-Chairman, Mr. Hilton Howell. Please go ahead, sir.

Thank you, operator. I thank all of you for joining us on us on this teleconference this morning. I will begin, as usual, with a brief overview of our results followed by Bob Prather, our President and Chief Operating Officer, who will add his thoughts concerning our performance so far this year, and then our Chief Financial Officer, Jim Ryan, will follow with a brief discussion of our income statement, balance sheet, and more detailed financial data. And, as is usual, we will have questions at the conclusion of our comments.

We are pleased with our results this quarter. As expected, we have come up against tough comparables due to the large amount of political advertising we received a year ago. Political advertising, which in 2010 set a record for our Company in a non-presidential election cycle. For the quarter, our total revenue decreased by 10% to $76.5 million from $85.3 million this quarter last year. This decrease is entirely due to the expected drop in political advertising of $10.8 millions in quarter-to-quarter comparisons.

Significantly, of our five largest advertising categories, automotive, restaurants, medical, communications, and furniture and appliances, all increased this quarter -- automotive increased by 5%; restaurants increased by 3%; medical increased by 7%; communications increased by 7%; and furniture and appliances increased by 9%.

Last quarter, our automobile-related category decreased by about 1%, which at the time, we attributed to the effects of the Japanese tsunami and, as we expected, it has reversed itself this quarter. For the nine months, total revenue decreased by 4%, or $9 million, to $222.5 million from $231.4 million year-to-date 2010.

Once again, the main issue here is the political revenue declining as I have mentioned before, though we all suffer in comparison from collecting no Olympic-related advertising this year, whereas in 2010, we received approximately $2.8 million Olympic advertising revenue from our NBC affiliated stations. Additionally, the Super Bowl was broadcast on FOX this year and our one primarily FOX affiliate station and four FOX affiliated secondary digital channels generated only $200,000 of revenue this year, compared to 2010 when the Super Bowl was broadcast on CBS and our 17 CBS affiliated primary stations generated close to $1 million of Super Bowl revenue.

All of the issues that account for our decreases in advertising were expected and planned for. We are very happy with the resiliency and vigor of our local TV properties and expect them to bring 2011 to a very successful close. On a final note, this quarter, the Company has continued to purchase in more shares of its outstanding preferred stock. We purchase in shares in private transactions from internally generated funds. We consider these purchases to be part of our broader effort to deleverage the Company.

With that, I'll bring my comments to a close and hand it over to Bob Prather for his thoughts. Bob?

Thanks, Hilton. I want to welcome everybody. As Hilton mentioned, we feel good about the quarter. I think the TV business in general has been a better year than most people thought for most of the well-run broadcasters out there. Political has been stronger this year than we thought. Wisconsin Union and recall, we had over $3 million come in there, Ohio is getting some of the same thing now, and we've got a strong Governor's race in West Virginia that we didn't anticipate. So we think there's going to be some -- it bodes very well for next year on political, especially.

The main thing we're working on right now, I mention it every time, we're fast getting all our stations up with local HD news and automation. I think we basically by the end of the year have three-fourths of our stations up and running with local HD news and we've just got most of our smaller markets are left to finish up next year, but I think this is critical for competition. I think we'd like to be the leader, we like to be the first in the markets to go local. We haven't been that in every case, but I think in most of the cases we have. So it's something we want to continue our leadership in the news, continue our tradition of owning strong number one stations in our markets.

We also are very busy right now negotiating our retrans with our cable operators. We've got 45% of our subs up this year, most of the big operators, we're negotiating with currently except for Comcast, and they're not up this year. But we feel very good about the negotiations in the early stages, but we think we're going to get some good increases and some well-deserved increases. I think TV has long been undervalued by cable operators and I think they're now realizing the value of especially TV stations with strong local news franchises like we have. So this is something we hope we'll have these negotiations concluded by the end of the year and going into next year with a new round of retransmission revenues coming in.

