Gray Media Inc (GTN) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Gray Television second-quarter 2012 earnings release conference. As a reminder, today's presentation is being recorded.

For opening remarks and introductions I would like to turn the call over to Mr. Hilton Howell, Chief Executive Officer and Co-Chairman. Please go ahead, sir.

Thank you, operator. Good morning. Welcome, everybody. I am Hilton Howell, as the operator mentioned. I will be making a few brief comments, followed by Bob Prather, our President and Chief Operating Officer, and then Jim Ryan, our Chief Financial Officer and Senior Vice President, who will both add their own color and comments to this quarter's really outstanding results. We will then have questions at the conclusion of our comments.

It was quite simply an extraordinary quarter, another record. Revenue for the second quarter was the highest the Company has ever reported in its entire history. For the quarter, total revenue increased by 24% to $94.7 million from last year's $76.2 million.

Similarly, the Company reported record revenue for the first half of 2012 of $175.4 million, up 20.2% from $145.9 million last year. These truly extraordinary increases led us to report net income of $9.8 million for the quarter compared to a profit of $771,000 last year. And for the first half of the year, we reported net income of $12 million, compared to a loss of $4.1 million for the six months of 2011.

On a per-share basis, this translated into earnings of $0.17 per share for the quarter and $0.21 per share for the six months of 2012, compared to earnings of $0.01 and a loss of $0.07 per share, respectively, in 2011. Obviously, a record pace of increasing political advertising accounted for the lion's share of this growth, but we also saw an increase in virtually all of our revenue categories as well.

For the quarter, we received $13.1 million of political ad dollars, and year to date, we have received $18.1 million. Those numbers are all-time records for Gray. But just as significantly, of our five largest local and national advertising categories -- automotive, restaurants, medical, communications, and furniture and appliances -- we saw increases in every category, save one.

For the quarter, automotive increased by 20%. Our lone decrease was in restaurants for the quarter, which decreased by 5%. Medical increased by 8%, and communications increased by 2%. Further, furniture and appliances for the quarter increased by 3%.

Year-to-date, we saw all increases. Automotive increased by 14%. Restaurants increased by 1%. Medical increased by 11%. Communications increased by 9%. And furniture and appliances increased by 4%.

We were also pleased that this quarter we added three new CBS affiliations to our existing markets in Panama City, Florida; Harrisonburg, Virginia; and Parkersburg, West Virginia. We anticipate that these new stations will be on the air by September 1 for Panama City and Parkersburg, and by October 1 in Harrisonburg. Going forward, we will be operating affiliates as CBS, NBC, The CW, and MyNetwork TV in Panama City, Florida; CBS, ABC, FOX, and MyNetwork in Harrisonburg; and the CBS, NBC, FOX, and MyNetwork in Parkersburg, West Virginia.

With the excellent financial results our television properties are delivering, we have continued our effort to improve our balance sheet. As we discussed last quarter, we pre-paid approximately $10 million of our debt. And we announced earlier this week that we have retired $20 million of our Series B perpetual preferred stock, plus accrued dividends.

This repurchase will save our Company $2.1 million in dividends on an annual basis. After this transaction we will have only $22.2 million of preferred and accrued dividends on our balance sheet, and we have confidence that we will have that retired in the relatively near future.

I would also like to use this opportunity to thank Nick Matesi and his entire team at KKTV, our CBS affiliate in Colorado Springs, Colorado, for the superb job they have done in reporting on the recent Colorado fires. Their co-coverage on television, the Internet, and on social media was outstanding, and I want to congratulate everyone at that station for an exemplary job.

With that, I will bring my comments to a close and turn it over to Bob Prather. Bob?

Thanks very much, Hilton. First of all, I want to say that I think our numbers speak for themselves. We continue to be at the very top of the television industry for the last 12 years, and I think we will continue to stay there because we're doing the right things to make sure we are operating as efficiently as possible and trying to take advantage of new automation in the television world to make sure that we are more efficient going forward.

We got two priorities at Gray. One of them we have had from day one; the other one we have had for the last few years.

The first one, the number-one priority for us right now is to get our balance sheet in better shape. As Hilton mentioned, we have paid down debt. We paid a good chunk of our preferred. We want to continue to do this.

We hope to pay over $50 million down on our senior bank debt before the end of the year. There is $22 million left on the preferred; we want to pay that off in early January of next year. So we are working hard to get our balance sheet in better shape, and it's our number-one priority as a Company.

