Gray Television, Inc. Q1 2009 Earnings Call Transcript

| About: Gray Television, (GTN)

Gray Television, Inc. (NYSE:GTN)

Q1 2009 Earnings Call

May 8, 2009 10:00 am ET


Hilton H. Howell, Jr. – Vice Chairman of the Board & Chief Executive Officer

Robert S. Prather, Jr. – President, Chief Operator Officer & Director

James C. Ryan – Chief Financial Officer & Senior Vice President


Marci Ryvicker – Wachovia Capital Markets

[Steven Carbone] – GE Capital

Aaron Watts – Deutsche Bank Securities

Welcome to the Gray Television’s first quarter 2009 earnings conference call. Today’s call is being recorded. For opening remarks and introduction I would like to turn the call over to Mr. Hilton Howell.

Hilton H. Howell, Jr.

Welcome to the first quarter Gray Television earnings call. As the operator indicated my name is Hilton Howell and I’m Vice-Chairman and Chief Executive Officer of the company. Bob Prather, our President and Chief Operating Officer is on the line as is Jim Ryan, our Chief Financial Officer. I’m going to have a few brief opening statements and then Bob is going to follow up with some more detail and then Jim with even more.

I will say as we look at our first quarter performance, in this unique operating environment we are relatively pleased with our operating performance in Gray Television. As we have looked at all of our competitors and all of the reported results that is available to us so far this quarter, we will report probably the best results of any station group in the country with a drop of only 14%. Now, 14% drops in total revenues is nothing to brag about but all in all we’re relatively pleased with that.

It has been better than our expectations and we have been pleased to see that in terms of what our station managers saw as what we expected to get through the course of this quarter, we have beaten it for eight weeks in a row. That I think might be some indications that perhaps we’re finding the bottom in the advertising market. I will say this quarter that it is particularly gratifying to me that after years of expense with no financial return to our shareholders and in full compliance with all of the SEC guidelines, nearly two thirds of all of our stations are now fully converted and broadcasting in the high definition format.

Further, we have completed our retransmission consent negotiations really throughout the company and in this quarter and going forward throughout 2009 we expect to be able to benefit from that added revenue. Also, as you know, the company sought and secured a loan covenant modification from our banking group on our eight year term loan, six years of which remain that will see us through the course of 2009 and in to the beginning of 2010.

This quarter we have all benefitted from the initiatives started in the company in 2008 that has continued in to 2009 to identify and reduce wherever we could our operating costs without compromising in any way our commitment to the quality of our news broadcast to our local coverage and to the quality of our television broadcast experience for all of our audiences and we’ve been very gratified to see those expenses come down nicely through 2008 and in Q1 of 2009.

Also, I wanted to share with you that this past quarter I visited a number of our television stations and I’m pleased to report that in each of our different markets and in each market in almost a unique way our station managers and our sales staff have identified new advertisers that they have brought on rather than relying upon sort of the old advertising paradigm of looking to the automobile manufacturers and the automobile dealers to satisfy all of that advertising need and to fill up our inventory.

In many cases our television sales staff have converted the advertisers that in previous quarters and years looked to the local newspaper to advertise their products and services. We have converted and brought not only to our TV spot market advertising but to various different advertising spots on our websites which we find very gratifying.

Finally, as we look forward to the balance of 2009 and 2010 we always look to our big years, the political years and as we look in to 2010, Gray Television in particular should be enjoying a very strong political year. We have identified in 2010 12 contested governor’s races and 15 contested senator races in the states in which we broadcast. This compares to our 2008 numbers which had only three contested governor’s races and 14 senate races in that year. So, we expect a strong 2010 not only in political but vis-à-vis our Olympic broadcasting and other opportunities that we have.

Bob, do you want to take it from here?

Robert S. Prather, Jr.

First of all I always try to be positive as most of you know and let me start out by saying that I think our strategy that we’ve really been following since day one at Gray Television of buying strong number one or number two stations in good markets has proven to be very sound. Our 17 university markets, eight state capitals and our other markets have been less effected in this economic crisis than other markets.

I think that’s why in the first quarter we were down 13.6%. Here again, like Hilton said nothing to brag about but best in the industry which I’m proud of and I think here again it’s attributed to our management team out in our markets and the markets that we’re in. I think most of our markets are actually doing better than the national average in most of the towns that we’re in. We also finished ahead of the top end of our guidance and once again, we try to be very careful with our expenses and our guidance and Jim Ryan and his financial team do a great job of making sure when we tell you we’re going to hit a number, we hit a number.

We’ve converted 28 of our stations to digital on February 17th and I’m proud to say this process went much smoother than we thought. We had roughly 5,000 calls in the first two or three days out of a total of 28 stations, probably 90% of the calls were strictly for information purposes where the customer was really just saying, “How do I get this box on?” Or, “How do I do something.” We walked each customer through on an individual basis with phone banks open at every station and I think it went extremely smoothly and we’ve had virtually no glitches since then and we’re looking forward to getting the rest of our stations on June 12th deadline.

