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Gray Television (NYSE:GTN)

Q4 2012 Earnings Call

February 20, 2013 10:30 am ET

Executives

Hilton H. Howell - Vice Chairman, Chief Executive Officer and Member of Executive Committee

Robert S. Prather - President, Chief Operating Officer, Director and Member of Executive Committee

James C. Ryan - Chief Financial Officer and Senior Vice President

Analysts

Aaron Watts - Deutsche Bank AG, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Barry L. Lucas - Gabelli & Company, Inc.

Daniel Charleston

Andrew Finkelstein - Barclays Capital, Research Division

Operator

Good day, everyone, and welcome to the Gray Television's Fourth Quarter and Year-End 2012 Earnings Release Conference Call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call to Hilton Howell. Please go ahead, sir.

Hilton H. Howell

Thank you very much, operator. Good morning, everyone, and welcome to the Fourth Quarter and 2012 year-to-date Gray Television earnings call. I will begin with a brief overview of our results followed by Bob Prather, our President and Chief Operating Officer, who will offer his comments on our results; and then Jim Ryan, our Chief Financial Officer, will follow with additional thoughts on our financial results. Questions will, as always, be answered at the conclusion of our comments.

As you no doubt saw from this morning's press release, for both the quarter and year-to-date 2012, Gray reported record total revenue, record broadcast cash flow and record political revenue. Total revenue for the quarter increased by 50% to $126.6 million from $84.6 million a year ago, an increase of $41.9 million. For the year, total revenue increased by 32% to $404.8 million from $307.1 million in 2011, an increase of $97.7 million. Broadcast cash flow less corporate expenses for the quarter was a record $64.5 million against our previous record of $58.2 million set in the first quarter of 2010. For the year, broadcast cash flow less corporate expenses was $176.1 million against a previous record of $135.7 million also set in the fourth quarter of 2010. Obviously, political revenue drove this and set records as well. For the fourth quarter 2012, political revenue was $43.4 million against the previous record of $33.1 million in the fourth quarter of 2010. Year-to-date, our political revenue was $86 million against 2010's previous record of $57.6 million. Of our 5 largest nonpolitical advertising categories, for the quarter, automotive increased by 10%, restaurants decreased by 5%, medical decreased by 7%, communications decreased by 7% and furniture and appliances increased by 10%. For the full year, automotive increased by 16%, restaurants decreased by 4%, medical increased by 7%, communications increased by 2% and furniture and appliances increased by 8%. These record results were coupled with a complete [indiscernible] an improvement in our balance sheet set in the fourth quarter. We repurchased all of our remaining Series D preferred stock, sold $300 million in 7.5% senior notes due in 2020 and tendered for all of our outstanding $365 million 10.5% senior secured lien notes due in 2015. And we repaid all amounts due under our existing senior credit facility and extended -- and entered into a new facility. Our weighted average interest rate on our new debt stands at 5.7%, which represents an annual interest carry cost of roughly $50 million. With these new facilities in place, we expect to be able to significantly delever our balance sheet in the next several years. In sum, we candidly couldn't have been any more happy with the results that we've had in 2012 and look forward to 2013 with a great deal of optimism.

I would also like to take this moment to recognize Ray Deaver, who retired from our board at the end of 2012. He was an important and integral part of our company and its governance, and he will be sorely missed. Thank you, Ray, for your service.

Bob, with that, I'll turn it over to you.

Robert S. Prather

Thanks, Hilton. Welcome, everybody. I think Hilton summed it up pretty good. We had an all-time record year, which we're really proud of. It was obviously a very good year for the TV industry in general. '13 is another relative run in but it's not going to be as robust a year for a lot of reasons. Obviously, the political factor's a major factor that's not there. And also we had NBC, we had a record Olympics last year. So we got some pretty tough comps. But our stations are all doing good. Every station we have is profitable. We're proud of the fact that we still have more #1 stations than any group in the country. We want to keep it that way and all our stations that aren't #1, that are #2, their mantra everyday is just try to get to #1. Sometimes that -- is not possible because the #1 station is also very well run and do a good job in the community but we're certainly trying every day and it's a never-say-never-type attitude.