Our second priority -- and this has been our overall number-one priority since the day Mack Robinson and I bought control of Gray -- and that is to continue our efforts in local news, to be the number-one source of news in the markets we are in. We are very fortunate we have got more number-one news stations than any other group in America, and we want to continue that. We want all our number-one stations to get better, and we want anybody that is not number one to strive to be number one.

We are doing this in a lot of ways. And we are -- increasingly have more competition, not only from the local stations in the towns we are in but competition from Google, competition from YouTube, competition from all kinds of sources of news that weren't even in the market 5, 10 years ago.

We are trying to continue to develop our Internet products and our mobile products. I think we've done a great job in this area.

We have been profitable from day one with our Internet properties, and we went to continue not only to grow the properties but to continue to be very profitable. This is something that is very important to us here at corporate and to our GMs.

But I want to emphasize again our local news is the only thing we own 100% of. It's the only thing we've got total control of. And it's incumbent upon us to make sure that we are the leader as a news source in all the markets we are in.

This also ties you emotionally into these towns. The Colorado Springs coverage is a good example. We were on the air for 131 straight hours. We think that may be a TV record.

And one thing that enabled us to do that was our TVU mobile units we were able to use out in the field, and our automation in our building. We called in people from several other stations to help out. But we probably used half the number of people you would ordinarily use to sway on the air 131 straight hours of local news coverage.

They did a great job. Our chief photographer's house burned to the ground, and as he was leaving his house with 20 minutes' notice he was filming what was going on in his neighborhood.

I went to visit the neighborhood afterward and it looked like Tokyo after the firebombing in World War II. There were 350 homes destroyed in his neighborhood, and I mean burned to the ground. It was one of the worst natural catastrophes I think I have ever seen.

But our coverage out there was outstanding, and I want to thank Nick Matesi and all his team. We couldn't have asked for -- and that is what local TV is really all about.

That is what makes your reputation in a market. That is what ties people to you. This is the kind of coverage we want to have everywhere, and we pride ourselves on what goes on in our local news markets.

Another thing I want to mention before I turn it over to Jim Ryan. Bishop Cheen, who is usually the guy with the fastest fingers on these calls, he has been at Wells Fargo a long time. He's been a long-time personal friend, going all the way back to his Kagan days.

Has just announced his retirement. He's one of the best I have ever known, and the industry will miss him, and I wish him well in his retirement. But, Bishop, we will miss you.

Anyway, at this point, I will turn it over to Jim Ryan, and Jim will go over some numbers. And then we will open it up for questions.

Thanks, Bob. I'm going to keep my comments brief because I think things are pretty well laid out in the release. Focus most of my comments on the balance sheet, but a couple of quick things again.

With the record-setting revenue in any second quarter as well as in any first half of the year, our broadcast cash flow and operating cash flow numbers also set new records for a second quarter and for any six-month period -- any first half of any year. And we are very pleased to see that. Naturally they fall out of the record-setting revenues that has been discussed already.

As far as the balance sheet goes, our senior first-lien leverage ratio at the end of the quarter, according to the definitions in the senior credit facility, was at 3.52 with a trailing eight-quarter average cash flow of 126.5. At our net leverage on a trailing 12-month basis, leverage net of cash, was 6.64.

We had a cash on hand at the end of the quarter of $28 million. After making the $20 million payment on the Series D preferred earlier this week, our cash balances are still in the low $20 million range.

Total debt at the end of the quarter was $825.6 million with first lien debt at $460.6 million, and the second lien is at $365 million. Again, we took -- we paid an aggregate amount of $20 million for the Series D repurchase earlier this week. After that transaction, we had $13.6 million liquidation value of the Series D still outstanding and approximately $8.6 million of accrued and unpaid dividends, for a total obligation as of this week of about $22.2 million.

Our CapEx estimate for the year we are increasing to $23 million from the previous estimate of $20 million. The increase in $3 million is attributable to two things.

First of all, we will be spending approximately $2 million to build out the transmission facilities and other equipment we need to launch the new three new CBS affiliates that Hilton discussed a few minutes ago. We are also closing today on a new building for our Colorado Springs property as well, and we will be relocating our facility to the new building early part of next year, with the intention of selling the current building after we vacate it. So that would probably be sometime next year.

Cash taxes for the quarter were $220,000. Still expect cash taxes to be relatively small, probably in the $1 million, maybe a little bit more, range if political is extremely strong in Q4.