I actually testified before Congress last month, they called me and several other people in the industry up because we had converted more stations than any other group and I was very pleased to tell the committee that we felt like this transition was going a lot smoother than anybody anticipated and we thought it would in the future. So, I feel very good about the fact and as Hilton mentioned we finally hope we can get some benefit out of the $60 million plus we spent on digital over the last few years.

We also completed all the contracts on our retransmission consent deals that we talked about at the end of the year. We’ve got $13 million of new money coming in beginning January 1 and we think this money will continue to grow in the future. We’ve got increases set in for the next three years on almost all the contracts and once there we think this will continue to be a growing source of income for us.

We’ve also identified $15 million of expenses which we implemented at the end of last year that we’re taking the benefit of right now and even in first quarter we’ve come up with probably another $1 million that we’re implementing and we’re looking at every single expense aspect in the company and ways to save money and be more efficient and also to continue being the dominant news factor in most of our markets. We want to make sure that we don’t do anything that would harm our news product because this is really the heart and soul of our company.

One thing that we are very proud of, our new media continues to grow and most companies obviously digital is a growth factor but ours we’re especially proud of, we’re averaging 45 million page views a month right now on our websites. 8.3 unique visitors a month which I think is extremely good, our mobile is averaging 7.2 million page views a month which I think is probably higher than anybody out there in our size markets and we’ve got 735,000 unique visitors per month on our mobile phones. We’re averaging 2.5 million monthly views on our video.

We’ve got over 25,000 Twitter followers on our stations. For all of you I’m sure if you don’t know who Twitter is you’ll find out but we’re encouraging all our on air people to have Twitter accounts and Facebook accounts. We’ve got over 12,000 friends and fans on Facebook pages. So, we’re trying to make sure that we stay up with these new media trends that we’re with it as you would say in the market especially for young people because obviously these are our future viewers and we want to make sure we capture them.

One other thing that we’re doing, we’ve got a strong promotion going to increase our text alerts and we’ve done a great job. Our goal is to have at least 5,000 text alert viewers in every market and we’re getting close to that in virtually all of our markets. This is something we think if people are getting their text alerts on news, weather sports, other things that they’ll be more inclined to go watch our news at six and 11 so we think this is a good growth area for us in the future.

The last thing I mentioned, 2010 I think Hilton pointed out but I think it’s going to be an extremely good year. I think the economy is going to be turned around at that point. As he mentioned, we’ve got some strong governor and senator races, we’ve got the winter Olympics on our 10 NBC stations and we’ve got the Super Bowl on our 17 CBS stations. I think all these auger for a very strong year in 2010 so I’m looking forward to it.

I think 2009 is going to get better as the year goes along. I think the key factor for all of us is what’s going to happen on the auto. But, as Hilton also mentioned, we’re making a strong effort to get out and get new business. We had in the first quarter roughly 1,800 new accounts signed up with a total of almost $6 million of revenue from people that have not advertised with us in the past. So, we’re out beating the bushes trying to find newspaper advertisers, local cable, they call go in to our triple play challenge that we started back in September of ’07 and I think this will continue to pay dividends for us.

At this point I’m going to turn it over to Jim Ryan for more financial details and we’ll open it up for questions.

James C. Ryan

I’m going to keep my comments relatively brief by just again, running through the highlights of the first quarter. Revenue was down 14% although as Bob and Hilton have both mentioned, while we’re not pleased with the negative the decline on a relative basis is better than the peer group so we are taking some satisfaction with that and certainly the revenue at $51.4 million was a bit higher than our high side guidance and the first quarter strengthened especially as we went through March both somewhat in the time sales and also a little bit of an uplift in some political as well.

Our local revenue was down 14%, national was down 21%. In relation to the TVB reports, again, on a relative basis we did pretty well. TVB reported the industry down about 25% in local and 26% in national. Our Internet combined the direct and the time sale related Internet ads was basically flat to slightly down to the prior quarter although we were pleased to see the direct Internet revenue which is actually the revenue derived directly from the website was up 10% in the quarter and again we’re pleased to see the direct Internet revenue was growing. The softness in the time sales given the overall economy was not terribly surprising.

Political for the quarter ended at $1 million and again it was a little bit better than we had expected. Looking to categories, the good news, our telecommunications and legal categories were both up. Certainly as everyone else has said, that’s already reported auto was down significantly for us at about 42.6% and it now represents about 16% of total revenues. All of our other categories, entertainment, financial, home improvement, medical, restaurant, furniture, appliances, electronics and department discount stores and supermarkets were all down reflecting the effect of the overall recession.