I know you all like to know about what's going on with the other side of the coin with the networks. Fortunately, none of our affiliation agreements are up until next year. NBC, we have had preliminary talks with them, nothing definitive. They've told us they'll get back to us some time by the end of the month to start talking about our NBC stations for 2012, our ABC stations are December 2013, and our CBS, which is the 17 CBS stations, are December 2014, so the good news is we've got some time. The bad news is that most of the market will be set by then on what the people are paying the networks. So we're keeping a very, very close eye on this, monitoring closely with friends of ours in the business, and something we obviously is going to be very important to us going forward that we are able to maintain our retransmissions growth on the cable side to more than offset our payments to the networks, but I think this is something that will be one of our number one priorities in the years ahead.

As Hilton mentioned, we want to continue to paying down debt. Our goal next year will be able to pay down $50 million plus in our debt, which I think we'll be able to do. We're looking forward to continuing the rest of this year being a good year. I just talked to our national rep firm, they said auto and national is looking strong for the rest of the year, which we're seeing in our local markets, so I think the year-end is going for finish up good. And as I said, next year, we're very excited about having the Presidential election cycle, having the Olympics back, so it ought to be a great year for us.

At this point, I'll turn it over to Jim Ryan, our Chief Financial Officer, and let Jim mention some numbers to you. Jim?

Thanks, Bob. Good morning, everyone. I'm going to keep my comments relatively brief. I think a lot of the information is laid out pretty well in the release and our 10-Q will be filed later today, as well. Again, total revenue was down for the quarter because of the $8.8 million year-over-year change in the political, which is obviously expected. Our local was up 1%. National was down about 4%, but actually came out a little bit better than we expected. It seemed to improve sequentially and definitely improved in September.

Our internet, as you know, has been a focus of growth for us this year. We had strong growth the first half of the year. Third quarter continued; it's up 57%, and we're very, very pleased to see that. And our political for the quarter came in at $5.2 million. Our all-time off-year record for political was $10 million and we set that in 2007. As of our October 31 closing, we've already broken that record and, as you can see from our guidance, we'll be well north of $10 million by the time we get to the end of the year and political each week seems to be creeping up a little bit as we go.

I think Hilton covered the categories that are up in his comments. The only three categories we saw decline, aside from political, was financial, supermarkets, and entertainment, and those same three categories have been down consistently all year, so that really didn't surprise us. Our operating expenses were about 2% under on TV and we're pleased with that. For nine months, again, local, national, and internet combined is up about 3%, which, given the overall state of the economy and an off-year of political, is not all that bad. Again, total political for nine months was just shy of $9 million. And as I said, as of our October 31 close, we've already broken our $10 million previous all-time record for a year, so we're very pleased.

Operating expenses were up just slightly on a nine-month basis and within our expectations. Turning quickly to our balance sheet. At the end of the quarter, total debt was $829.2 million, our senior facility was at $464.2 million, we had $9.1 million in cash. Our trailing eight-quarter cash flow that's used in our first lean leverage ratio and our senior credit facility was $114.3 million which put our first lien leverage ratio and our senior credit facility was $114.3 million, which put our first lien leverage ratio that's defined in the credit facility at 3.98%, which is well below the covenant.

As Hilton and Bob mentioned, we had redeemed a little bit of our Series D preferred during the quarter. CapEx for the quarter was $4.7 million. Our program payments were $3.8 million. Amortization was $3.3 million. We paid about $47,000 in cash taxes for the quarter and will be a de minimus taxpayer for the full year. We paid so far about a little over $400,000 and it won't be much higher than that on a full-year basis.

A couple of quick comments for our guidance for fourth quarter. Certainly, auto has been very strong in October and November. We're pleased to see that rebound. We've also seen, I would describe it as relatively small but sequential week-to-week improvement in our internal forecast. And if that trend continues, we would expect that when we get to December 31st, our current revenue guidance may be looking a little conservative, but we certainly would rather be sharing good news with everybody at the end of the year rather than bad news.

Most of the improvement we're seeing, national is definitely each week improving a little bit. I think that primarily auto-driven. We're also seeing, again, improvement in the political numbers. As Bob mentioned, we've had a good Governor's race in Kentucky, where we have two stations, we have a Governor's race in Mississippi, as well. Bob already mentioned about the special off-year elections in Ohio and Nevada. We have not yet seen though any early presidential money at our two stations in Florida, nor have we seen any in Nevada, so that certainly leaves potential upside in political as we get into the very late part of the year.