We got our NBC deal done with our NBC affiliates for last year. It's a 4-year deal ending in 2015. We're overall happy with it. I think we're -- all the groups are learning to live with these networks better. We've become a very important customer to all of them now, which I think makes them -- makes us more important to them, and I think that will depend on the future. We've got our ABC stations coming up at the end of this year, and then CBS coming up at the end of '14. Our 3 CBS digital stations we put on the air are all gone up and running, doing very well. We've got a couple of more digital properties in motion right now. We hope to be able to announce soon that we'll add some more major networks to us. And I think it's been a great strategy for us. Our -- we've got 42 digital stations on the air right now. They're profitable, they're growing. I think they give us a lot of local presence that we can use in the future and we want to continue this thing.

The other thing we're working on very hard is continuing our news dominance and adding to it. Just to give an example, we recently got outbid in a market for Dr. Phil. The competitor station paid more than 3x what we were paying for it. We didn't want to go up that high, so we turned around and just read in an hour of news, instead of having Dr. Phil there. It will be an hour we control. We think we can make money with it. We're sure we can and will add to our news dominance in that market. So those are the kind of things that -- our news is what we totally control. We own 100% of it. It's local, which everybody in the world wants to be today is local. We've got those markets sewed up if we continue to do the right job, and we plan to. So we're doing a lot of news research in markets just to make sure we know what the audience is saying and thinking, not only about our product but about our talent. And we're constantly trying to tweak our newscast to make sure they're better. And it's something -- it's a daily process for everybody in the company.

Our digital product continues to grow. We're very proud of that. I've mentioned in the past, the mobile product of -- mainly due to the iPad, is just exploding. We average in about 150 million page views a month, and I think a year ago, it was about 31% for mobile devices. It's over 60% now for mobile devices. So this is an area that we're focusing on. I think everybody in the business world has got to focus on mobile because the mobile platform seems to be where everything's going. Google is paying attention to it, Amazon is paying attention to it. All the big guys are -- wanting to be more mobile everyday or be mobile friendly, let's put it that way. So we're going to continue to work on it real hard.

We -- this year, we're going to spend a lot of time. We're going to keep our expenses flat from last year. We're going to spend a lot of time working on continuing our automation and our efficiency in our news operations, trying to get much more efficient on how we gather news. It's a goal in all our stations. We continue to improve on this every day, and I think it'll continue to be a #1 priority for us in the year ahead.

I'm looking forward to an overall good year. I think it'll be better than people think it'll be depending on the macroeconomy, which we don't have much control over, obviously. But I think in the markets we're in, we're in good markets, so we're in very stable markets. And I think we've got a good chance to have another real good year this year.

Jim's going to mention one of the things we're concentrating on, is paying down some more debt this year, which we plan to do. This is our #1 priority overall for the company, is continue to improve our balance sheet. And we will definitely be doing that this year and next year.

At this point, I'll turn it over to Jim Ryan. He could tell you a little more in detail about the numbers, then we'll open it up for questions. Jim?

James C. Ryan

Thank you, Bob. Good morning, everyone. I think Hilton and Bob have talked a lot already about the operating results. I'll spend a couple of minutes talking about the balance sheet a little bit. At the end of 2012, we had $835 million of debt outstanding, $535 million was in the senior facility and then the -- which price is at L+475 with a 100 LIBOR floor. And then $300 million of the 7.5 notes, we were able to pay down voluntarily $20 million from free cash flow in December of 2012 to bring the senior balance down to the 5.35% with what we closed the year. Cash on the balance sheet at the end of the year was $11.1 million.

As both Bob and Hilton had said, all preferred stock had been redeemed earlier in the year. Under our senior credit facility, our operating cash flow, as defined in the facility, was $174.1 million, that's on a trailing-8-quarter-average basis. So that brought our leverage covenant on the senior facility, our total leverage covenant, to 6.08 at the end of the year. On a T12 basis, that would equate to a 4.73 leverage -- total leverage ratio. And if you just looked at the senior debt, it would be at under trailing-8-quarter, the senior leverage ratio was 3.86, although there is no covenant on that. The covenant in the senior facility is just on total leverage.

Our total balance sheet is $1.2 billion. We had about 57.5 million shares outstanding. CapEx for the year, net of insurance proceeds, was $23.7 million, and that offset number reflected the buildout in the latter third of the year of the 3 new CBS digital stations that Bob referred to. Total cash taxes for the year was $836,000. We have approximately $250 million of NOLs left to use. I don't foresee us being a significant taxpayer for quite a few more years yet. Next year's cash taxes would be in the same range or lower than the $836,000 in 2012. Programming payments for the year were $11.8 million, and our amortization was -- program amortization was $11.1 million.