Q3, to kind of briefly -- on the Olympics, right now it looks like we will have net revenue attributable to our Olympics in Q3 of about $4.8 million, which is significantly higher than any previous Olympics. The last Summer Olympics in 2008, we had $3.4 million, so we have been extremely pleased with the Olympics sales this year. We think it is in part attributable to the venue in London and only a six-hour time difference.

But also we have seen a very healthy buy out of political advertisers for Olympics as well. And I think our NBC stations did a good job of -- especially where political has been highly active, did a good job of holding political back -- or holding some inventory back to be able to charge premium rates to those political advertisers at the last minute. And certainly that is helping us get to what looks to be a very substantial, record-shattering $4.8 million in Olympics sales for this year, which we are very pleased with.

Bob, at this point I'll turn it back to you for questions.

Things, Jim. Operator, we are ready to open up for questions.

(Operator Instructions) Aaron Watts, Deutsche Bank.

Hey, guys. I'm just curious; if you strip away auto and political, can you maybe just give us some thoughts on what you are feeling from your markets with the other categories? And just -- we heard payrolls weren't so -- were okay today, but unemployment is not coming down and consumer spending is hit or miss. Just a general sense for the underlying currents in the ad environment.

Aaron, I think we are fortunate for two things. One, I think most of the markets we're in have not been hit as hard in the recession as some of the -- the only market I would say that was really, really extremely hot housing market, we had two. One was Reno and one was Colorado Springs.

They probably performed -- they have probably been the toughest two markets we've had. But in general, most of our markets outperformed the economy in general.

I think our focus on being in the college towns and the state capitals has paid off. We just haven't seen -- most of our categories are doing -- are up.

Hilton mentioned restaurants being down a little bit, and for some reason wireless has just been tough both -- all over the country. I've talked to other TV guys, they said it. I've talked to newspaper guys, they say the same thing.

And nobody is really sure what is going on right now in the wireless world. I think AT&T and Verizon and T-Mobile are all just competitive as ever. I just think they are all reassessing strategies and figuring out how to go after more subscribers, and it just seems like they are all planning right now and not spending near as much.

But overall, most of our markets really just continue to be a lot better than the general economy, I think. So, we're not going to look a gift horse in the mouth right now. I think, like I said, we want to take in everything we can take, while we can get it.

So I think the rest of the year is going to be real good, even without political. Next year probably will be a challenge, but they all are a challenge at some point. So we will fight that battle when we come to it.

But -- and I frankly think if there is a change in the administration, there's going to be feeling of optimism. Here again, I think there is always that when a new President comes in. But I think there will be a real feeling of optimism in the country that hasn't been around for a while.

So that could be good news for 2013. But I am not politicking; I am just stating the fact that you saw it when Obama came in; there was a lot of optimism. And I think there will be if there is a change again.

Now, whether it works or not, that is anybody's guess. But I think that would in the short term be good for the economy.

Okay, no, that's helpful. Then, a quick one for Jim. Just thinking about your dry powder to go after more preferred, and I think you used your $20 million basket. Is it now really dependent on leverage the rest of the way before you go after more?

No. We used our $20 million basket for this calendar year, and we did is basically as soon as we practically could, which was this week. So under the senior credit facility we would have to wait until 2013 to take the next $20 million out.

And as Bob alluded to, given the strength of this year and our expectations for the second half of the year, right now that's something we would probably look to do very early next year. If -- and this comes with a big if -- if we were to go to the credit markets for a larger refinancing sometime later this year, and I am not saying we will or we won't, I am just saying if that were to happen then we would have an ability to take out the rest of the preferred even sooner. But right now, we are looking at taking our next $20 million bite as early as we can in 2013.

Okay. Then last one for me. I appreciate you taking these. Maybe for Hilton or Bob, just some thoughts around some of the M&A that has gone on in this space. Maybe about what the multiples have been.

Gray has obviously been on the sidelines here. Maybe what it's going to take to have you guys get involved. Whether it is getting your leverage down, or these weren't the right assets and you are waiting for the right assets, maybe some thoughts around that. Thanks.

I think we will continue to monitor the market. But I think as I mentioned, Aaron, our number-one priority is getting our balance sheet in better order. And frankly I haven't been really excited about any of the deals that were out there in looking at them.