There's also, I think, a possibility, although certainly it's hard to predict, but I think there could be a possibility of issue money that comes out not only for us but other people in the industry as the budget Super Committee reports at the end of this month and then Congress enters its debates over those recommendations in December. It could set the ground for special interest money coming out similar to what we saw a couple of years ago during the healthcare debate. We'll just have to wait and see how that develops. At this point, Bob, I'll turn it back to you.

Thanks, Jim. Operator, we're ready for questions now.

Thank you. (Operator Instructions). And our first question comes from Marci Ryvicker with Wells Fargo.

Thanks. Good morning.

Hi, Marci. How are you doing?

Good. I'm actually going to cheat because I'm going to ask two questions for me and then two questions for Bishop because Bishop couldn't dial in.

All right, I'm going to be double-teamed, huh? Okay.

But I'll ask them a lot more brief, so I won't take up as much time. The first question is for you, Bob. Just in terms of the advertising environment, is anyone talking about 2012 yet? And if so, what is the general tone?

I've heard very little, Marci. I think everybody is happy with what's going on in 2011. The visibility, as you know, continues to shrink it seems like in the industry, but right now, like I said, I'm feeling good about 2012 because of political, because of the Olympics coming back, and the economy seems to be, if not, getting better, it seems to have stabilized where we are, and I think the people that -- I know there's still a lot of unemployment and a lot of uncertainty, especially in the real estate area, but I think the companies that are reporting good earnings, I think companies are very cautious, sitting on a lot of cash, paying down debt like we're doing.

So, in general, I think people are -- anxious probably is the right word, but at the same time, I think people -- the consumers seem to be spending more than people thought they were and advertising has clearly been better I think than anybody thought it would be. Car sales seem to be going stronger now that the Japanese are back in the market, the car sales have picked up even more. The Japanese, obviously, make good cars and know how to sell them and know how to advertise. So I think you'll see that area continue. I was told that the national car sales are about 128% of plan for the fourth quarter as far as advertising and sales goes. So I think you're going to see 2012 being a good year for advertising, in general, and I think it's going to be a real good year for us.

I'll stick with you, Bob. In terms of M&A, there have been a lot of transactions, are you guys a net buyer, a net seller? Any thoughts on M&A?

I'd say we're a net status quo-er. We're happy with the stations that we've got. We want to continue to improve our balance sheet and pay down debt. So I think that right now we would probably be status quo. Like I said, we've got great stations, strong stations in most of our markets, and we're happy where we are. We just want to keep better at what we're doing.

Okay. And then I have two housekeeping questions for Jim. Any thoughts in operating expenses and CapEx for next year? I don't know if you've had your budget meeting yet, but anything you're thinking? And then also, any game plan for redeeming the preferreds, any timing you can put on that?

Let me -- we're still on the early end of working on the 2012 budget. I think in the broad sense, Marci, as you know with the large influx of political we'll have next year, we do have to pay a national rep commission on that of about -- it averages about 7%, so that's about a couple of million, or $2 million or $3 million, probably $3 million actually that pick up in any major political year. We've done well this year controlling the costs.

So I wouldn't expect a significant increase in cost going into next year with the one caveat. There's probably something that will end up being paid to NBC as we renew the affiliation agreement. That seems to be the set trend. Now, how many -- I wouldn't expect it to be a lot of money next year, but at this point have no ideal exactly how much that is, but excluding the impact of that, I would not expect a significant increase and we'll try hard to keep it closer to flat than anything.

Okay.

On the preferred, we have said we would like to be opportunistic there if we can. We obviously picked up almost $10 million between par and accrued dividend. Because our first lien ratio is now below four times under our can senior facility this year, we have a technical capacity for an additional 10. I think it will -- whether we do anything sooner or a little father down the road is really going to depend on our cash positions and how well we feel. We certainly would like to do something with that, but I don't think we necessarily want to be extensively borrowing on the revolver for any protracted amount of time do anything either, so it will be a little bit of a balancing act, see how the rest of this year comes out and maybe take it as we come.