In looking at 2012, our free cash flow, which I would define as our operating cash flow less cash interest, cash taxes and our CapEx, was at $94 million -- I actually round it to $95 million. If you think of that on a cash flow per share basis, 2012 generated free cash flow of $1.65 a share. Thinking ahead over the next couple of years, I think that metric speaks very well for the company, certainly based on the full year guidance we have in today's earnings release for 2013. You can see that we expect '13 to be significantly better, from a cash flow perspective, than 2011. With our cash interest at only $48 million in 2013, we certainly would be generating a significant amount of free cash flow in the off-political year. I'd say, rough math, it probably puts you at around $40 million, which would probably will be primarily used for debt reduction. And certainly, we're well positioned as we move into the 2014 political cycle as well.

With that, Bob, I'll turn it back to you.

Robert S. Prather

Thanks a lot, Jim. Operator, we're ready for questions now. Okay?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Aaron Watts, Deutsche Bank.

Aaron Watts - Deutsche Bank AG, Research Division

So a few questions for me. I guess, first, just thinking about moving from the fourth quarter to the first quarter, what you're seeing on the categories that are driving your guidance. Any big changes from kind of what you talked about and saw in the fourth quarter?

James C. Ryan

I wouldn't say, Aaron, that there's significant changes. Autos has been, so far, very healthy in first quarter. Pace for the entire quarter is up over 10%. Our auto in the month of January alone was, just a minute, about 6 -- up about 16%. So it's very healthy there.

We have seen some slowness or softness in communications. Some of that's from regional cellular operators like U.S. Cellular, that was expected. That's not -- it wasn't really surprising. We've seen a little softness from some larger -- a couple of larger MSOs as well in some markets. We think that may be more just the timing of their ad spend for their own product releases and their own product placements. So we don't -- we're not viewing that as a major red flag right now but we have seen some of that in first quarter. Restaurants and -- is also been a little bit slower but not significantly different than what we saw in fourth quarter.

Aaron Watts - Deutsche Bank AG, Research Division

Okay. And then just thinking about rolling through the rest of the year, implicant in your full year outlook for revenues, it's ramping up from the pace you're seeing in the first quarter. You've got Olympics kind of going away there, but you've got probably an easier comp towards the end of year because of political pushout in 2012. I mean, is there anything else driving kind of better operating performance as you roll through the year after the first quarter?

James C. Ryan

You're right about the Olympics. We were pleased, we did $1.1 million with our 20 CBS channels. That's up 30% overall from the last time CBS had it. Although, it's actually the additional channels, certainly the 3 extra channels helped that somewhat, so actual same-station basis would be up a very healthy 19%, 20%. We're very pleased to see that. We do have sales initiatives for the year that are in process. Some of them are designed to roll out a little bit farther in the year. You're right that we -- as we get into especially third and fourth quarter, the core local national comps get easier because of the just the massive amount that political used in the inventory last year. So we think the year builds upon itself.

On our Internet, we are engaging in site redesigns that'll be rolling out this year, which we think will help us be more salable later in the year. We also are rolling out a mobile app tied to our Moms site, which is a proprietary site within our overall Gray umbrella, that we think has a lot of sales potential for us later in the year. But it's a case of we've got to get the apps out, deployed and in use before we can start ramping up the selling efforts.

Aaron Watts - Deutsche Bank AG, Research Division

Okay. And then last one for me. This is a little bit more big picture. But we've seen a lot of M&A transactions in the space over the last 12 months. Gray hasn't participated in those. When do you think you would be able to participate in those to the extent you wanted to? Those that have, have extolled the benefits of increased scale, but I guess when do you think you get your leverage to a point where you could be acquisitive? Or do you see yourself as a better seller of assets?

Robert S. Prather

Aaron, that's a legitimate question. First of all, we've been very particular about the stations we've bought down through the years. First of all, for us to be looking at stations, it would have to fit our profile of being a #1 or a very strong #2 in a market we liked, in a demographic area we liked. And then, I think, it would have to be very accretive. And frankly, there's not many of those deals running around anywhere.