But beyond that, I think the multiples are -- you hear all kind of numbers, but they are probably in the 8.5 range, which I guess in today's world is okay. But I think we can put our money to a lot better use right now paying down debt and getting rid of this preferred.

I mean the preferred is accruing at 17%. There is no station out there in 17% growth, so -- no matter where you look.

But -- so I think we are going to be a lot better off concentrating on our balance sheet. You know, if we get back in the deal market at some point in the future, we will make sure we do it and keep our balance sheet in good order at the same time.

Okay.

Bob, let me follow up with that. Aaron, this is Hilton. I will say I think it is a very good sign for the industry as a whole that a lot of these players are stepping up and purchasing television assets.

Being here in Atlanta, Bob and I have talked about it and Jim, and Kevin Latek, our Chief Legal Counsel as well. It is a bullish sign from our standpoint to see Cox stepping back in and purchasing some assets.

I think that Bob Prather's comments are right on. We have to continue to increase or improve our balance sheet, because our goal here is to get our stock price back up, and I think that the balance sheet integrity is critical. But we will look at transactions if they are something that we can do that doesn't end up betting the Company or leveraging us up too much, with the idea that continuing to improve our balance sheet is the preeminent goal here.

Okay, great. Thank you, guys.

Bishop Cheen, Wells Fargo.

Hi, thank you, Bob.

Hey, Bishop, you're getting slow in your old age.

Well, Aaron is just quicker. Thank you for the kind words. You know, whatever you said about Colorado, I watched that. You guys set the network. I saw your coverage. It was dramatic. You can't throw out enough superlatives about what you guys did there.

Amen, I agree with you. I was very proud of our people out there.

It was really something. I hope -- I mean, like you said, it demonstrated the power of local television. I sure hope we never have to see that again.

Yes. No, I agree, Bishop.

Thank you, Jim, for the color on the recap. I think you said it all, on what you are looking at and what you are dealing with. And you will make those decisions when you make them is what I am guessing.

Your Internet performance, that is, what, Facebook-like, and is -- and I am not talking about the retrans. Just as you break out the Internet, do you expect that kind of pace to sustain as we go ahead?

Bishop, I think in the next year or so that, call it, high teens, low 20s pace probably we can -- I would expect to continue for at least another year, maybe a little longer. It might eventually start working down, but clearly it is a growth area for us.

If you go back and track our numbers over the last few years, there were a couple years there where we had kind of leveled off and were stalling out a little bit, to be honest. And last year we made it a big push again, and we are continuing that push this year.

We are getting the effect, the full-year benefit of a lot of the things we started last year. I think it has still got to be a big focus of our planning and our sales efforts in '13. So therefore I would expect some very strong year-over-year growth there in '13 as well.

Okay. Then last -- Robert, I know you said you want to focus on the balance sheet, but I know you are a student of M&A.

Yes.

So just the gaps that we see in the public-private market values, do you think that gap is going to change after everybody sees evidence of political -- what does it take to close that gap?

One thing, Bishop -- availability of money. If the money is available, the gap will close. People will go out and buy.

And if they can borrow more from the banks, the multiples will go up. It's as simple as that. I have been watching it for 30 years now, and (multiple speakers)

So M&A would -- the affirmation of values in M&A would motivate public multiples for stock values, I think is what you are telling me.

Yes, I think so, right, yes.

Okay.

I think if the markets -- if the finance markets are available, and they are willing to loan more, and it takes less capital, like I said you will see the multiples go up and you will see more people trying to jump in. I think the big issue that -- I think the private equity guys probably have had their fill of TV for a while and you may not see them around for a while.

But I think most people realize that to fight these networks you probably need to be bigger and stronger, especially in the retrans battles going forward and the affiliation battles going forward.

Yes sir. Well, the other way is you have got to say --- can the strategic operators do it on their own without the private equity groups? Because --

I think they can.

(multiple speakers) the front half of the last decade it was the PEGs driving everything.

No, I agree. But I think they can going forward.

Okay.

Thanks, Bishop. Good luck to you.

All right. I will be in touch. Be good.

All right.

Marci Ryvicker, Wells Fargo.

Thanks. Good morning. I have a few questions. The first is, have you done reverse comp deals with NBC?

No.

They were on hold. Are they still on hold or delayed?

We are still in negotiation and we are on a short-term extension, one of several short-term extensions. We expect those negotiations to continue to proceed at pace. And sometime later this year I am sure we will ultimately come to what both sides think is a reasonable deal.