Our operating expenses were down 9% which was a little better than we had anticipated and again, it goes back to as Bob already mentioned, at the grass roots level all the way up everybody is working very hard to keep the expense reduction plan that we already identified $15 million for moving forward and looking hard for additional expenses as well.

Turning to the balance sheet for a moment, total debt at the end of the quarter was $798 million. The leverage ratio test which is a trailing eight quarter test in our senior credit agreement put our leverage ratio at 748 against eight times covenant. On a trailing 12 month basis our trailing operating cash flow ended up being $111.6 million and on a trailing eight quarter basis as defined in the credit facility our operating cash flow number was 105.4. Cap ex in the quarter was $5.4 million, approximately half of that would have been related to the final conversions of DT where we were in several markets switching from temporary UHF transmitters and associated antennas back to permanent VHF.

Cash taxes in the quarter were a minimal amount, about $16,000 and I currently expect cash taxes for the year to be only about $150,000 to $200,000. Our program payments were $3.9 million and amortization was $3.8. At this point I’ll turn it back over to Bob.

Robert S. Prather, Jr.

Operator we’re ready to open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Marci Ryvicker – Wachovia Capital Markets.

Marci Ryvicker – Wachovia Capital Markets

I have a couple of questions, the first I know you said auto is 16% of your revenue. Is that still the largest ad category?

James C. Ryan

Yes, yes it is.

Marci Ryvicker – Wachovia Capital Markets

What’s your exposure to Chrysler and GM?

James C. Ryan

Our accounts receivable exposure to Chrysler at the end of April, now when I say Chrysler I’m talking about corporate, I’m talking about the dealer associations and I’m talking about the local dealers, all combined is about $1.7 million. The direct exposure to Chrysler corporate, it was less than $200,000. We had a little over $100,000 direct exposure to local dealers in accounts receivable. The bulk of the money is in the dealer group and as you know those are funded in part by the dealers and in part by corporate contribution so the dealer groups accounted for about $1.4 million of the total exposure.

Marci Ryvicker – Wachovia Capital Markets

There’s been tremendous amount of cost cutting I think across most media industries, broadcast media in particular. How should we think about expenses in a recovery. Are you going to have the same type of growth that you had before, is it just a different expense base, how should we be thinking about this?

Robert S. Prather, Jr.

Marci, we want to continue to ideally zero growth or less in expenses going forward. We really believe that in the future we’ve got to operate these stations more efficiently, we’ve got to learn better ways. We’re doing [inaudible] we’re doing more things that will allow us to be more efficient going forward, we’re buying smaller cameras and doing video journalists in most of our markets. A lot of these things are ways we can get the same services to cover the news with less expense.

We’re looking for example at Skype and [Streambox] and other technologies like. Being able to do live shots in the field with little small cameras and with a laptop computer as opposed to a big live truck or a sat truck. All these things are ways we can cover the news as efficiently as we have in the past but from a cost standpoint much less expensive so this is really going to be an ongoing effort for us in the years ahead.

Marci Ryvicker – Wachovia Capital Markets

Can you just talk about how the month trended in the first quarter?

Robert S. Prather, Jr.

Marci, we basically saw a little bit of an improvement as the quarter went. January, we were probably running, and this is combined local national probably running about down 15%, February, the decline picked up a little bit about down 18% but then March rebounded about 14%. Now, those percentages are also excluding political year-over-year so as I said earlier March especially kind of strengthened towards the end which we were pleased to see. April for us came in right at expectation or very, very close to expectation. It’s a little too early to tell where May’s going to shake out.

We’re cautiously hopefully that second quarter’s pattern will be similar to first so we’ll see a little bit of pickup as we move through the quarter. Visibility at the station level and I’m sure you’ve heard this from everybody else who has reported is just extremely limited. A lot of people are literally only placing about a week at a time. So, we’re pleased to see that April came in where we wanted. We’re cautiously optimistic about the rest of the quarter.


Your next question comes from [Steven Carbone] – GE Capital.

[Steven Carbone] – GE Capital

Where do you expect the total retrans to come out for the year at this point?

Robert S. Prather, Jr.

A little over $16 million total for the year which we have about $3 million last year and we’ll have a little over $16 million total this year.

[Steven Carbone] – GE Capital

Your strategy looks like now you’re going for smaller accounts and accounts of customers that hadn’t advertised with you before. What kind of impact does that have on margins?

Robert S. Prather, Jr.

Very little right now. You know, necessity is the mother of invention they say and I think that one of the things in the television business we got use to auto being such a huge percentage for so long that we all kind of got use to it. This is actually making us get out and reviewing our sales techniques, how we go after business. I think our margins can be just as good or better. Frankly, a lot of the auto business is fairly cheap, especially national auto, they handle pretty good on the rates so we can actually do better with local. Especially most of this business is local direct so you don’t have an ad agency involved so I think our margins on some of this new business can actually improve. But, still hard to make up for a 42% decline in something that’s been 25% of your revenue.