And as I mentioned earlier, and we've all mentioned, our #1 priority is paying down debt. So it would just have to be a very compelling deal. I think there are some things we can do, the duopoly here, that might make sense, some -- those kind of things, adding some more digital, especially top 4 networks, where we can find areas where they're not being served property, those kind of things. But just going out and making deals right now, I think we're better off paying down debt as quick as we can, especially, we ought to be able to pay down a decent amount this year, and then pay down a big chunk next year. And like I said, we've been -- I've had a philosophy from day 1, let's buy good stations in good markets and try to make them better and that's what we tried to do for the last 18 years. So...

Operator

Moving on to the next question from Marci Ryvicker from Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I have a couple of just clarification questions on the guidance. The first, for the retransmission consent acceleration from the fourth quarter to the first quarter, is this just annual escalators? Or do you have new deals coming up? Or did you sign any new deals at the end of '12?

James C. Ryan

Marci, it would reflect, in part, annual escalators that were billed in to the 3-year deals we've struck that went from -- that covered '12, '13 and '14. We also, to a certain extent, as we've added the digital channels, especially those 3 CBS digital channels last year, there are some additional revenue coming in from those as well. We have one large MSO contract that will be up for renewal October 31 of this year. It covers roughly 1 million subscribers. And that's a very old deal. So we're obviously looking forward to our chance to reprice it to market.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. For the digital stations, do you pay reverse comp to the networks on those?

James C. Ryan

Yes. And that's reflected in the overall expense numbers both in '12 and in '13.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Would those be at similar rates as to your non-digital stations?

James C. Ryan

It's hard to say to use -- those happen to be CBS, and we really don't have comparisons yet with the rest of our CBS portfolio. It may be a little bit -- a little bit better due to the nature of the facility. It's just that we really don't know. It's hard to compare. I would -- I'd say it's not terribly dissimilar from FOX and NBC. Obviously, it involves a lot more stations, and it would've been a -- it was a different negotiation as well.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. I guess somewhat related, the broadcast expense guidance for all of 2013, of that plus 2% to plus 2.5% growth, what is the contribution from affiliation agreements? I think it's just NBC. Is that the bulk of the increase in broadcasting...

James C. Ryan

No, the bulk of the increase -- some of the increase is really driven by benefit -- employee benefit costs in healthcare and in pension. There is some increase year-over-year in the aggregate amount of reverse comp we're paying. So it would involve the stations we're already paying CBS for which is a few channels, our NBC channels and our FOX channels. That number in aggregate in 2012, was about 5.5 to 5.6, and because of full year effect of additional channels and pricing escalators and all of those agreements, that number for 2013 is about 7. If you give me a minute, I'll look it up.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. In the meantime, the last question, maybe it's for Bob. I just -- your full year revenue guidance, do you have any expectation baked in for a pickup in the economy?

Robert S. Prather

That's a good question, Marci. I think -- I'd say, our guidance is based on the economy being like it is right now. If it picks up, it'll be even better. We try to wait till as late as possible to get our budget set, just to get a better idea of what the economy is looking like. And I would say most of our managers are cautiously optimistic. I haven't heard anybody saying, "Woe is me. We're really in for trouble." I just haven't seen that and these guys are pretty close to the ground out there on what's going on, on a daily basis in the markets we're in. And I'd say, most of them are cautiously optimistic, and I think we'll hit our numbers if it stays like it is. And if it gets better, we'll be better.

James C. Ryan

And Marci, that 2013 number, again, stressing that's in the aggregate, so it involves multiple networks and multiple channels, it's -- we're expecting about 7.1 versus a 5.6 for 2012.

Operator

We will now take our next question from David Seabird [ph] from Wells Fargo Securities.

Unknown Analyst

I wanted to dig a little deeper on the core local national guidance for 2013. Just wanted to know what some of the drivers were to have local outperform. Is it heavier autos ad spend? Just trying to get more thoughts there.

James C. Ryan

First of all, it's probably the math, I mean, and also our control of our local markets. Certainly with our station dominance in many markets, we're really able to push the local a lot harder than the national. So I think that's reflective of the stronger growth rate. I think our expectations in auto in general, are that it's going to be very healthy all year long. So that's certainly helpful.

And then national, traditionally, has been more of a price negotiation and we're always very sensitive and careful about our pricing on our national that we don't, especially where we're a strong #1, or even a very competitive #2, we're always sensitive about not diminishing the overall pricing in the marketplace. So we tend to be a little bit more picky on national business if the price points look pretty low to us, which can obviously skew the national number a little bit as well.