Okay. CBS mentioned yesterday on their call that they are having conversations with affiliates who may be willing to do their reverse comp agreements sooner and bring them forward. Are you in that camp?

No. And matter of fact, we have talked to them and they have not wanted to talk to us. So we are kind of happy to be at December 14, but we have to talk to them.

Okay. Then can you just talk a little bit more about the CBS stations that you're launching? I just wanted to make sure we understand. Now you have triopolies in those markets?

Yes; matter of fact, quadopolies in a couple of them. We will have a primary, NBC or ABC, and then we will have a FOX, and we will have a MyNetwork and a CBS. So we will have some places quadopoly.

And I think the CBS is going to be great. I think we can really bring a local flavor to them. Those markets have not had local CBS affiliates in the past, and we are going to really get a push on from a proposal -- from a promotion standpoint to really let people know in these markets that they have got local in CBS coverage. And I think based on CBS being so strong in prime, it is going to technology be a boon for us.

Do you have any sense as to the revenue and expense contributions we could expect?

I think we are hoping to be cash flow positive within the first 12 months after we get up, probably the next year, not I would say the first 15 months. We hope to go on the air, as we mentioned, September and October, and it will be a shakeout period for a while.

But like I said, we think because of CBS's strength those stations are going to catch on pretty quick. And we think the advertisers, local advertisers will jump on the bandwagon pretty quick.

Thanks. The last thing, I just have a comment. I want to second everyone else's comments today with regards to Bishop. because Bishop has been someone I have looked up to and I have talked to every day almost for the past 10 years I have been doing this. He's been a great friend and I am going to miss him.

Yes, we definitely will.

Thanks.

(Operator Instructions) Barry Lucas, Gabelli & Company.

Thanks very much and good morning. Two areas, Bob. One, we keep asking about from quarter-to-quarter, and that is mobile and any developments coming up there, and expectations for that revenue stream to begin to flow.

Barry, I think live mobile is still in the incubation stage. As I mentioned before, I think that the technology is there right now. I just think it still -- the OMVC is still trying to figure out a model that will work and make everybody happy. As I mentioned, we have got a lot of mouths to feed there. The networks and the syndicators and everybody that provides something to the stations want a piece of the action with mobile.

So I think it just boils down to economics. I think it will work. I think I am not sure when it will be consumer viable or economically viable, but I am hoping sometime in the next 12 months it will start picking up and maybe in '14 it will -- mobile is growing so fast in general, more and more people are demanding mobile content from every angle.

All the smartphones are getting smarter and smarter and more technologically updated. So mobile is here to stay, and mobile is going to continue to grow. If you look at the average young person today -- when I say young from pre-teen up till their 30s -- I mean, they live on these mobile devices, either the smartphones or the iPads or similar type devices.

And they're not going to change those habits as they get older, I don't think. I think you're going to see more and more of that, and I think it is incumbent upon us to put out a product on those devices that people want to watch.

Great. Next here, maybe you could provide a little observation on what you think about Aereo, the threat. And in particular with relation to, as you justifiably pointed out, your strength in local news and what kind of defense that really provides.

Probably the only threat to a Company like us on Aereo is if a of people went off the cable we would lose those subscribers as far as getting retrans money. My impression is that Diller is backing this thing -- Diller is a big-market guy, and I would think it would be a long, long time before he got past the top 25 markets, for example.

I imagine that is pretty expensive to install in a market. He's starting out in New York, and I am sure he will jump to Los Angeles, Chicago, San Francisco, the big markets. It may be quite a while before he gets down to market 59.

And I think there's still some legal battles. And there is a fair number of FCC lawyers who think that even if they win the court battles that the FCC will go into Congress and try to get some legislation passed to fight this thing.

Although I'm a big believer it's hard to fight technology. I think if there is a superior technology out there, it is hard to keep it underground. It's happened a few times in history; but, it is kind of like the buggy whip manufacturers trying to keep the cars from going up and down the road. Just -- they might do it for a while, but they're not going to do it if it is a superior technology.

So I think it's something we've got to watch, but I don't think it's going to have any effect on markets like ours for a good while.

Great. Thanks, Bob.

And at this time there are no further questions. I will turn the call back to our speakers.

Thank you very much, operator. I thank everybody for being on the call. We look forward to talking to you next quarter. I think political is going to be pouring in pretty strong between now and then. And as I always say, we answer our own phones; don't hesitate to call any time. Thank you, everybody.

Ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.