In a lot of cases, in big cities you see even a bigger percentage of that at a lot of stations. Nobody is having fun out there [inaudible]. It will come back. I think Chrysler’s bankruptcy plan is in motion now, I think General Motors is probably not far behind them. I think once they get these plans in place and get financing they’re going to have to advertise. They won’t be paying as many debts off so they’ll have plenty of money to advertise to go forward and they have to do that. So, I look forward to the second half of the year being much better for auto.


Your next question comes from Aaron Watts – Deutsche Bank Securities.

Aaron Watts – Deutsche Bank Securities

Two questions for me, I guess first Bob if you can just give a sense for how do you think when advertising does come back and you just said how the auto companies start spending again, is it your sense that if you think about it as a pie, how far back can we get once the ad market comes back in the auto space? Like, the OEMs start to advertise again but what about on the dealer level where maybe you have fewer dealerships that potentially have a little bit more flexibility to advertise more. How do you think about that?

Robert S. Prather, Jr.

That’s a great question Aaron and I’ve been asking a lot of people in the car exactly that question but I don’t think anybody has a crystal ball to answer that right now. All the major manufacturers I think domestic have announced plans, General Motors wants to get rid of 1,000 dealers, I think Chrysler 700, Ford wants to get rid of dealers, that could work both ways. They say less competition might think they can spend less but don’t forget that there’s still a huge competitive factor out there between the three manufacturers and the foreign autos. Toyota is not going away, Honda is not going away. None of these people, Mercedes, all of these guys are going to be here trying to sell cars and they all know the best way to at least get the public’s attention I think nowadays is still by TV.

Most of them have a big web strategy but the strategy is based on TV driving people to the web. They go to the web to get more details. But, I think most of the people I talk to and I just talk to the Chairman of Interpublic Group Michael Roth yesterday as a matter of fact and he was pointing out that they loss some General Motors business last year and they actually got more profitable because General Motor business is so cheap. He said, “Look I’d like to have it back, I’d still like to be able to make money of it.” But, I think the local dealers have always been our strength and I think they will continue to be our strength in the future and they’ve actually held up much better than the national.

The national ads, we’ve been [inaudible] from our national rep firms, their national auto ads are down 61% in the first quarter and we’re their biggest single customer so we’re down 42% and a big chunk of that was national. I know that’s a long convoluted answer but I think auto will come back. The other thing I might tell you that’s interesting is Mike Jackson who is president of AutoNation, I heard him at a speech a couple of weeks ago and he pointed out that right now we’re only selling about 9.5 million cars a year in the United States and about 9 million cars a year disappear off the road either from old age, wrecks, stolen, chopped up, whatever. So, we’re just barely replacing the cars that disappear a year and there’s a huge pent up demand for new cars.

Everybody likes to have a new car. I think you’re going to see a huge – once people feel more secure about their [inaudible] and feel like things are going to get back to more normal you’re going to see a huge rush here to get new cars. Like we said we’ll have a better feeling for what the future is going to be.

Aaron Watts – Deutsche Bank Securities

My second question also a little bit big picture for you is online providers insights garner more and more video, sites like Hulu with the networks signing on for those. Do you view that as being something that will siphon off viewers and advertisers ultimately at the end of the day at the detriment of TV especially at the younger demographic or do you think it can be complementary?

Robert S. Prather, Jr.

I really don’t. I’ll tell you a quick story, my assistant Dottie came in a couple of weeks ago and said, “Mr. Prather, I need to apologize to you. I watched eight hours of Hulu this weekend to catch up on 24,” and some other programs she had missed. She said, “Now I can go back to watching it at the regular time.” So, I think it’s an addition to us as a business. I think TV remember is a habit, we want to keep people in the habit. People have busy lives nowadays, you can miss some of these shows that have an ongoing arch to them as you call it where they’ve got a continuing story, you can go to Hulu or and catch up and the they like to sit back on a weekly basis and still keep up. I think it can be helpful to our business and not hurt it especially I think we’ve got to continually have our strength in local news and local program, from the prime time aspect I don’t think it will have that much of an impact on us.

Aaron Watts – Deutsche Bank Securities

You don’t think it will hurt prime time enough where it hurts your lead in to your local news?

Robert S. Prather, Jr.

No, I don’t. Not at all.


Having no further questions I’ll go ahead and turn the conference back over to Mr. Prather for any additional or closing comments.

Robert S. Prather, Jr.

I want to thank everybody for joining us today. We look forward to having you on our call next quarter. As I told you before, we’re all easy to find, we all answer our own phones so you can call at any time with any specific questions. Thank you for your support. We look forward to the end of next quarter.

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