Unknown Analyst

Okay, that's helpful. And then, have you guys provided any guidance on CapEx for 2013?

James C. Ryan

It would be, at a minimum of $15 million. There's a possibility it could go a -- somewhat higher, certainly not go past $20 million. But at a minimum, $15 million and a lot of that range would really depend on how strong the year ended up for us and how well -- if it hits our expectations or not. As Bob mentioned earlier, our continuing priority is to complete the HD build outs where we haven't done them. We've got a few markets left we've got to start and finish. We also have markets where we need to come back around and they have the basic capability but we certainly want to augment it. We're also, in '13, completing a building project for our North Carolina station, which we think is a long-term, very, very good move for the station. We're also -- we're able to, in late '12, buy a building for our Colorado Springs facility, which was in a, as Bob described it, it was in a giant Quonset hut, and we will be completing the actual equipment build out of that facility in '13 as well. So at a minimum $15 million, and if the year goes well, it might be a little bit higher.

Unknown Analyst

Okay. And then 2013 retrans up, up nicely double digits. Hate to jump ahead a year, but correct me if I'm wrong, you guys have some pretty sizable renewals in 2014, correct?

James C. Ryan

We -- I'd already mentioned that we have a 1 million subs renewing on October 31 of this year. We have another approximately 1 million subs that we'll renew December 31 of this year. So certainly, we have strong expectations for a significant increase in retrans as we get into '14.

Unknown Analyst

Okay, fair enough. And then the last one for me, on the spend side again. How do you guys see syndicated programming playing out over the next year or 2?

James C. Ryan

Actually, that cost is moderated. Our total costs over the last few years has come down a little bit. I think it's -- we don't see any big increases there over the next several years. I think by and large, we feel we're in pretty good shape on the syndicated front. And as Bob pointed out, in some cases where the pricing is just getting way too rich on certain syndicated products, where it make sense to us and where we can make money, we're just as happy to put in news.

Operator

We will now take our next question from George Heim [ph] from Core Partners [ph].

Unknown Analyst

Just a quick question on the consulting revenue from Young Broadcasting. I guess just correct me if I'm wrong, but there is a possibility for you guys to see some incentive revenue in the second quarter when they have their audited financials?

Robert S. Prather

We plan to, yes. And the contract was over in December but they will definitely pay us an incentive payment as soon their audit's done. Yes.

Unknown Analyst

Yes, I guess if I'm thinking it correctly, if their -- even if their EBITDA is flat from 2010 to 2012, you're in line for probably more than $3 million?

Robert S. Prather

I wouldn't want to speculate, but I think it'll be a nice payment, yes.

Operator

Next we'll take a question from Barry Lucas from Gabelli & Company.

Barry L. Lucas - Gabelli & Company, Inc.

A couple of quickies. One is a quibble on the expense guidance, somewhat similar to the revenue guidance. You've got a fairly healthy ramp in 1Q for your operating expenses and...

Robert S. Prather

Barry, we always give raises in the first quarter, and that usually is why first quarter usually ramps up. That evens out as the year goes along.

James C. Ryan

And, Barry, you also have in Q1 this year, we've got the additional digital CBSs in operational. That wasn't there Q1 last year. Also as the year goes on, we paid significant amounts in national sales rep commission last year because of the political revenue and there's a natural savings on that as we progress through the year and, obviously, without the political this year.

Barry L. Lucas - Gabelli & Company, Inc.

Since you've indicated that priority 1 for free cash, at least in the near term, is paying down debt and you could be an enlightened observer, let's say, of the M&A market. How do you see that evolving this year, Bob?

Robert S. Prather

I think there'll be some -- more deals coming out this year. You just hear through the deal grapevine that there's several more groups thinking about putting themselves up for, as they say, speaking [ph] alternatives, so corporate alternatives. So I wouldn't be surprised to see some more come on the market.

The ones that are out there for sale now, Barrington and Fisher, ComCorp, I would assume something will on all those deals in the not too distant future. So there's definitely an appetite that wasn't there for -- basically, no deals done '09, '10 until late '11. So it's nice to see the -- that there are people who want to buy. But I think most of the deals are strategic buyers now. I think the private equity guys are pretty much on the sideline right now, but we're probably better off as an industry for this cheesy buyers to -- and I think there's an appetite for consolidation, there's no doubt about that. You're seeing more of that and I think that will continue.