Certainly, next year, our cash position will be much, much stronger with political. We'll also be paying down debt and we've also said if the larger credit markets give us a good opportunity, we certainly would be willing to be thoughtful about potential refinancing transactions, as well. So, obviously, if we're doing a larger refinancing transaction, we would want to be taking out the preferred at the same time.

Got it. Thank you so much.

Marci, I want to thank you personally for the job do you for the whole industry. We appreciate it. I know, first of all, you shoot straight, but also you're kind of a beacon of light out there in an industry where we've seen a shrinkage with people following us, so we all appreciate the job you do and you do a great job. I want to thank you.

Thank you so much for the comments.

(Operator Instructions). We'll now go to Barry Lucas with Gabelli & Company.

Thanks and good morning.

Hey, Barry, how are you doing?

I'm well, Bob. Thank you. Let me get back to Marci's final question, which I didn't hear wasany thoughts on CapEx for 2012 as you wind down a lot of the HD investments? Can that go down from current levels and how far down?

Barry, thanks for reminding me, I had forgotten to answer that part of the question. I think as we try to round out and finish out next year, go through all of our markets, plus there's a little -- there's some what I would call sweep-up/clean-up type work from what we've been doing this year we want to get done, too. I would say right now, it's probably in the $20 million range for next year. Then I think it drops off significantly after that because we'd probably be over the hump. And in 24 months or so, we would have gone through and basically redone most of our stations. Next year, especially with a very strong political and a very, very strong cash position that political creates for us next year, it's a good year to make a final push and get it done, that's why I think it will be about the same number as this year.

Thanks, Jim. On the affiliation agreement comments, Bob, when you talk about NBC. What has ever happened to the negotiation or the proxy solicitation where they would do the negotiating for you and there would be some sort of split, and everybody would be happy campers?

Barry, we've been told by the affiliate relations people of NBC that they have not been able to come up with a plan yet. They're still working on it. They've asked us for patience, I guess is the right word. We wanted to go ahead and start negotiating our affiliate agreements and they asked us to give them a little more time, that they're trying to come up with a plan that they can present to the affiliate board and get their sign-off, that they would then present to the individual groups, the stations. So far, they are not there yet.

I personally think it's just such an extremely difficult thing to take all the complex factors into account. I think they'll have a hard time coming up with something that would work for the vast majority of the stations, but I wish them luck. If they come up with something, we'll take a hard look at it and make a decision. It will be what we think is best for Gray Television. But right now, there's nothing on the table.

Okay. Thanks, Bob. Last item, and I don't mean to throw cold water on this, but when we look out to 2Q and 3Q of 2012, you've got the December Olympics on your bigger NBC's and an influx of political and relatively easy comps on the auto side, hopefully with Toyota and the other Japanese nameplates spending a lot in the middle part of next year, what's your sense in terms of displacement?You're going to be running out of inventory, and I know that's a high-class product.

That's a problem we always like to worry about, okay? It's like owing too much taxes. It's usually a good problem to have. So I would say that we do a really good job in our markets of talking to our strong local advertisers, and a lot of them pretty much sit on the sidelines during the really heavy September, October, first week of November type time period. They know the rates are higher then, they know that they're going to be fighting for the best time, and we do I think a good job of communicating to them that, "Hey, we'll make it up to you, don't worry."

And a lot of them, like said, literally sit on the sidelines. And so while there's a lot of people that want to get in there, they know it's going to be expensive and very crowded, and do you want to be stuck in a car commercial inside of 10 political commercials? So I think there's a -- the good news is we get a lot of political and the bad news is it does affect our overall, some of our local, good advertisers.

Great. Thanks for the commentary, Bob.

Thanks, Barry.

At this time, it appears there are no further questions, soI will turn the conference back over to our speakers for additional or closing remarks.

Thank you, operator. I want to thank everybody today. We're real happy with the way the business is going right now. We look forward to a strong fourth quarter and end of the year, and we look forward to talking to you guys in the early part of 2012. And I want to wish everybody a great Christmas holiday season and Happy New Year between now and then. Thank you, everybody.

Ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.