Barry L. Lucas - Gabelli & Company, Inc.

One other, and it's great to see the mobile traffic and the downloads and the access that people have either via smartphones or tablets. But how do you get paid for that?

Robert S. Prather

We're selling sponsorships, mainly on mobile. We've done a pretty good job with that. We pretty much cover our cost on the mobile. The problem for the mobile for everybody in the business, they're always saying about the Internet turning dollars into dimes, well the mobile turns dimes into pennies. And you've got to be aware that the mobile -- they're not going to get the kind of dollars that we've gotten in the past. But the mobile is growing so fast, it could make up for that in a lot of ways.

And we're looking for new ways. Apps are becoming more and more important. We try and develop more apps all the time to make sure we make it easier for people to access the information on the mobile. And I think, obviously, one of the key elements of mobile, and we're working -- trying to work on more, is weather. And if you're walking around town and you've got your mobile -- your smartphone with you, and you want to know what to -- what the weather's coming up, there's no better place than to go to your local station and see what the weather is doing. So I think this is an area where we can work on, doing a better job on sponsorships and making sure we got local weather apps that people can get to real easy.

Operator

[Operator Instructions] Moving on, we'll take our next question from Robert Tanner [ph], a private investor.

Unknown Attendee

The earnings report was sensational. They were outstanding. They were very exciting. How do you feel like...

Robert S. Prather

We like them too.

Unknown Attendee

I'm sure you did. I've been a fan of you all for so many years and I have got a great deal of stock in the company, and I just -- I see great things in the future for Gray Television. It just keeps getting better and better. Do you think today's earnings report will push the stock higher since this morning there was a considerable drop in the stock as you've noticed. And so what do you think the reason for that is? What would that...

Robert S. Prather

I'm not sure. We've had a real good run up the stock for the last 6 months. There may be some people taking some profits, now that we've got a new year going.

As I said, I think we're going to be in for a good year this year, and I think people will recognize that. We're still trading at a very low multiple of free cash flow, probably the lowest in the industry. And I think more investors are realizing that free cash flow is a very important element for any company. But we're very proud of our strong free cash flow and we think more and more people in the market will recognize it.

Unknown Attendee

I sure hope so and it's very exciting. I look forward to come over there in Atlanta and maybe coming and visiting you.

Robert S. Prather

We'd love to see you. We're here all the time and we're easy to find. And Jim and I and Hilton, we're all here. So you're welcome to come by anytime.

Unknown Attendee

And based on the earnings report for the last quarter of last year, you do see very promising things in the future for Gray Television, don't you?

Robert S. Prather

Yes, sir. I sure do.

Unknown Attendee

Okay. All right. So we just need to put it in the drawer, stick in there for the long run, and in this fiscal year here coming up, we can continue to see escalation in stock prices, don't you think?

Robert S. Prather

I hope so. That's what I've done. So I'm a -- I've been buying the stock for a long time and I think it's a good buy. I think it's a better buy than it has been in a long time. So we -- I think we've got a very strong base of stations and markets and a very strong management team, especially our -- Jim is out in the stations, and I think we're in for the long run being a very strong company.

Unknown Attendee

Okay. Do you think that there could be a possible proverbial bounce from today's report in the stock tomorrow? Is that...

Robert S. Prather

I don't know. It's a good question. I'm not a stock market expert, but I would hope -- I sure hope the market recognizes we've got a real strong company here. So...

Operator

Moving on, we'll take our next question from Dan Charleston from Global Credit Advisers.

Daniel Charleston

Question about the capital allocation use of free cash. You mentioned debt reduction, do you think about a target leverage ratio over the next year or 2? And then I guess a follow-up would be some of your competitors are paying out dividends on their common. Have you thought about that as a potential use of free cash?

Robert S. Prather

I think all our options are on the table. We -- our board studies things every quarter we meet. We look at it -- Jim and I keep a very close eye on the financial markets. I think right now we need to get our debt to cash flow ratios a little stronger before we consider moves like that. But we've been a dividend payer in the past, and I don't see why we can't be again in the future. But I think in the short term, it's more important to spend the capital we think we need to spend and pay down debt.

Daniel Charleston

Okay. And target leverage ratio, if at all?

Robert S. Prather

Yes, I would really like to be down in the 4s in election year and then low 5s at a non-election year. I feel comfortable at those levels and I think TV groups, in general, probably feel comfortable at those levels. So I think that's kind of my goal firstly, and I think Jim and I have talked about it, and Hilton and I think it's a good goal for us as a company.

Operator

Let's move on to Andrew Finkelstein from Barclays.

Andrew Finkelstein - Barclays Capital, Research Division

A couple of bigger picture questions for me. Bob, I don't know. It seems like there's been some more pressure on the network ratings again. Just wondering if you're seeing any impact on your news ratings or any of your shoulder programming from that?

Robert S. Prather

Andrew, we haven't. But I do -- I think there's concern about it seems like a lot of the new programming is not yet free to the networks this year pretty much. I think we're in great shape because CBS has got so many long-running, leading shows on. But all those cogs and things come to an end. NBC can tell you that. They were on top for a long time and when Seinfeld and Cheers and E.R., all those shows eased out, all of a sudden, they looked up and said, "Where's the programming?"

And so I think it's new programming is important to -- for the industry. As I've said before though, luckily, most of our very strong stations are pretty much independent of the networks' fortune. Year in and year out, our #1 stations stay #1 no matter what the fortunes of the network are having. And as I mentioned to you earlier, we're trying to put on more news. We want to be less dependent on the networks and more in total control of our own destiny, so to speak. And so, I think we will -- we're going to continue to do that. The networks, there'll be a new programming guru to come along in one of the networks and you'll just, they'll all of a sudden, have a bunch of new programs that everybody likes.

But in the short term, like I said, I don't think it will affect us. If, I think, if all of the networks ratings were declining year after year, we'd be concerned too. But it just looks like everybody had kind of a bad year picking what would work so far. So I know, yes, so where CBS canceled a show this we week. They had 2 episodes. So they've got a lot shorter fuse they use to have, too. So I think you're going to see -- it's amazing how much it costs to develop a pilot and then to run 2 episodes, somebody lost a chunk of money there. So...

Andrew Finkelstein - Barclays Capital, Research Division

Right. And then from the field, are you guys seeing any tougher competition from some of the other options on the local level, whether it's local cable, radio or Internet? Kind that you play...

Robert S. Prather

Yes, it's a great question. I think it's something I preached to our managers all the time, that their competition is not only the stations in town, but it is Google, it is these Hulu. It's all these things, Netflix, that are out there that are taking eyes away from our broadcasts. So I think it's very important that we're well aware that there's a lot of competition out there. And we've got to have compelling programming that'll keep them coming back to us.

Andrew Finkelstein - Barclays Capital, Research Division

But so far, no change in what you're seeing at least from last year that...

Robert S. Prather

Not really. I haven't seen any kind of drastic change. No.

Andrew Finkelstein - Barclays Capital, Research Division

Okay. Just want to ask, just given the changing landscape and some of the M&A activity, where do you see the TV business going? Do you think the smaller mid-sized markets that you guys are focused on is still the right place to be? Or is there any need to have some larger market presence? You in for renegotiations?

Robert S. Prather

We certainly hope so. We like the mid-sized markets. We think the markets we're in, in most cases, have better growth profiles than the bigger markets. I think in most cases, they've got better demographics, especially university towns and state capitals. And we like the size markets we're in. We like the markets where we've got maybe 4 stations instead of 15 like they got in some of the big markets. And we've done real well in these sized markets. And that's where we want to keep our focus.

Andrew Finkelstein - Barclays Capital, Research Division

Okay. And then last one for me, I appreciate it. Just over time, I mean, how do you feel about the net retrans number to you guys, once you get through those network affiliation agreements? Do you think you can continue to grow retrans on a net basis over time? Or are we going to have to see some pullback in that profit line to you guys?

Robert S. Prather

I would certainly hope so. That's one of my main goals. I think it's very important for us at Gray Television, that we really pound home to the networks how important we are to them. We out-index the networks in every single market we're in and we bring a lot of viewers to them, not necessarily vice versa. I don't want to lose any of the networks but we're an important source of eyeballs for them and I think we need to emphasize that we're more important to them than a poor #3 or #4 station in the market that's got a poor news product. And I think it's incumbent upon us to negotiate hard with these guys and let them know that, hey, we think we've got a better product out there than a lot of other people.

Andrew Finkelstein - Barclays Capital, Research Division

Does the spectrum auctions voluntary? Does that improve your position at all if some of the smaller guys were to go down the road?

Robert S. Prather

It probably would. I mean, I think those auctions are just still way up in the air and way down the road. I don't think anybody knows what's going to happen. They may wind up being a lot more lucrative than anybody thinks or they may be a bust. I think nobody knows right now. And until they actually get a process in place and get congress on board and everybody on board on exactly how they're going to do it, it's just a speculation that I'm not enough of a prophet to figure that one out.

But we're using our spectrum. We've got 42 digital channels on the air. That's profitable for us. We save a little space for live mobile if we can ever figure out -- the industry to figure out how to make that work right. So I mean, I think we're a poster child for making the spectrum work like it was supposed to work initially when congress gave it to TV stations.

Operator

Moving on to our next question from Larry Schnurmacher [ph] from Morgan Stanley.

Unknown Analyst

I was just -- I don't know if I missed this or not, did you mention what the debt-pay-down strategy is? How much? How you plan on doing that? When? Stuff like that throughout the year that's, I think, it's key to the puzzle?

Robert S. Prather

Yes. Jim, you want to answer that one?

James C. Ryan

Larry, I commented that based on our full year guidance out there, and also even if you kind of look at what we did in 2011, and know with our full year guidance, that we expect '13 to be a better operating cash flow year than '11 by a relatively significant amount. And then $48 million of cash interest plus, even if you went on the high side of the CapEx number, you can easily get to a free cash flow number that's in the $40-plus million range. And you can do your own math and everybody will probably come up with a slightly different answer based on their assumptions. But certainly that would not be unreasonable right now.

And we've already said that, that free cash flow would be used to reduce debt. And I would expect that our debt reductions would probably be more backloaded into the latter half to the latter third of the year. But as we begin to build up some cash, and we clearly are not going to have a short-term use for, we will -- I wouldn't be surprised from time to time, during the year, we made some modest reductions as we went along.

Unknown Analyst

Okay, so a number or do we make our own up?

James C. Ryan

Well, I'm saying that free cash is probably around $40 million and most of that, if not all of it, would probably go to debt reduction. So -- what I think, though, is that the reductions happen more in the second half of the year than early in the year.

Unknown Analyst

And is any debt rolling or possibly renegotiated during the year?

James C. Ryan

Well, we just refinanced completely last fall -- our senior facility has a soft call for the first year at 1/01. So I guess you never say never, but it seemed to me, you'd have to be getting an extremely good reduction in rate to make it worth your while. And all of our maturities are long term at this point, so there's no compelling need whatsoever to refinance anything. It well may be that the rate reduction was so attractive that it was -- it made sense. And never say never but I -- that would be a high-class problem to have.

Operator

And we'll take our final question from Alex Carnelli [ph] from SM Investors [ph].

Unknown Analyst

Some of them were answered. Just for me, one clarification on the 2013 revenue guidance. Are the production and other revenues, are they embedded in the guidance or should I think of adding something to reflect that?

James C. Ryan

That number is relatively small. So we historically have not really commented on it in our guidance. It would be -- the production revenue is probably consistent with '12.

The other portion of that, though, we did have about $1.7 million, $1.8 million in 2012 of copyright royalties that were basic -- copyright tribunal cleared out backlog years from, I think it was 2004 through 2008 or '09 but maybe even longer. So that was kind of a windfall that, certainly, we wouldn't expect to repeat it. But other than that, I would think generally that those lines are relatively consistent year-to-year.

Unknown Analyst

That'll be around $7 million to $8 million with pretty good margins, is that correct? It's tower rent, call it. Is that correct?

James C. Ryan

It's tower rentals. It's commercial production. It's a few other odds and ends. It was $8 -- I think it was $8.9 million, call it $9 million in '12. It would be, like I said, probably $2 million lower simply because we won't have that royalty tribunal windfall that came in, in '12 that was totally unexpected.

Operator

And at this time, I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Robert S. Prather

Thank you, operator. I want to thank everybody for being on our call. We appreciate your support. As I always say you could call us any time. We're here. We answer our own phones. Looking forward to, I said, I feel like a good year this year, and look forward to talking to you at the end of the first quarter. Thank you, everybody.

Operator

Thank you. That will conclude our conference. Thank you for your participation.

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